Reference-Based Pricing – Coming to a Health Plan Near You?

I think you are going to hear more about reference-based pricing. Some history:

What stops a provider from charging whatever they want for care? Let’s say a doctor charges $200 to remove a splinter. If the patient were paying, she/he might try to negotiate the charge or get care elsewhere. But they are most often not. The payor is typically the health plan.

So, the concept of “usual and customary” arose, where the health plans surveyed prices throughout the market and determined the prevailing rate. Reimbursement to the patient was limited to that rate and the patient was “balanced billed” for any excess costs, in addition to their normal cost-sharing. Then along came the HMOs and “network” plans. The contract (or negotiated) rate became the basis for payment to providers and patients were billed plan copays. The two concepts were merged, and in-network care was reimbursed based upon contract rates and out-of-network care based upon prevailing or usual and customary (UCR) rates.

In order to discourage use of out-of-network services, the UCR was reduced from the amount which the 90th percentile provider charged, to the 70th percentile. And now, because of abuse by the providers, it is based upon Medicare allowable charges. All of this meant more balance billing to patients for out-of-network plans. And when copays for in-network care weren’t enough to control utilization in-network, cost-sharing and then high deductible plans were introduced, and patients had to refamiliarize themselves with cost-sharing. Very confusing isn’t it? All of this was to encourage patients to be consumers – but there was little success. The system is too confusing, and patients found it too complicated to shop for care.

Now there is a new payment model entering into the scene, known as “reference-based pricing” and it is catching on in some markets. The amount paid is based on a preset charge for each procedure code, and a multiple of Medicare’s reimbursement rate for hospital charges. The employee is given a tool to find providers willing to make services available for the preset rate. Typically, patients are free to use any provider, but charges in excess of the preset rate are not reimbursed and can be balance billed to the employee.

As expected, the first legal action related to a balance bill under a reference-based contract is underway. A Virginia hospital is pursuing an $84,000 balance bill. In May 2014, a Carter Bank & Trust employee had a heart attack and was admitted to Martinsville Memorial Hospital. This hospital did not have a contract with the bank’s health plan and they received a bill for $111,115. The insurer paid $27,254 to the hospital based upon the reference-based reimbursement rate (which was in excess of 100% of the Medicare rate) under the plan. The hospital balanced billed the patient for the remaining $83,861. While lying in the hospital bed, he signed a “Consent for Services and Financial Responsibility,” as anyone facing a life-threatening moment would do. It will be interesting to see what the courts do with this action.

Reference-based pricing seems more rational, transparent and can be a more cost-effective method for paying for healthcare, and with an open network there are no networks to manage. This should make patients better consumers. They would have a very direct, vested interest in finding out exactly what procedures will be performed and what it will cost. Unfortunately, not only is healthcare very confusing but the more significant costs are often borne at a vulnerable time – when illness or injury takes precedence over cost considerations.

The other problem is that providers aren’t taking the payment they receive lying down. They can – and often will – aggressively pursue excess charges from the patient. This is causing friction between the patients, the plan sponsors and the providers. But costs are out of control. Under the present system very little time is spent making price-based healthcare decisions even though these costs consume almost 20% of our gross domestic product. Look at what the power of the consumer has done for the price of televisions and cars.

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    • avatarCraig Hasday says

      Yes, there was an appeal and the case went to the Supreme Court of Virginia. They disagreed with the original ruling and sent it back to the Circuit Court to figure out. Still waiting on the final verdict.

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