While we were at the National Association of Health Underwriter’s Capitol Conference, we ran into quite a few friends and blog readers. Several asked us to write a post about reference-based pricing. Specifically, they inquired if there are any compliance-related concerns. Since we love to accommodate our friends, here it is!

Overview of Reference-Based Pricing

Reference-based pricing (RBP) is a strategy self-funded group health plans can use to help control and standardize claims costs. Instead of using a traditional network-based provider model, when a plan adopts RBP, they use a benchmark rate to set the price of health care. A percentage of what the Medicare program pays for a specific service is the most common metric. Payment caps often range between 120-200% of the Medicare rate, with variations due to provider competition in a given area. A recent RAND study indicates that the national average charge is 241% of the Medicare rate. So reference-based pricing has the potential to yield significant savings. It also helps make claims costs more predictable.

How Reference-Based Pricing Works in Practice

Let’s use Mary as an example. Let’s also assume she has coverage through a plan that utilizes reference-based pricing but hasn’t done any direct contracting with providers. Mary needs a non-emergent procedure that costs $500, according to Medicare. Her plan will pay 150% of the Medicare rate, or $750.  Mary is encouraged by her employer-plan to shop around for her care, but the best deal she can find is a provider that charges $1000.  When the claim comes in, Mary’s employer plan will pay the provider $750. It’s possible that the provider will accept the $750 payment. It is also possible that Mary will get a $250 bill for the balance of her care costs. If that happens, most RBP administrators will negotiate the bill on Mary’s behalf.

Who Needs to Be Thinking About Reference-Based Pricing Compliance Concerns?

Right now, despite the buzz reference-based pricing generates, it isn’t a commonly used cost-containment tool. A 2benefits benchmarking study conducted by Lockton in 2019 indicates that just two percent of employers use RBP in their plan designs. The Kaiser Family Foundation’s 2019 Employer Health Benefits Survey suggests that it might be a bit more pervasive. They found that eight percent of large employers do some type of direct contracting with providers. However, the average cost for a family premium in an employer-sponsored plan was $19,565 in 2018. So controlling healthcare costs is paramount for all businesses. When implementing cost-containment solutions, employers and benefits brokers need to know how to structure plans correctly. Otherwise, compliance costs and penalties can outweigh any savings that come from innovation!

Employers Considering Reference-Based Pricing Need to Think About Maximum Out-of-Pocket Limits

One of the top compliance issues for employers considering the RBP model is how to work with maximum out-of-pocket cost limitation requirements. Some plans only use RBP for out-of-network claims, but most eliminate networks for all or some covered services. The Affordable Care Act (ACA) limits the amount people with non-grandfathered plans may pay out-of-pocket. According to the law, the out-of-pocket cost-sharing limit typically applies to in-network claims. So, what happens in a plan with no network that uses RBP?

The Department of Labor’s ACA FAQ 21 addresses this issue. Employers thinking about using reference-based pricing need a third-party administrator that can comply with all regulatory guidelines. FAQ 21 makes it clear that if a provider accepts the plan’s allowable amount (i.e., the reference-based price) as payment, then the provider is considered “in-network” for the purposes of the maximum out-of-pocket limit. However, the plan also must demonstrate that participants have adequate access to quality providers at the reference price by meeting all of the following criteria:

  1. Type of Service: Plans that consider providers that accept the reference amount as the only in-network providers can only use RBP for services when beneficiaries have enough time to make an informed choice of provider. In particular, RBP cannot apply to emergency services.
  2. Reasonable Access: RBP plans have to ensure that an adequate number of providers who accept the reference price are available.
  3. Quality Standards: There must be procedures to ensure enough quality providers will take the reference price.
  4. Exceptions Process: There needs to be an easily accessible exceptions process if access to a provider that accepts the reference price is unavailable or quality of care is compromised.
  5. Disclosures: Plans have to give participants pricing information, including a list of services for which RBP applies. They also need to provide an explanation of the exceptions process. This information must be in a plan’s summary plan description or a similar document. The plan also needs to make specific additional provider information available on request.

Employers Need to Make Sure Their Plan Documents Reflect Reference-Based Pricing

If we’ve said it once, we’ve said it 1000 times—a group health and welfare plan is only as good as its official ERISA plan documents. Employers that choose reference-based pricing need to ensure their plan documents reflect this practice. It’s particularly important to address in the sections concerning out-of-pocket cost limits and claims procedures. In particular, a plan using RBP needs claims adjudication flexibility. For example, what if the plan document said that the payment rate was always 150% of Medicare, but the claim was for a service not covered by Medicare? Without the appropriate language in the plan document, a provider could allege an ERISA violation because the plan administrator couldn’t carry out the payment terms of the plan exactly as written.  A stop-loss carrier could also contest the payment.

Some Other Things Employers Will Need

Finally, we have a few more friendly suggestions about what brokers and employers considering reference-based pricing might need to be successful. One is a reliable partner with years of experience implementing the RBP model. Examine the partner’s track record with other groups relative to cost-savings and beneficiary support. Also, look at their stance on sharing fiduciary liability. Another necessity is excellent transparency tools for plan participants so that they can easily find providers that will take the assigned rate for their services.  Finally, constant employee education and communication are essential with RBP. Each business should think about how they will support their employees, as well as what help they will need to do that effectively.