Understanding Reference-Based Pricing (RBP)

The cost of healthcare in the U.S. has been on the rise for years, with no signs of slowing down. As a result, many employers and health insurers are exploring alternative methods to control costs while maintaining quality care for their members. One such method is reference-based pricing (RBP).

The healthcare market is forever in flux, with costs for services and prescription drugs rising every year. The burden of commanding greater healthcare price transparency and keeping costs reasonable and fair has fallen to the self-funded market.

What is reference-based pricing?

RBP is a healthcare pricing strategy that sets a limit on how much a health plan will pay for a specific medical service or procedure. The limit is based on a reference point, such as the Medicare reimbursement rate.

For example, if the reference price for a knee replacement surgery is $30,000, a health plan will only pay up to that amount for the surgery, regardless of the provider’s billed charges. If a provider charges more than the reference price, the plan would enter negotiation with the provider to reduce the price. Otherwise, the healthcare member may be responsible for paying the difference.

How does it work?

There are different RBP models, but the most common are the Medicare-based and the average pricing models.

Medicare-based model

Under this model, the reference price is based on the Medicare reimbursement rate for a particular service or procedure. The health plan will pay up to a certain percentage above the Medicare rate, depending on the plan’s design.

Average pricing model

Under this model, the reference price is based on the average cost of the service or procedure in a certain geographic area. The health plan will pay up to a certain percentage above or below the average cost.

The benefits

Cost savings

RBP can be a beneficial addition to a cost containment strategy. It can help control healthcare costs and incentivize providers to reduce their prices to match the reference price, resulting in cost savings for both members and health plans.

In fact, provider reimbursements using RBP may range from 120% – 180% of what Medicare pays. Compared to the typical network plan reimbursements, which range from 240% – 2,000% of Medicare, this ceiling proves considerable cost savings for members of the self-funded community.

Transparency

RBP can increase transparency in healthcare pricing, as members are made aware of the costs of medical services and procedures upfront. This can help patients make more informed decisions about their healthcare and avoid unexpected bills.

The greatest benefit of RBP is that pricing is already determined ahead of time, so the plan and plan participants can better estimate the true expense. And while there is no one set price for healthcare services, RBP seeks to find a fair cost.

Provider choice

RBP allows members to choose their healthcare providers based on their personal preferences and needs, rather than solely on network contracts. Members are encouraged to seek care at high-quality providers who have negotiated fair prices, but there aren’t any network limitations.

A traditional health plan requires covered employees and their families to seek care from providers and facilities that are contracted “in network.” An RBP plan is an alternative to the traditional PPO in that there is no network.

Meaning: plan members can make their own choices on whom they see for medical care.

Unique needs

RBP is not a one-size-fits-all concept.

It can be administered as a complete RBP program, including the pricing of healthcare claims and incorporating member advocacy, balance bill and appeals support, and fiduciary services. RBP can also be used in a hybrid manner, paired as a wrap around a narrow network. Another form of the cost containment solution is to use it only for transplant cases or carve-outs.

The challenges

Member discontentment

RBP success and satisfaction is directly tied to member experience. Thus, it’s essential for self-funded groups to choose an RBP vendor that offers a robust member advocacy program to help educate members on how RBP works, provide support services for finding RBP-accepting providers, and offer post-care support to navigate the billing process.

Risk of balance billing

If a provider charges more than the reference price, the patient may be responsible for paying the difference. This can result in unexpected bills and financial burdens for patients. Again, it’s essential to choose an RBP vendor with a strong member advocacy and legal support program to mitigate the risk of balance bills.

The wrap up

RBP is a cost containment strategy that offers predictable healthcare costs across the entire claims continuum. And while it does have its challenges (just like anything else), it offers huge benefits, such as cost savings, price transparency, and provider choice.

As healthcare costs continue to rise, RBP is positioned to become an increasingly popular alternative to traditional healthcare network models.

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