City or country: Where will reference-based pricing work best?

Benefits brokers know that healthcare is local. When it comes to alternatives to a fully-funded benefit strategy, brokers typically consider new ideas and plan designs in the context of whether it will work in their specific market.

Reference-based pricing, which is changing the way self-funded employers pay for healthcare, is no different.

Brokers on the cutting edge are increasingly adopting or considering implementing reference-based pricing with their groups, but so far, there isn’t a lot information on how the plans work in different markets.

First, what is reference-based pricing? Under a reference-based pricing strategy, employers pay hospitals directly instead of going through an insurance company to obtain discounted rates for services. Typically, they pay in excess of Medicare’s reimbursement rate, which is the “reference” point.

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A blood pressure monitor stands in the diagnostic imaging area at the Hong Kong Integrated Oncology Centre in Hong Kong, China, on Tuesday, Nov. 3, 2015. Equipped with biopsy facilities, body scanners, and quiet 'VIP' chemotherapy rooms, the Hong Kong Integrated Oncology Centre is the first of a string of such facilities that TE Asia Healthcare Partners, a portfolio company funded by TPG Capital, is planning in Asia. Photographer: Xaume Olleros/Bloomberg

Here are two predictions of the pros and cons of reference-based pricing in bigger and smaller markets.

In a big city or urban market

In a big city where markets are more crowded and billing is already complicated, it’s possible hospitals will want to simplify. When there are multiple hospitals and a varied payer mix, it is more likely hospitals will want to cash checks quickly. These providers may not have the administrative resources required to pursue balance bills with the same level of intensity as hospitals with more dominant market power.

See also: Is reference-based pricing right for your clients?

On the other hand, these hospitals may have a strong incentive to maintain the status quo. If one hospital began to accept reference-based pricing, insurers could decide to end existing network agreements there, and hospitals may not want to risk existing patient volume in a competitive market.

In more rural communities

A lot of factors will shape the success of reference-based pricing in rural communities. In one-hospital towns, for example, it’s possible that the hospital is in such a strong negotiating position that reference-based pricing will be challenging.

On the other hand, in areas where hospitals have predominantly government payers, if more employers are able to offer group plans because they are less expensive due to a reference-based pricing strategy, it might be welcome.

Another point to consider in rural communities is the negotiating power of local employers. While “factory towns” aren’t as common as they used to be, an area with one big, predominant employer might embrace reference-based pricing more quickly than regions with more sources of employment.

The rate of success for reference-based pricing in any given market will largely be shaped by the negotiating power of hospitals, insurers and employers in that market. But another factor is brokers, more and more of whom are pursuing these strategies for their clients.

As more referenced-based pricing solutions are becoming available to groups of all sizes, it will become clearer when and where the approach works best.

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