A piece of paper is born and claims are then processed and paid based on a contract between your insurance carrier and your doctor. Perhaps your doctor agreed to take 40 percent off that billed charge, which sounds pretty impressive if you're a bargain shopper, right? But if you don't know what the starting price is or should be, then what is the actual value of the discount?

Let's think about this logically for a second. If you need to make $250 for every office visit you conduct and you've agreed to a 40 percent discount with a carrier, what is your starting price going to be? You would actually need to mark it up over 60 percent to leave you with the $250 after the

discount. But why not mark it up even more? Even something on sale still generates a profit and if it didn't, many of us wouldn't be in business at all.

Reference-based pricing works in reverse. We take the provider's reported cost and margin for a procedure and we mark it up a little to give some extra profit and then we pay the claim. For example, if a provider bills $250 for an office visit and Medicare (which is the most commonly used reference for health care pricing) says that the cost for that procedure code is actually a hundred bucks, we might pay the provider 150 percent of the reported cost, or $150.

Now, the balance bill argument has some merit here, so let's walk through that, too. Most consultants balk at the fact that providers in this model have a right to balance bill a patient for what they didn't get paid, and this is absolutely true. When your provider “negotiates” with an insurance carrier on a PPO contract, they must agree to write off the difference between billed and paid with a promise not to bill the member for anything aside from what their plan design holds them responsible for, i.e. deductible and coinsurance.

Related: Reference-based pricing reimbursements: When to negotiate

How does a provider know what the difference in carrier payment and member responsibility is? It's not the PPO contract that they signed! It's the explanation of benefits that gets sent to both the member and the doctor, generated by the insurance company. Why? Because if you're a doctor with a different contract for every carrier network you participate in, how would you ever keep track?

So yes, balance billing can happen; however, it actually happens in less than 1 percent of cases in a reference-based pricing model that is structured fairly for providers. Would you be surprised to learn that balance billing happens just as often, and even sometimes more frequently, in a PPO arrangement? That protection in the contract holding the member harmless only applies to in-network services, so if one of your members ends up incurring an out-of-network service, a balance bill is born. The difference, though, is a balance bill in the PPO arrangement won't have any support or advocacy behind it. Your BUCAH does not care about your out-of-network liability. This is where the litigation versus negotiation models come into play.

As consultants, we have options when it comes to vendors, and if you're part of this health care revolution, I urge you to choose your partners thoughtfully. More importantly, be sure they're in alignment with the values you communicate as an advisor. You could choose a vendor who reimburses a low percentage of the Medicare allowable on all claims, which is bound to increase your rate of balance billing if your doctors and hospitals feel fleeced when it's time to pay.

You'll want to seek out a partner that will consistently reprice claims just a bit higher. We're talking around that 140 percent to 150 percent sweet spot. Paying a fair price to a provider will drive your rate of balance billing way down, which will prevent over half of the usual member disruption (the other half comes from simply understanding how to navigate a health plan without a PPO network).

A repricer that doesn't pay a provider an adequate amount for services will build additional revenue into their fees to cover the disputes that are more likely to occur as a result of the underpayment. That's the litigation model. That means that your client will pay more in fees to the repricer for the potential of a legal interaction between a facility and a health plan. And, because it is so rare that any of these bills actually go to a true legal dispute, the fees are often a wasted and unnecessary expense to a health plan.

Most balance bills are settled with the repricer or, to be frank, the provider gives up the good fight and writes off the balance. Doctors have better things to do, like deliver medical care to patients! Most often, and this is important, a repricer who builds in defense fees also assesses their fees as a percentage of… something. Most often, a percentage of the claim savings or, and I cringe to say this, a percentage of the billed charge.

Think about that for a moment. Imagine marketing your company as a cost containment strategy against the outrageous cost of health care but then taking revenue based on the very same egregious billed charge that we're all fighting against as unreasonable. What's good for the goose is good for the gander, then? Can you say conflict?

Furthermore, think about that cost impact on a large claim. Let's say there's a million-dollar claim passing through the repricing system and maybe the Medicare allowable for the billed codes ends up being $200,000. Your repricer might take 10 percent of the billed charge as their fee, so while we could argue that even at a total of $300,000 you've saved 70 percent, you could have saved 80 percent and not paid a hundred grand to have one single claim adjudicated. This means that 30 percent of your final cost went to your vendor. Add this up over time, and the amount you pay the repricer has the potential to outweigh the money your health plan is paying to actual health care providers who are taking care of your members. We can all come up with cost saving solutions, but shouldn't they align with our mission to drive down the overpaying of incentives that contribute to the bigger problem?

But hey, we all need to get paid. I'm not suggesting any of us work for free, but if we expect our providers to bring down their pricing to what we consider “reasonable,” then isn't it fair to hold our partners, and ourselves, accountable to the same standards?

