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Reference Based Pricing is an Underutilized Tool

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Reference Based Pricing is an Underutilized Tool

Reference-based pricing relative to medicare costs, or RBP, is one of the most important mechanisms to understand in order to save on medical costs. Helping your business understand the concepts and related costs is essential in an environment of increasing inflation. Reports from the RAND corporation measured the cost of care across the United States relative to medicare. They found that costs vary widely and averaged over 240% more than medicare[1]. However some charged significantly more – leaving the gaps wider for employers and insurers to fill.

RBP is a solid way to help your business cap your costs.[2] By tying and negotiating medical expenses and costs to those negotiated by medicare, your business can save significantly. Typically, PPO (preferred provider organizations) will tie a discount to cost of care. But a discount is relative to what a provider chooses to bill for that service in the first place. So what seems like a negotiated “discount”, makes it highly unlikely to truly save vs. negotiating specific costs of service. RBP on the other hand, already has a price set for each billing code, ensuring more predictable costs for the insured and employers.

Typically, RBP based plans tie cost of care to 120-300% of medicare costs. And this allows plans wider coverage of where their insured are able to go and seek care. Providers still generate a profitable service, while recipients receive care that is far more affordable on average. The average costs tied to RBP is an effective strategy that can save upwards of 20-30% on claims costs for employers on average. More importantly, the costs are predictable and not left at the behest of a provider.

Data shows only 2% of employers are utilizing RBP today[3]. Which means there is a potential for more growth for companies to help showcase the savings and offer better care at better prices. Leaving costs open to PPO negotiated “discounts” is opening employers to more and more potential surprise costs. Companies like Walmart have already moved to plans that tie using RBP in order to save on medical costs for an enormous labor pool. And given that providers can charge upwards of 15x times the cost of medicare? Means that negotiating a pre-set rate is far more effective than expecting a discount on cost of service.

Employers still need to consider and plan accordingly for RBP. There are new plans and options for those seeking to self-insure, and new providers that are incorporating RBP into their offerings by understanding the benefits and value of capping costs. HR teams often will need to negotiate education for their staff and team[4] to implement RBP changes.

These cost savings from RBP can be significant for both the employer and employees and allow better spending on other company benefits. These savings can be allocated back into business initiatives vs. supplying the ever increasing cost of care.

[1] Stephen Miller, C. E. B. S. (2019, August 16). Employers Cut Health Plan Costs with Reference-Based Pricing. SHRM. July 2021.

[2] White, C., & Whaley, C. M. (2019, May 9). Private Health Plans Pay Hospitals Much More Than What Medicare Would Pay. RAND Corporation. July 2021.

[3] Lockton. (2019, April 17). Lockton releases results of national benefits survey. July 2021

[4] Mind the Gaps: Why Partners Are Pivotal to Implementing Reference-Based Pricing. Quantum Health. (2021, June 16).  July 2021.