medical bill with a stethoscope and calculator nearby

It’s no secret. Healthcare is one of the largest expenses for employers. A study by the Kaiser Family Foundation (KFF) shows that in 2021, the average cost for single coverage was $7,739 and $22,221 for family coverage.

In 2023, a 10% increase in costs is expected, according to Willis Towers Watson’s (WTW) 2023 Global Medical Trends Survey. This increase would bring costs to their highest level in nearly 15 years. And some employers are seeing even higher increases going into next year.

Another report from WTW, the 2022 Best Practices in Healthcare Survey, found that 70% of employers expect to see a moderate to significant increase in healthcare costs over the next three years, with more than half expecting to be over budget in 2023. In this report, almost 25% of employers say they plan to shift costs to employees through higher premiums.

With double-digit increases, what can self-insured employers do to contain costs without sacrificing benefits? One way many employers are doing so is with reference based pricing.

While in the past, reference based pricing hasn’t always been an employee-friendly strategy, there’s been a renewed interest as value-based benefit design becomes more popular.

In this post, we’ll explain the basics of reference based pricing, including:

  1. What reference based pricing is
  2. Which employers are good candidates for reference based pricing
  3. The benefits of reference based pricing to employers and employees
  4. What to look for in a reference based pricing plan

What is reference based pricing?

Also known as RBP, reference based pricing is a cost containment strategy where a self-insured employer pays a set price for a healthcare service rather than a price determined by the health plan. Typically, the prices are based on established benchmarks like Medicare or other third-party data.

When a provider bills for services, the employer, through its TPA, pays the set price or maximum allowed charge.

These prices that providers and facilities charge will drastically change based on where they’re located (state, rural vs metro, etc.), payment agreements with health plans, healthcare systems, contract stipulations, and more.

Here’s an example:

Edith, Dianna, and David are all employees of the same company but live in different states. They all three need hip replacements. Because each facility and provider charge a different rate, Edith’s will cost $40,000, Dianna’s will cost $55,000, and David’s will cost $75,000.

With a reference based pricing plan, you generally pay the same amount for the hip replacement regardless of location. In this example, you could potentially pay $30,000 for each surgery, saving a total of $80,000. Plus, you know the providers provide high-quality care, and the risk of them returning because of complications is low, potentially avoiding even more costs.

In most cases, private health plans are paying much more than what Medicare would pay. A 2019 RAND research report showed they’re paying 241% more than Medicare payment rates for inpatient hospital care and 293% for outpatient hospital services.

Who should consider reference based pricing?

The best candidates for reference based pricing are self-insured employers. This is where employers pay their claims rather than paying a set fee to a carrier. Because of this, they have a strong incentive to control costs as much as possible.

What are the benefits to employers?

The most obvious benefit is cost containment. In today’s world, employers are paying much more than what Medicare pays. With reference based pricing, you pay much less than you would with a traditional provider network.

When pricing varies greatly, it is difficult to plan for future medical expenses. However, with reference based pricing, there is better cost predictability. There’s no disparity in pricing from region to region or state to state. There are also no hidden fees or upcharges.

Employers with reference based pricing plans also see lower stop-loss renewal rates because the risk of unexpected catastrophic claims is significantly reduced.

What are the benefits to employees?

The greatest benefit to employees is better quality care at a better price.

Modern-day reference based pricing networks have a strong focus on quality as well as cost. They aren’t looking to just contract with the cheapest provider. They’re looking to contract with the highest quality provider at a reasonable rate. It’s that attention to quality that drives the greatest outcomes for the employee.

Another benefit to employees is that when combined with care advocacy, it drives more appropriate care, helping to avoid unnecessary treatments. The employee knows that they are getting the right kind of care without worry.

What should you look for in a reference based pricing plan?

There are a couple of non-negotiables when it comes to reference based pricing.

Focus on quality

As we said above, reference based pricing plans MUST consider quality when contracting with providers. It doesn’t do any good if the employee gets low-quality care, doesn’t improve, and returns for additional care, costing everyone even more money. The reason that these plans often have a more “narrow network” of providers is that only the highest quality doctors and facilities are included.

At SentryHealth, providers go through a rigorous process to ensure they offer high-quality care. In fact, only one in five doctors meet our strict standards.

Expert guidance through care advocacy

Reference based pricing can’t just be a small network of high-quality, low-cost providers. It needs to include care advocacy. This ensures that employees are guided toward the right provider for their medical issues. Care advocates work to understand members’ needs and then create personalized care plans that include recommendations for the highest quality, lowest cost providers.

Not only that, but they also serve as educators for members and providers about how reference based pricing works. This type of plan can be scary for some employees. If they don’t understand how it works and why it was implemented, they can often feel restricted or confused about how to get care. Communication is key.

If a provider doesn’t understand the plan, it’s likely they may turn members away because “they’ve never heard of their insurance.” Our Nurse Advocates will facilitate conversations between members and providers to reduce confusion about the plan, improving satisfaction for everyone.

How can SentryHealth help?

SentryHealth offers a reference based pricing plan that is tightly integrated with our care advocacy services. It’s the best option for self-insured employers looking to improve costs without sacrificing care quality. Contact us to learn more.

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The SentryHealth difference.

SentryHealth is leading the charge in employee health and wellbeing. Integrating smart technology with personalized guidance from Registered Nurse Advocates, we empower employees to make more informed decisions while guiding them to quality, affordable care. The result is greater engagement, higher satisfaction, better outcomes, and lower costs.