As self-insured employer groups wrestle with the requirements of the Affordable Care Act, some continue to explore the potential of reference based pricing (RBP) as a cost control tool. I truly believe RBP’s time is nearing. Here’s why:

A proven cost-saver
Self-insured employer groups have always been ahead of the curve, understanding that their good risk management habits could reduce the frequency and severity of claims and, consequently, health care costs. RBP is on the same part of the curve, taking aim at medical provider costs by capping the amount employers pay for common medical procedures with wide price variations.

Health insurance companies negotiate rates for all plan costs, and self-insured organizations are showing increased interest in adopting a similar philosophy. One success story is the California Public Employees’ Retirement System (CalPERS), which serves 1.4 million people. CalPERS began using RBP more than three years ago for elective knee and hip replacements. In 2009, CalPERS noted a wild $20,000-to-$120,000 variation in charges its self-insured plan paid different hospitals for the two procedures, with little difference in quality. CalPERS then established a $30,000 reference price it would pay for the two procedures, identifying 41 hospitals as “value-based purchasing design” facilities.

Employees paid a 10% copayment on any price under $30,000, and dollar-for-dollar for charges over $30,000 out of network. Geographically dispersed, the hospitals scored at or above average for quality. The result: Almost $6 million in savings over two years, according to the National Institute for Health Care Management.

Balance billing a big obstacle
With success like this, why don’t more self-insured employer groups move to an RBP approach? There are a number of hurdles, but one of the most concerning is balance billing. RBP typically pays a reimbursement rate equal to Medicare rates plus an additional 25-35% for predetermined procedures. Unfortunately, some providers charge employees extra — the balance. In the case of a $30,000 surgery, the balance can be substantial. It shouldn’t be that way.

RBP pays more than Medicare and offers providers profit margins. However, providers still earn more in the private sector, so if they don’t feel the level of payment matches their cost, they balance bill to make up the difference. This practice, along with the uncertainly surrounding what is permissible, turns off potential RBP adopters.

We see more companies and vendors providing this service to self-insured employer groups. We all know it makes sense. It is a cost control tool that carriers and the government employ. RBP’s time will arrive when self-insured employer groups and an educated workforce learn more about value-based healthcare. It will require stronger contractual guarantees negotiated by third parties and a realization by medical providers that reference based pricing is fair, needed, and something whose time will come.

Today, I hear the beginning of a death knell for PPOs. RBP is a sound cost control technique – sooner or a little later, but it is coming.

Fleet is president of AmWINS Group Benefits, a wholesale broker of comprehensive group insurance programs and administrative services. He can be reached at asksam@amwins.com.

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