Reference-based pricing can keep your benefit costs down

Health care benefits costs keep rising, and employers need to do whatever they can to keep a lid on these expenses before they continue to spiral further out of control. A combination of inflation that’s impacting many types of products and services, tight labor markets, consolidation among providers, the continued health-related impacts of the pandemic, and newer, more expensive drugs are all among the reasons why. 

Whatever the cause may be, at least three surveys have shown health care costs likely to rise by 6%, give or take, in the next year. One taken by the consulting firm Willis Towers Watson, for example, finds that U.S. employers projected a 6% rise in health care costs in 2023, compared with the 5% they have experienced this year, and that two-thirds of U.S. employers (67%) plan to prioritize health care cost control over the next three years.  

This data and plenty of others — like the fact that 66.5% of household bankruptcies are somehow health care-related, or that health insurance costs have risen 40% in the past decade, or that private health plans paid more than double what Medicare pays providers—show why the path American employers typically take toward purchasing health care needs to be diverted in a direction that tackles rising benefit costs.  

That’s because while employers can’t be expected to simply eat all the costs associated with health care and overall inflation, asking an employee making $15 or $20 per hour to pay a $5,000 deductible is going to lead in the direction of that employee forgoing care entirely. In fact, the Journal of the American Medical Association reports that while wages increased an average of 11% from 2007-2019, deductibles shot up a whopping 110% and premiums by more than 50% for family coverage.      

A more promising path, which is built around greater data transparency, significantly reduced medical cost, and higher-quality metrics leads in the direction of reference-based pricing plans. These improve both cost control — by reducing medical spend by 15% to 30%—and improve outcomes for employers battling the headwinds of inflation, recession, and the Great Resignation. 

Through reference-based pricing, one tool in the cost containment kit employers should consider, health care consumers learn at least a ballpark of their expected costs upfront in addition to metrics related to quality. They gain visibility into: here’s what you will pay, and here’s what you did pay for your recent appointment or treatment, and here’s why. In other words, the same information you would expect with other big-ticket items like a mortgage or a car. Why would anyone choose to buy medical care any differently? 

Our metrics show the average employer saves between 20% and 30% overall on medical costs. This, and knowing what prices will be ahead of time, can help patients greatly in ensuring that they don’t rack up the kinds of deep medical debts that can wreck their financial futures. While not a new concept, reference-based pricing has become all the more of an attractive alternative at a time of galloping costs. 

Member employees also have a wider array of options, a particular boon to those with lower wages who can’t afford deductibles and thus are otherwise disincentivized to seek coverage. And, they gain from new, intuitive, and easy-to-understand technological advances, such as apps that shed light on providers’ quality and cost metrics (as measured by the Centers for Medicare and Medicaid Services) before they go in for a particular procedure.  

This educational background, which can be tailored to members based on what they need to know, can spotlight red flags about a particular hospital or physicians’ practice — or on past positive outcomes, leading patients to green-light going to a certain care provider. 

Self-insured employer groups find reference-based pricing beneficial because this method helps to bring down deductibles, which encourages employees to seek treatment and thus stay healthier. More broadly, these plans are preferable, from an employer’s standpoint to shifting costs to their plan members through higher contributions or deductibles — moves that can tamp down employee loyalty, and thus retention rates.  

Instead, employers can use the savings from these reference-based pricing plans to boost salaries and other types of benefits, positively impacting hiring and retention as long as they explain the benefits in a clear fashion to current and prospective employees: here’s what the plan is going to pay, here’s why, and here’s how this compares to how your health care has worked in the past. 

Under most current plans, employers can’t tell their plan members how such issues are going to play out, leading to greater unpredictability. These employers can bolt on as many cost-saving tools as they want to their existing plans, but if they don’t drive to the heart of the issue around transparency and savings, they’re not going to get traction. Having said that, those who aren’t quite ready to make the jump all at once can offer reference-based pricing services in addition to their existing PPO network; or they can rip off the Band-Aid and replace it all at once. 

The No Surprises Act adds protections for consumers against balance billing, where a provider bills a patient for the difference between the provider’s charge and the allowed amount, resulting in the surprise of an unexpected bill to the patient. While all plans experience balance billing, reference-based pricing plans offer a Patient Advocacy Center (PAC) which acts as a bulwark, working on behalf of the patient to resolve them in a way that shields them from these additional costs, lowering the member’s stress and easing the burden on the employer. 

“With no end in sight to projected cost increases, the need to manage health care costs and address employee affordability has never been greater,” says Courtney Stubblefield, insights & solutions leader for health & benefits at Willis Towers Watson. “Yet, with so many potential actions, employers must focus on changes that go beyond addressing their employees’ needs to also support efforts to attract and retain talent during a tight labor market.” 

Related: Reference-based pricing, uneven hospital pricing and the battle against inflation

For providers, reference-based pricing creates such benefits as estimated payments before service, on-demand payments, members who are better educated as to the quality, and more thorough demographic and competitive information about potential members. Reference-based plans benefit payors by boosting member engagement. 

Bottom-line, by adding transparency and breaking the upward spiral of health care costs, reference-based pricing leads to a win-win-win-win for employees/plan members, employers/plan providers, insurance companies, and health care entities. They represent a new direction that all parties, who all have skin in the game, should want to follow. 

Ryan Day, President, HST, a MultiPlan Company.