As health care costs continue to rise amidst a constantly evolving health care market, employers are more challenged than ever to find new and creative ways to lower their health care costs. While many avenues exist to reduce health-related expenditures and save money, reference-based pricing (RBP) is gaining traction as a strategy of choice among employers throughout the country.
RBP enables employers to set spending limits on specified services or procedures. This means an individual is covered only up to the established limit for a given service or procedure; if it ends up being higher than that limit, the individual would then be responsible for paying the cost difference out of pocket. That said, such limits should only be set on services that are “shoppable”—in other words, services whereby an individual can make an informed decision based on price and quality. Some examples include lab tests, prescriptions and joint replacements. In these cases, lower-cost options typically are of or about the same quality as pricier options.
RBP – A Closer Look at How It Works
Third-party vendors typically are retained by employers to establish ideal limits for given services and procedures. Such vendors conduct extensive market research on pricing and best practices, and they can negotiate deals with providers.
So when does RBP deliver optimal results? Industry professionals agree that RBP works best when applied to services and procedures with fluctuating costs. If a procedure ranges in price from, say, $800 to $4,000, an employer that utilizes RBP could utilize market research to determine the median price, and then set the spending limit at that amount. If an employee undergoes the procedure at a price that exceeds the RBP amount, he or she will be responsible for covering the difference out of pocket.
There are two primary benefits to RBP:
(1) Lower total health care expenses. Coverage traditionally extends to any in-network service or procedure, regardless of cost. Therefore, employers that utilize RBP can avoid paying steep prices for services or procedures that can be delivered or performed more cost-efficiently.
(2) Greater health literacy for employees, and deeper employee engagement in their health care decisions. Some estimates peg low health literacy costs in the U.S. at between $106 billion and $238 billion annually. Setting limits on specified services and procedures puts the onus on employees to consider cost – in addition to quality – when determining where they will receive a service or undergo a procedure. This likely compels employees to conduct research, which ultimately educates them and makes them smarter, more informed consumers of health care. In the end, that benefits employees—and it helps to lower overall health costs.
What to Consider When Implementing RBP
RBP is a complex undertaking, and many moving parts must be accounted for at numerous points, so it’s a path best traveled alongside an experienced vendor. That vendor should have the capabilities to ensure a smooth transition for your company into the RBP model. If they fall short in this regard, that could potentially disrupt often-used providers. Additionally, inexperienced vendors may set your company’s RBP limits too low for services and procedures, thus rendering your health plans unaffordable for employees. Finally, forgoing a vendor altogether and attempting to implement RBP on your own could potentially leave your enterprise vulnerable to providers that attempt to balance the bill.
Employers should look for every opportunity available to them to lower health care expenses. RBP is an innovative strategy to accomplish while boosting employee engagement in their health care decisions and their overall health literacy.
Identifying a reliable and experienced vendor to work with your company on developing and deploying a winning RBP strategy is critical. If you seek ways to decrease your company’s health care costs, or to learn more about RBP, please contact Ross Farro, President for the Cleveland Market of Marsh & McLennan Agency, formerly Benefits Resource Group. Marsh & McLennan partners with privately held businesses, individuals and public companies that seek solutions that go beyond traditional employee benefits services to help them better manage their bottom line. You may contact Ross by phone at 216-520-5000 or by email at Ross.firstname.lastname@example.org.
Disclaimer: This document is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Marsh & McLennan Agency LLC shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting or legal matters are based solely on our experience as consultants and are not to be relied upon as actuarial, accounting, tax or legal advice, for which you should consult your own professional advisors. Any modeling analytics or projections are subject to inherent uncertainty and the analysis could be materially affective if any underlying assumptions, conditions, information or factors are inaccurate or incomplete or should change.