Understanding Reference-Based Pricing

What is reference-based pricing?

Reference-based pricing (RBP), also called metric-based pricing or reference pricing, is a cost-containment strategy that looks at costs in a different way by using public data as a pricing benchmark.

Rather than relying on the hospital or facility’s chargemaster price (which is often over-inflated) to price a claim, RBP uses a more data-driven approach to establish a fair cost of care. To determine this more reasonable cost, most RBP providers use a benchmark like Medicare, usual and customary costs, or the actual cost reported by the facility to determine the reimbursement. With the established benchmark in place, the RBP provider reprices the claim, adding a fair profit on top of the reference price. This becomes the new amount paid to the healthcare provider.

What are the benefits of reference-based pricing?

The #1 benefit of RBP is cost savings. This proven approach to repricing and paying employees’ medical claims reduces medical costs for people who pay for healthcare insurance: self-insured employers and their workforces. In most cases, companies can lower their healthcare spend by 15-30%.

RBP delivers significant savings that impact everyone.

• Employers can lower their costs over the long term.
• Employees and their covered dependents can reduce their out-of-pocket spend.

The challenge with reference-based pricing is provider acceptance. While there is data to support high acceptance rates, there is a chance providers will bill patients for the difference between what the plan paid and what they billed.

How does reference-based pricing work?

As part of the claims review process, the RBP provider reviews and audits medical bills on their client’s behalf, and then reprices each claim using the reference-based pricing methodology outlined above. The repriced claim is sent back to the provider with payment.

To determine a fair price, Imagine360 uses both the actual cost as reported by the facility or hospital and the Medicare reimbursement rate to determine payment to the provider. The higher of the two reference points (Medicare and actual cost) is used to ensure a fair reimbursement.

After a patient receives care, the reference-based pricing provider:

• Audits the healthcare claim for errors, excessive costs and unexplained charges.
• Identifies the cost of care, including health services and materials.
• Reprices the claim based on the actual cost of care and Medicare rates.
• Determines equitable payment, with a fair margin for the provider.

How does RBP differ from a traditional PPO pricing model?

The bottom-up approach used in reference-based pricing is vastly different from the pricing used within the Preferred Provider Organization (PPO) system. With a PPO, pricing typically starts at the top with a price that originates on a facility’s chargemaster — a number that is greatly inflated, sometimes as high as 3,800%¹. A traditional PPO network discount is applied to help reduce the inflated price, but the charge often remains high and unreasonable.

A 2022 RAND study² found that U.S. hospitals are charging wildly different prices for the same services. According to the report, on average, employers are paying 224% of what Medicare pays for the same services at the same facilities. Who pays the price for that significant cost disparity between Medicare and private insurance? Employers and, ultimately, their employees in the form of higher deductibles and out-of-pocket costs.

Here’s an example of how reference-based pricing works

• The average cost of a CT scan in the U.S. is $3,821 (chargemaster price).
• The actual cost of the CT scan as reported by the facility is $100.
• PPO members pay $1,582, a 50% discount off the chargemaster price.
• With RBP, the claim is repriced using the Medicare reimbursement rate and the member pays just $250.

Watch the video to see the larger impact of RBP on plan members.

What types of health plans can incorporate reference-based pricing?

RBP is a cost-containment option for self-funded health plans. With a self-funded health plan (also called a self-insured health plan), the employer assumes the financial risk of the health plan.

Being self-funded provides a number of advantages to employers, including more control over how the health plan is created and managed. For example, with self-funded plans, you have the ability to customize your health plan and add innovative solutions, like reference-based pricing, to your overall healthcare strategy.

How does self-funded insurance work?

Instead of paying premiums to a traditional insurance carrier, the employer pays all medical claims on behalf of the plan members, who include all eligible employees and their covered dependents. Most self-funded employers establish a fund, with pooled contributions from the company and participating employees, to pay all healthcare-related claims. The vast majority of self-funded employers rely on third-party administrators (TPA) to manage all healthcare claims. Self-funded employers that add a referenced-based pricing solution to their health plan can lower their healthcare costs by 15 to 30%.

Self-funding insurance provides a number of benefits to employers, including:

• A reduction in taxes and fees
• Increased transparency into healthcare spend
• Greater visibility into plan performance
• More flexibility in health plan design

Want to learn more about the benefits of self-funding? Download our guide: The fundamentals of self-funded insurance.

How does the RBP solution from Imagine360 differ from those of other providers?

Other RBP products are a separate component that must be added to a self-funded health plan strategy. But Imagine360’s RBP is different. Imagine360 launched the very first complete health plan solution with reference-based pricing built in.

The Imagine360 offering includes everything you’d expect from a comprehensive self-funded health plan solution: the third-party administrator (TPA), world-class member support and contracts with high-quality health providers — plus the benefits of reference-based pricing. Imagine360’s RBP solution is backed by more than 16 years of healthcare data and, by leveraging predictive analytics, potential provider billing issues are identified and mitigated before the member is impacted. In addition, Imagine360’s customer support leads the industry when it comes to quality scores — with a 76 Net Promoter Score (NPS) and a 98% member satisfaction rating.

Why is reference-based pricing needed?

RBP is a form of price protection that guards companies and their employees against potentially inflated costs for treatments. It can help lower costs and empower employees to make active, informed choices about their care. With most RBP solutions, a self-insured company pays for medical services based on the actual cost or the Medicare reimbursement rate, plus a reasonable profit. This approach is in contrast to the PPO methodology of paying a discount off a highly inflated chargemaster price.

For example, a report by the Health Care Cost Institute and the Wall Street Journal found that the cost of a Cesarean section can fluctuate wildly — with costs that range between $6,241 and $60,584. That’s a massive price gap for the same procedure! RBP helps identify inflated pricing to create a more level playing field to ensure self-insured employers and their employees pay a fair price for healthcare.

What are the advantages of reference-based pricing?

Organizations that incorporate RBP into their healthcare strategy experience an array of benefits:

• Employers reduce their healthcare spending. On average, companies can save up to 30% of their total healthcare spend in year one — with sustained cost savings after that. For many organizations, that adds up to millions of dollars in savings. At Imagine360, we’ve saved clients over $1 billion compared to estimated traditional PPO costs.
• Employees save money on healthcare. With RBP, employees and their family members can spend less on healthcare when companies pass on plan savings in the form of lower out-of-pocket expenses and decreased premiums.
• Increased plan flexibility. Health plans with RBP provide more freedom by expanding access and eliminating the restrictions of provider networks. Some companies also offer traditional PPO plans alongside RBP plans, giving employees the option to choose the health plan solution that works for them.
• Ability to reinvest savings back into the business. Lowering an organization’s healthcare spend by up to 30% can have a significant impact on the bottom line — allowing companies to reinvest savings back into the business.
• Better benefits help with recruitment and retention. Tight labor markets are challenging organizations to improve benefits to attract and retain employees. Health plans with RBP provide a high-quality, low-cost health plan solution with savings that can be reinvested into higher salaries and richer benefits.

Why move to reference-based pricing now?

Many companies are struggling to keep up with the rising costs of healthcare. According to a 2022 study by Willis Towers Watson, 54% of companies report that healthcare expenditures will be over budget. And with costs expected to rise by another 7.4% in 2023 (after a 6% rise in 2022), companies are searching for new ways to cut costs.

Many companies are losing faith in traditional health plans like PPOs. According to the Kaiser Foundation, premiums have risen 47% and deductibles by 68% in the last decade. Rising healthcare costs impact everyone — companies, employees and their families. With numbers like these, it’s no surprise that more self-insured employers are turning to reference-based pricing to help address rising healthcare costs.