Reference-Based Pricing: The Unicorn of Cost Containment or the Latest Fad?

Custom network design utilizing indexed reimbursement strategies (sometimes known as reference-based pricing strategies) has emerged as a tool self-insured organizations are utilizing to combat the growing financial burden of rising healthcare costs across the U.S.
After years of consistent increases, a recent report found that the cost of medical care benefits are expected to rise by nearly 9% in 2024 . Even with this increase, employers face greater cost uncertainty thanks to hospitals and outpatient facilities charging a wide variety of prices for similar procedures and services.

With the right approach, indexed reimbursement pricing can alleviate these issues and provides employers with greater cost clarity by allowing companies to set limits on how much they will pay for medical services. Under most reference-based pricing systems, employers agree to pay a reasonable fee for each service, which is typically calculated based on Medicare pricing and general cost information.

Here’s an example: Say an employee is seeking a knee replacement, and he or she can choose between two hospitals for their procedure, Hospital A and Hospital B. Hospital A charges approximately $75,000 for the procedure, while Hospital B only charges $50,000 for the same service. If Medicare typically pays $40,000 for a knee replacement and the employer has agreed to pay 125% of what Medicare pays as part of an indexed reimbursement approach, the employer will pay up to a maximum of $50,000 for the procedure. The employee has a choice: get the surgery done at Hospital B and let their employer pay the entire bill or go to Hospital A and pay the $25,000 balance. No matter what choice the employee makes, the employer’s cost is capped at $50,000 in an indexed reimbursement pricing system.

Indexed reimbursement pricing offers dual benefits for both employers and employees. For employers, it offers significant cost savings, maintains consistent quality and eliminates the need for network negotiations. For employees, these systems provide cost transparency and certainty. They also allow employees to choose any hospital or outpatient facility they desire by eliminating provider networks.

Indexed reimbursement has emerged as an established strategy, but it may not be the right fit for all employers. While the financial benefits are appealing, making a shift to an indexed reimbursement system is a big change for employees. It also requires a significant investment of time to complete.

Before diving headfirst into custom plan design and reference-based pricing tactics, employers must ask themselves the following four questions:

1. Are you willing to champion change?

Switching over to an indexed reimbursement model is a change that can take some time for your employees to get used to. For the first time, they’ll be asked to consider the costs of the healthcare they receive. They’ll have to do their due diligence on pricing before deciding where to receive care. Then, they’ll have to consider their options, which is more than they’ve previously been asked to do.

Companies that adopt indexed reimbursement pricing often reject the status quo and are looking for something innovative. With ever-increasing healthcare costs, they may be financially unable to sustain coverage as they have always provided it. While this change can be disruptive initially, it can prove to be a viable long-term solution. A successful implementation requires the adopting company to be patient and live through some growing pains in the early goings.

2. What does your employee data say?

As a self-insured organization, you have access to a large amount of health care claims data. This data can tell you what services your employees are using, where they’re getting care and what factors are playing into this decision making. This data must be evaluated to determine if the savings of indexed repricing is available to you based on your employees utilization of various low and high cost facilities.

3. Are you willing to use a third-party administrator?

Companies must be willing to leave their current health plan administrator for another third-party administrator (TPA) that is well versed in the intricacies of indexed reimbursement pricing systems. TPAs will help you set prices, negotiate with hospitals and other healthcare providers, process claims and keep track of employee records. Companies considering indexed reimbursement pricing must be comfortable hiring a TPA to help handle these essential functions. Thankfully, the right brokers have partnerships with highly experienced TPAs which can help your company smoothly implement and effectively utilize this strategy over the long term.

4. Do you have the capability to effectively communicate this change to your employees?

The final but perhaps most critical question employers must answer before implementing indexed reimbursement pricing is whether they can effectively communicate the changes to their employees. Your employees will likely be wary of any alterations to their health insurance. When presented incorrectly, some may interpret this move as imposing unnecessary limitations on how and where they receive care. The opposite is true. Indexed repricing is a better plan design but can result in additional hurdles to care the employer will hear about in the first year after implementation.

The employer should create a win-win for employees. We recommend that employers considering indexed repricing take the following actions:

• A C-level champion who is bonused for its success;
• Lower employee payroll contributions, deductibles and co-insurance (saving employees approximately $1,750 annually based on client experience);
• An honest conversation with employees that this change is needed to maintain benefits at the current level without shifting costs to employees;
• There will be the occasional provider who won’t serve an employee, but we will get them seen and the treatment they need.

Employers must make a concerted effort to help their employees understand why this decision was made and exactly how it will impact their coverage. Employers should go the extra mile by opening lines of communication to answer any questions and facilitating conversations between managers and junior employees. If internal communication is not your company’s strong suit, extra precautions must be taken to ensure a smooth transition.

When the glove fits

While not for everyone, custom plan design with indexed reimbursement can effectively keep healthcare costs down at many organizations. As the premiums paid by employers continue to rise and hospitals charge varying rates, indexed reimbursement pricing solutions are another tool in an employer’s arsenal to help combat rising expenses that have become overly onerous for some companies. Before committing, it’s important to walk through the pros and cons to see if it could be a good fit for your organization.