Finding the sweet spot in health care costs: Is reference-based pricing the answer?

Preferred Provider Organizations (PPOs) are the most prevalent type of commercial health plan in the United States. However costs and service have been in question lately. According to the Kaiser Foundation, employee health care premiums have risen 47% and deductibles have risen 68% in the past decade, compared to an only 31% increase in wages. The American Public Journal of Health has reported that approximately 530,000 families file for bankruptcy each year because of medical bills.

However, nearly 50-year-old ERISA laws have allowed plan sponsors to change and set up the way they provide health or benefit plans. One such method are reference-based pricing (RBP) plans, which allow sponsors to set the pricing model (sometimes based on Medicare) that will be reimbursed to plan participants as opposed to the typical “charge master-down” model discount that is typical in most of the carrier-based models.

As time has passed, more weight has been placed on the fiduciary to make sure they are operating a plan in the interests of their own responsibility, but also of their employees. Fast forward to 2010 when the Affordable Care Act was enacted and many of the top carriers changed how they began measuring costs, which has affected employer costs. Tom Wittik, Senior Vice President, Growth, Imagine360, says there have been increases of as high as 30% year-over-year, which is why RBP is becoming of more interest to employers.

Starting the RBP process

“It is not perfect for everybody, says Wittik. “It needs good communication; it needs a broker to understand how this works and how it needs to be supported from a member perspective so there are some unique aspects to the plan. It’s just making sure that your partners in that plan do a great job for you in order to make it work.”

Stephanie Koch, Director of Human Resources, Hendry Marine Industries, has adopted the RBP approach with 300 full-time employees and 338 total lives covered: 60% of their workforce is enrolled in health care benefits and the company covers 75% of health care benefit premiums. She says that $5.5 million in costs have been saved since 2019.

“It wasn’t just about how the company was going to save, it was about how it would impact the out-of-pocket for the employees as well,” she says.

Clint Lautenschleger, Chief People Officer, Restaurant Growth Services, says he was able to save $8 million in the first year. He says that prior to that he was seeing a reduction in service but a rise in costs. “We couldn’t ask our low wage team members to bare the brunt of these costs that they are not creating.” Communications and how you use your ‘concierge’ is key to using the plan. “We’ve been conditioned for decades on how to use health care, and this is just different,” adds Lautenschleger.

His company went three years with no increases and even though there was a 12% increase in costs this year, they would have been significantly higher without a RBP plan since the plan was initiated, he says. It has meant a savings of thousands of dollars per year for team members, he adds.

In 2021, Koch says her company had a surplus of $1 million, which allowed them to have an on-site clinic. Having the transparency of data and the ability to see what you’re paying for is key to creating a strategy for your health care plan.

Member experience can be frustrating initially. It’s important for HR to tell the team member exactly what is needed, which again, is a communications issue. “We went to the lengths of explaining in our open enrolment meetings what ID cards would look like, how you explain who you are insured with, and encourage the provider’s office to contact them to qualify and verify the benefits that you have,” says Koch. Benefits change can cause disruption, and she says, the more detail you can provide the smoother the process will be.

Also, claims are being settled at a faster pace at a lower cost, as well, from a workload perspective has been easier and more efficient, notes Lautenschleger. Koch agrees and says after being in HR for 25 years and questioning how support would work under the new plan. “The employees calling for support were getting a specific person and were not stuck in a call cue.”

Advice for HR

Lautenschleger says thinking through the communication strategy is the first and most important place to start. “All of this is about how you functionally use the benefit, so know how you are going to communicate it and feel good about it. To me that is 99% of the success. It is scary and frightening but we have to get past that. The savings is a huge win for the company and the team member, and they will get better care in the long term.”

Related: Reference-based pricing: 10 keys for successful implementation

Don’t hold back because you think you’ll need to add staff because you won’t, he adds. “You can actually reduce staff or at least reallocate staff to other things that are bigger and more important to the business.”

Koch says it is important to re-visit the brokers you are working with on your benefits plan, and if they have not brought this solution, then “you may want to consider whom you are working with.” Look at other solutions and believe that you have an opportunity to save money but make sure that your employees are getting quality care, she adds.