How Do Employers Save Money With Reference-Based Pricing?

JULY 5, 2023

Reference-based pricing, or RBP, is a cost-containment strategy used to determine the fixed amount an employer or insurance company is willing to pay for certain healthcare services or procedures. Compared to rates set under a traditional PPO plan, RBP can produce cost savings because of how rates are negotiated. Implementing an RBP plan can reduce employer health plan spending by 20% to 25%.

Under a PPO plan, insurance companies use a top-down pricing method, negotiating costs and discounts for medical services and procedures with provider networks. But those providers can charge drastically different prices for the same procedure. Protected by confidentiality agreements, the rates are often set arbitrarily high – one study estimated PPO reimbursement rates were 241% higher on average than Medicare for the same services and procedures.

Unlike a PPO plan, RBP uses a “reference price” to determine reimbursement rates. Taking a “bottom-up” approach, reference price negotiations usually start low — often based on average costs for services and procedures, benchmarked rates for a specific geographic region or provider network, or Medicare reimbursement rates. The rate may also be negotiated directly with providers. Regardless of how it is determined, the agreed-upon reference price is often 20% to 25% lower than a traditional PPO plan.

Employers may have concerns about implementing RBP – especially if providers are unwilling to accept the reference price or charge over the negotiated rate. But as this pricing model has evolved, so have opportunities to implement RBP successfully.

What Are the Opportunities for Employers?

Increasing Availability: RBP has grown in popularity as more employers see the financial impact. Additionally, third-party administrators (TPAs), RBP vendors, and stop-loss carriers have been taking an increasingly collaborative approach to negotiating with providers, helping them understand the value and mutual benefits of RBP. Insurance companies have also been using more advanced methods to determine reasonable and fair rates to make RBP more attractive to providers.

Improved Adoption and Usage: Concerns about the limited availability of providers who would accept these reimbursement rates may have prevented some employers from considering RBP. However, the nature of negotiations, reimbursement rates, and consumer protections regarding balance billing has evolved over the past several years. Although not as seamless as a traditional PPO network, many RBP plans do offer a comprehensive turnkey solution that limits or mitigates much of the risk previously associated with these programs.

Refined Pricing: As more plan data becomes available, insurance companies will be able to leverage advanced analytics to evaluate healthcare utilization under an RBP plan and determine more accurate reference points. Insights into usage and provider performance, cost drivers, and reimbursement rates will guide more precise decision-making and result in greater savings. Integrated technology and tools also help insurance companies better manage RBP plans and facilitate more efficient communication among employers, providers, and patients.

What Does Successful Implementation Look Like?

While RBP may not be a good fit for every organization, many employers – particularly large, self-funded health plans – have successfully implemented and managed RBP plans and found significant financial benefits. Click on a case study to learn how USI helped these clients reduce health plan spending with an RBP plan:

A 1,100-employee Midwest branch of a global metals manufacturer conglomerate was concerned with the double-digit increase in their per-employee per month (PEPM) health plan costs. USI presented the company with a reference-based pricing (RBP) plan alongside their national PPO plan and explained how RBP could change the trajectory of their benefits spending by significantly reducing claims costs.

The company was interested in the projected savings and agreed to implement an RBP plan alongside the national PPO. In the first year, the PEPM for the RBP plan was 57% lower than the PPO. The company saw continued success with the RBP; the RBP plan was 103% lower than the PPO plan in year two and 87% lower in year three.

A financial services firm with over 3,500 employees was concerned about the rapidly increasing cost of their health plan and asked USI how they could reduce costs. USI proposed a reference-based pricing plan projected to reduce their PEPM costs by as much as 30% compared to the national PPO plan they had in place. The firm decided to implement the RBP plan alongside the PPO offering, and in the first year alone, the RBP plan was 42% less than the PPO plan. Four years into plan implementation, RBP remains 49% lower than the PPO plan.

A 6,000-employee long-term care organization with operations across ten states was looking for a solution to lower its health plan costs. USI proposed implementing an RBP plan alongside their current health plan, with the goal of eventually offering just the RBP plan. While most employees were initially hesitant, 71% had enrolled in the RBP plan by year two. An analysis of the company’s actual net health plan costs showed that, when fully implemented, the RBP plan cost 46% less than the projected cost of the PPO plan.

These examples demonstrate significant cost savings through RBP. However, it’s important to note that each employer’s experience will vary based on their unique circumstances and the effectiveness of their RBP program design and implementation. USI can help you determine if RBP is a good fit for your organization and set up your plan for success.

Contact your local USI benefits consultant or email to learn more about the advantages of RBP and other cost-containment strategies.