“It’s not health insurance that’s expensive; it’s the cost of healthcare,” a keen observation from a recent blog post by Frenkel Benefits’ president, Craig Hasday. It’s safe to reason that anything which lowers the cost of healthcare should lower premium rates – but is it that easy to get done?
Employers try to mitigate healthcare costs in a couple of ways; by directing employees to networks with negotiated discounts and by shifting cost onto employees through higher deductibles and copays. But this has played itself to an extreme position – with the large-scale adoption of High Deductible Health Plans (HDHPs) over the past decade and the growth of narrow networks, many employers can no longer find deeper network discounts or reasonably shift further costs. As medical cost trend continues to rise and put endless upward pressure on premiums, employers are reaching a breaking point and looking for alternative solutions.
Enter reference-based pricing. In short, its goal is to eliminate the impact on claims from arbitrary pricing differences between providers by giving members a set amount of money to cover specific healthcare services. The objective is to motivate participants to search for the most cost-effective provider of care since the member is responsible for charges above the set reference-based pricing level. For example, if the average cost for a surgery is $49,000, the participant would only be covered for charges up to $49,000. If the member elects a more expensive provider, they would be responsible for the difference.
The risk of paying significantly more out-of-pocket drives plan participants to search for cost-effective care more aggressively than they would through other methods, like an HDHP. And if reference-based pricing became commonplace throughout the industry, it could create pressure on providers to price at the average level or provide significant justification for their higher charges.
An earlier post on this pricing model spoke to large, self-insured employers. Today, we’re starting to see this concept move down to smaller groups. It’s blended with a self-funded policy (another large group trend that’s been steadily moving down market) and allows the small employer the possibility of significantly lowering their health insurance claims, resulting in lower premiums. For small employers, this could be viewed as an improvement over traditional plans since members can visit any medical provider. It’s also important to understand how a reference-based plan will impact drugs and major services (think organ transplant).
Changing from a traditional plan to reference-based pricing is forcing a significant behavioral change on employees, but it’s a shift that aligns with the recent consumer-driven approach to healthcare. For employers, large and small, looking for relief on health insurance premiums, reference-based pricing might be an option worth exploring.