Find the negotiation model. Find the partner that can aggregate their costs into a reasonable per employee per month fee and don't pay fees for services that don't actually surface, like legal fees. Find a partner who sets their reimbursement amount fairly to begin with and then buffer up to a maximum reimbursement that the health plan is willing to shell out on a single claim. This gives the vendor an opportunity to settle a claim or balance bill up to the maximum allowed in the plan document at their discretion and drastically reduces the level of member disruption. And I don't want to hear the nay-sayers who will tell me their health plans won't save as much if the reimbursement amount is higher. Take what you're saving in inflated “fees” with the other guys and throw that into your overall wins for the year. I promise you that a plan structured to pay providers fairly will lower the balance billing risk while keeping doctors and employees happy and still saves a boat load of money for a self-funded employer health plans when pitted against any litigation model.

While we're here, let's talk briefly about stop loss. Most stop loss carriers will give a better rate for a reference-based plan, but be sure to look for the pitfalls. There are two things important to note: First, you'll get a better rate from a stop loss carrier if you pitch the litigation model. Why? Well, if you pay 120 percent of Medicare on every claim, that's easy to underwrite on a couple of years of prior claims data. However, the negotiation model operates within a delta that it a little harder to predict. For example, if you implement a plan that starts with 140 percent of Medicare for all claims, but allows discretion to settle tough claims at 180 percent if needed, then the numbers

become a little more variable. However, a good stop loss carrier can still underwrite the risk conservatively by using an amount closer to the maximum for the first year and continue to assess at each renewal.

The second thing to watch for is more important. Reference-based pricing vendors in the litigation model will sometimes have their fees (which, remember, are a percentage of the actual claim) covered under the stop loss policy. This is often to justify covering a fee that is much higher than a PEPM model would be; but anyone with an actuarial heart will agree that this is simply cost shifting. The fees still need to be paid, and an advisor who claims that the client won't have to pay it because it can go through stop loss perhaps doesn't understand who pays the stop loss premium; spoiler alert: it's the client. And, be aware that those additional amounts being absorbed by the carrier will have an impact on your renewal and the premium increase. Remember, stop loss coverage is underwritten on claims, and if your fees get dumped in with your claims spend, your policy will be underwritten accordingly.

So, what are the components to implement a truly successful reference-based plan that will actually slash your client's costs in half? Start with your reference-based pricing partner and make sure they have invested well in a robust member advocacy team. When balance bills occur (and they will), you want a team prepped and ready to take the member out of the equation as quickly as possible. Always, always ask what is in place for member support!

Next, take a look at the last couple of years of claims experience — billed and paid. Can you find an average within both of those categories? This will help you with the temperature of your RBP porridge. What is the right percentage of Medicare for your client in your state? This can be found in both the client's prior data and with the help of the vendor you choose to reprice the claims. Keep your reimbursement at a digestible level for providers. We don't want doctors getting paid poorly for their work. That is not the intention or function of RBP. Take the time to find the right number for the least amount of disruption.

Also: It's time for transparency in health care

And while we're talking disruption, make your open enrollment meetings mandatory for this style of plan. It is imperative that plan members understand how to navigate in a no-network environment. While we don't expect members to manage their own plan entirely, they will need to know what conversations to have at the point of service. The most frequent push back from a provider is, “Sorry, we aren't in-network!”

Doctors are very accustomed to having their wrists tied to a PPO contract, so billing to a health plan that has no network contract at all is likely going to be a new experience for them. We all need a little comfort for new, big, scary things. Provide it.

And finally, choose your people wisely! Your third-party administrator and your RBP vendor should be good buddies. They should know each other well and integrate their systems efficiently. They'll likely have overlap in their offerings, like member advocacy and direct contracting services on both sides. Utilize both at every opportunity! Review the fee structures for everyone involved. Know where the money is going and why. Is your TPA throwing in an extra fee here and there for a reference-based plan model? If so, what's it for?

Keep in mind that there's still work to be done. Reference-based pricing cannot fix the health care system, because the issue is not so narrow in nature. While we all agree the cost of

health care has spiraled out of control, we still need to tackle the quality of care issue, which is an entirely different subject altogether. Cost and quality go hand in hand and can negatively contribute to one another in an unmanaged environment. Be aware that the art of reference-based pricing only touches the finances of a health plan and not always the health outcomes of the members enrolled in the plan. However, with the barrier of a network removed, we can embark on strategies like direct contracting to really start steering the quality of care in the right direction alongside the finances.

In order to find the magic pill that incorporates both, you'll have to partner your reference-based pricing solution with strategies that supports increased quality, like direct primary care or redirection of care into a proven, data driven, higher quality environment. If you're lucky, you might come across a repricer that has the ability to do both.