Reducing Health Care Costs

Have you considered reference-based pricing?

Health care costs continue to rise, which means employers need to take every opportunity to lower expenses. One strategy is to implement reference-based pricing (RBP), a health care coverage option that enables employers to set limits on certain medical services, shifting the cost-analysis burden onto employees.

RBP works by setting spending limits on certain procedures or services—meaning a company's health plan would only cover an employee up to the established limit for these services, and the employee would have to pay out of pocket if the cost exceeds the limit.

With RBP, a health plan establishes price limits for "shoppable" services where an individual can take time to make a decision based on price and quality, such as prescriptions, lab tests and joint replacements. In all these examples, there typically are lower-cost options of the same quality as the more expensive alternatives.

RBP is most effective when applied to nonemergency procedures with fluctuating costs. For instance, colonoscopies may range from $400 to $6,000, depending on the physician. In this case, an employer using RBP might set the spending limit to the median price of the procedure, based on market findings. If an employee uses a health facility that charges above the spending limit for a specific procedure, the employee will need to cover the difference out of pocket.

Potential benefits for employers

RBP creates health care cost savings by producing three outcomes:

  • Patients choosing providers that accept the reference price
  • Patients paying the difference between the reference price and the allowed charge
  • Providers reducing their prices to the reference price

What's more, by setting a spending limit on certain procedures, employers are empowering employees to take charge of their health care decisions. If you establish limits on specific services, employees must consider cost, in addition to quality, when choosing where to have a procedure. This requires research on the part of employees, encouraging active participation in their health care.

The role of third-party vendors

Employers typically work with a third-party vendor to establish the reference price for a procedure. Such vendors—referred to in the industry as "third-party administrators" or "reference-based pricing specialists"—help conduct market research and negotiate the most appropriate deals with providers. Finding a reliable vendor that works well with your company is crucial for negotiating the best prices for your employees.

You'll want to discuss with your vendor its strategies to deal with employee balance billing. This could include employee education, provider outreach/negotiation, patient/employee advocacy services and even, in some cases, access to legal representation for the employee. The latter may be needed in the event a provider seeks the balance of a bill through litigation.

An innovative approach

As the health care market continues to evolve, employers are tasked with developing creative strategies for reducing these costs. RBP is a promising example of such a strategy. The RBP model is unique in its ability to reduce costs while simultaneously promoting employee health literacy.

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