How Reference-Based Pricing Is Disrupting Healthcare Models

Welcome to reference-based pricing, the “Wild West” of self-funded healthcare. Reference-based pricing (RBP) has emerged as a game-changer for cost containment—but comes with big disruption. “Reference-based pricing can save companies a lot of money, but it will certainly impact the employee experience,” said Jason Jurgill, Newfront vice president of employee benefits.

RBP falls under the umbrella of self-funded healthcare, which is when employers take on the cost of healthcare claims themselves rather than going through a carrier and paying premiums. (To learn more about saving costs through self-funding, read our post on the self-funding trend.) Organizations using reference-based pricing work with third-party administrators (TPAs) and repricers to set their own prices for healthcare services. By slashing the delivery system and insurance carrier margins, organizations can lower their total cost of healthcare. Read on to learn how this works. 

How does reference-based pricing work? 

Health care costs are not set in stone. For example, if a patient needs surgery for a broken ankle in Northern California, Medicare might set the rate at approximately $20,000. At that price, the facility breaks even on provider costs, making minimal profit. Because Medicare is a government program, their payouts  are well below market rate. Private insurance carriers, on the other hand, negotiate their own rates with the hospital and, as for-profit companies, charge clients more but also pay higher reimbursement fees to hospitals. According to Congressional Budget Office data, private insurance pays more than twice as much than Medicare rates for hospital services. (That review also found that commercial insurers pay 129% of Medicare Fee-for-Service prices on physician services.) In this example with the broken ankle, if that same service runs through insurance, it will likely be reimbursed at $40,000 to $50,000. In a scenario where an employer uses a carrier, the insurance will cover much of the surgery cost, with the injured employee covering out-of-pocket costs such as co-pays. The insurer also recoups that cost by instating higher premiums the next year. 

Reference-based pricing falls somewhere in the middle. The self-funded company doesn’t pay the same amount as Medicare would or what a private insurance carrier would. Instead, the organization works with a TPA to determine a “fair price” for the healthcare service. How are “fair prices” set? The repricer collects publicly available data on the cost of medical services from the Centers for Medicare & Medicaid Services Healthcare Provider Cost Reporting Information System and adds margin, landing at a price which is somewhere between what Medicare and the private insurers would reimburse. The costs can scale depending on the severity of the injury or illness.

Because Medicare rates are below a hospital’s actual cost of service, the self-insured employer might agree to pay 140% of the Medicare rate, so the hospital covers its costs but the employer ultimately saves more money than if they’d paid out the excessive insurance carrier rate. For the broken ankle surgery in this example, the employer might agree to pay $28,000. This also translates to lower costs for the insured, as the employer passes on the savings to their employees.

With RBP, the employer doesn’t necessarily ask for permission from the hospital but, rather, tells the hospital what they’re willing to pay, and then negotiates rates that the healthcare providers are willing to accept—if the provider is willing to deliver the service. “It’s a lot more disruptive and there are trade-offs,” Jurgill said. “But the companies save 20-40% a year in their medical spending because of this arrangement.”

Not just less expensive care, better care
Since reference-based pricing offers greater flexibility in choosing healthcare providers,  employees are not limited to a specific network of providers. They are free to explore a broader range of medical professionals and facilities, and have a better chance of designing plans that truly align with the needs of the organization and its employees.

Jurgill gave an example of a self-funded company which, after examining their demographics, realized they had a large number of employees between the ages of 25 and 40. The employer anticipated that they might see a spike in employees starting families, and so they decided to compare the cost of baby delivery in their area. “They looked at three hospitals and, in the reference-based pricing world, you can actually see quality and cost metrics,” Jurgill said. 

Hospital A was the best hospital, with better clinical outcomes and lower complication rates. Hospital B was ranked second best, and Hospital C was the third best—but Hospital A was also the most cost-effective. The company then designed a plan to incentivize employees to choose Hospital A for natal care and childbirth.

“They told employees, ‘Hey, if you’re going to be delivering a baby, we have this program that's available to you,’” Jurgill said. “‘You don’t need to use it, but anyone that gets their baby delivered at Hospital A gets free diapers and wipes for a year.’” The company steered employees to a hospital with better outcomes and, even with the diaper perk, saved money—a win for all involved.

How do you implement reference-based pricing?

First, consult with your benefits partner about whether self-funding in general is right for your organization. (Learn more about when it makes sense to self-fund in our guide.) “Any benefits broker can self-fund a plan, but very few know how to properly educate their clients and get them ready for the road ahead,” Jurgill said. “Find a partner with deep expertise to ensure your plan gets on—and stays on—the right path.” 

When it comes to reference-based pricing, an experienced TPA and consulting firm like Newfront can customize plans and assist with negotiations. Newfront can also help you plan how to educate employees about the RBP model and how it impacts their healthcare choices.

Considering implementing reference-based pricing as part of your employee benefits strategy? Talk to Newfront today.

About Newfront

Newfront is a modern brokerage transforming the risk management, business insurance, total rewards, and retirement services space through the combination of elite expertise and cutting-edge technology. Specializing in more than 20 industries and headquartered in San Francisco, Newfront has offices nationwide and is home to more than 800 employees serving organizations across the United State and globally. For more information, visit and follow us on LinkedIn.

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