Four decades ago, PPOs were hailed as the “silver bullet” to control healthcare costs. Participating providers were contractually obligated to accept discounted fees, which seemed like an obvious solution to out-of-control increases in healthcare costs. Self-funded plan sponsors readily adopted this approach to gain access to network discounts and lower their healthcare costs. In fact, some self-funded plan sponsors still periodically conduct a re-pricing analysis or another method of comparing which PPO yields the best discounts for their specific group.

However, as provider contacts expired, they were renegotiated at higher rates for providers and higher costs for plan sponsors. In addition, hospital charge-masters have increased at an exorbitant pace and have largely gone unregulated and uncontrolled. As a result, the significant discounts once achieved by PPOs no longer deliver the true savings that were seen in the 1980s and 1990s.

[Image credit: Bloomberg]
[Image credit: Bloomberg]

For example, a 60% discount on a $1,000 “oral cleansing device” (more commonly referred to as a toothbrush) clearly does not deliver value for the plan sponsor or member and is indicative of some of the billing practices that go undetected. The same could be said of a $150,000 knee replacement. Using a PPO for its discounted fees is somewhat analogous to buying a car by negotiating a discount off the list or sticker price.

As employers gain a better understanding of the questionable value of PPO discounts and pricing optics, reference based pricing (RBP) and reference based reimbursement (RBR) provide possible solutions by addressing the demand for:

· Price transparency,
· Benchmarking the cost of claims,
· Eliminating inappropriate charges, and
· A fiduciary or co-fiduciary serving on behalf of the plan sponsor.

With RBP, the plan specifies the amount that will be allowed for certain common procedures such as MRIs or knee replacements based on prevailing charges. Covered members have access to a list of participating providers who have agreed to accept these payments. Should the member choose a higher-priced provider, he or she may be responsible for the balance of the payment.

RBR uses a common “pricing reference” — often tied to the Medicare allowance and the actual cost for a specific service – and then reimburses the hospital or facility an additional 20-80%, allowing for the provider to make a “fair and reasonable” profit. For context, many PPO discounts result in net payments equal 250% or more of the Medicare allowance.

There are different ways this strategy can be implemented. Some employers begin using RBR exclusively for out-of-network claims. In other cases, RBR is used for all facility claims in conjunction with a PPO network for physician claims or an accountable care organization.

While used successfully by many employers, RBR can be disruptive for some employees when a provider attempts to “balance bill” patients for the difference between the set plan allowance and the provider’s billed charges. In the overwhelming majority of cases, however, these issues are quickly and easily resolved in favor of the plan sponsor and member. Rarely does a discrepancy like this lead to legal action.

Employers who decide to implement a RBR strategy need to carefully select a partner with expertise in communicating and educating employees about how these arrangements work and what to do should they receive a balance bill. The RBR partner should also have expertise in negotiating pricing discrepancies with providers, providing employee advocacy, indemnifying the plan and its members, and modifying the language in the plan document.

Many early adopters of this approach were often those who were subject to extreme increases in healthcare costs and who saw RBP and RBR as a last ditch effort that would enable them to continue to provide medical benefits for their employees. We’re now beginning to see more employers adopt this approach as a way to more effectively determine and control the cost of healthcare.

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