Industry Trends: Reference-Based Plan Models

Industry Trends: Reference-Based Plan Models

As the health insurance industry searches for the magical solution to lower costs and higher quality care for Americans, it is important to understand recent history and how the popularity of PPO’s emerged and they contribute to continued escalating costs. At the height of the HMO movement in the 90’s, PPO’s emerged in an effort to leverage the same savings off of the frugal HMO platform, but out of the necessity to build larger, more flexible networks. That movement met resistance from key providers who in trade for participation to the PPO network would not uphold the rigid HMO reimbursement model. Rather than hold the line and set reasonable prices, PPO’s acquiesced and agreed to pay providers—especially hospitals—pretty much anything they wanted using a discount-off-the-billed-charges model.

The problem was that there were no regulations on what hospitals could bill for services, so the PPO shell game of “discounting” went into effect.  Today, the average for-profit hospital charges more than 700 percent of what Medicare would pay, while non-profit hospitals charge approximately 550 percent of Medicare. Since the discounting levels from the PPOs are not generally openly discussed or disclosed, self-insured employers are unaware that they are paying roughly three times the amount that the largest payer in the country has deemed to be a ‘fair’ reimbursement.

The Affordable Care Act began to expose the health care payment system, and a variety of companies started to publish data exposing the PPO industry and the careless “discount” reimbursement model. In reality, hospitals readily accept 130 percent to 150 percent of what Medicare would pay (sometimes less) for those willing to make cash-based payments.

A new self-insured plan concept referred to as reference-based pricing (RBP) offers two remedies to this inflated, unfair system by using a defined-contribution model of health care benefit financing. First, a group health plan determines a fair and just reimbursement for hospital and outpatient medical services.  Early results RBP operations have found that providers would readily accept reasonable payments for services in order to retain their business. In contrast, the PPO industry that most employers utilize today guarantees overpayment for services in almost all scenarios through their contracting models, especially for hospital services.

While there are a number of delivery models and flexibility for RBP, they all provide logical, fair and transparent reimbursement for medical services. RBP models fall into three categories:

  • A hard line-defined contribution model: “This is all we will pay.”
  • A pure negotiations model requiring that all claims be negotiated to mutual satisfaction.
  • A hybrid model that limits payments but uses multiple reference points to confirm reasonable reimbursements.

RBP and defined-contribution health care delivery is expected to change the face of employer-sponsored health care plans by changing the dynamic between those who offer health care services and those who utilize those services, and fair and reasonable payment levels should arise on both sides of the equation. Employers that utilize such plans will see an immediate reduction in their health care spend of 20 percent to 30 percent, and their member employees can finally start to see some relief—not only in their contribution rates, but also in their out-of-pocket costs.

By Chris Elvidge, Director of Account Management