Don’t Take Your Benefits by Chance: Pros and Cons of Referenced Based Pricing

While on a recent trip to the beach, I ran into a CFO friend of mine on the boardwalk.  As we were in line waiting to grab a slice of pizza, the topic of healthcare came up (wouldn’t you know).   We started talking about healthcare spend, inflation, and  if there is a silver bullet that can take the stress away.  I reflected back on a conversation I had with one of my former underwriter colleagues and he told us “there is no free lunch with healthcare” – the claims are the claims.

The good news: there are ways that employers can buy better.  In a previous Carlozo’s Corner we talked about how groups who are self-funded have an advantage with cost containment solutions.  One of those solutions is Referenced Based Pricing.  This approach can save plan sponsors and their members, but there are pros and cons and considerations to evaluate.

First:  What is Referenced Based Pricing (RBP): In an attempt to make the explanation easy to follow, RBP at its very core reprices hospital claims at a percentage above what Medicare pays for the same service or the hospitals cost to deliver the service plus a fair margin. Generally, 140% of Medicare is standard across most RBP plans.  Why does this method have a savings impact and what could a company expect?  A couple reasons:

  1. Hospitals are marking up these services in some cases by over 400%.
  2. Generally speaking, hospital claims represent approximately 10% of the number of claims, but close to 50% of the spend. As a result, the repricing will have a significant impact on spend.
  3. Stop Loss companies have seen the positive impact on claim savings (especially high-cost claimants), as a result, rating can be more competitive.
  4. I have seen proposal from various RBP companies come in a from 20-25% savings on claim spend.

Second:  What are the considerations – is it too good to be true?

RBP is not new to the industry.  These companies have been around for years.  With that said, it works and you would not be the “guinea pig” with this solution.  But, it does come with questions.  Savings are crucial, but it is important to make sure employees are covered.  As a result, what do you need to know?  This is not traditional insurance through the Blues, Aetna, Cigna and the like.

  1. There is NO hospital network. Employees can walk into any facility.
  2. The physician network will change as well – For example, the employers are using TPA’s to administer the PHCS network to handle physician claims.  Note:  it is important to understand the disruption going from a common carrier network to this approach.
  3. In summary: self-insured groups need to find a TPA that administer claims on the physician side.  All hospitals claims are handled and negotiated by the RBP firm.
  4. Education of members is a must! Employee support will be a big item to consider when you evaluate RBP firms.
  5. Employee Protection: Could employees be balanced bill if the hospital does not accept the reasonable?  The answer is yes, however, the employee advocacy the RBP companies have can assist balanced bill issues and negotiate on behalf of the employee.

So, what is the bottom line?  To understand all of the components, it is important to go through a formal review and evaluate several RBP companies.  Each one operates a bit differently and their fee structures.  At the end of the day, we are in a landscape where employees want more, want flexibility, and employers are looking for creative ways to bend the curve, find some dollars and provide more.  Referenced based pricing can deliver that opportunity.

If you have any questions, please hit me up at [email protected]!  I would be happy to share more thoughts, opinions and help take you down the journey.

Welcome to Carlozo’s Corner, a new weekly installment I’m pleased to contribute to the FENG newsletter. I’m Anthony Carlozo, a client executive at Marsh McLennan Agency (MMA), the employee benefits division of Marsh.

At Marsh McLennan Agency, I work with organizations of all sizes to help them minimize their risk and maximize the value of their benefits programs.

Here I’ll be sharing insights about a current market trend and the strategies I’m seeing employers adopt to adapt to today’s evolving business landscape.