Reference-based pricing has helped many self-funded employers take greater control over healthcare spending through more transparent and predictable cost structures. Now, some employers are now taking the next step by building direct partnerships with community healthcare providers.
By moving beyond traditional reference-based pricing models, employers can create a more collaborative and sustainable approach that supports cost control, provider relationships and employee access to quality care.
The Advantages and Limitations of Reference-Based Pricing
How does reference-based pricing work? Instead of relying on insurance carriers for traditional network discounts, and instead of accepting the often-inflated “standard” prices that hospitals charge, self-funded employers pay an agreed amount, which is based on Medicare rates.
For employers, this is great. Pricing is simple and transparent, and employees don’t have to worry about constantly changing networks and unexpected out-of-network costs.
But there are downsides. Healthcare providers often dislike reference-based pricing, and they may not accept it. According to the American Hospital Association, which is very critical of reference-based pricing, the pricing model pushes costs onto patients and providers while ignoring the quality and leaving plan members vulnerable to additional costs if reference-based pricing is not accepted.
Aligning Employer and Provider Incentives
A payer might look at something like a CT scan and think a 10-minute imaging procedure shouldn’t cost that much, but the provider also has to consider the cost to purchase and maintain the equipment, train staff, prep the patient, interpret the results and provide follow-up.
In reference-based pricing, the payer sets rates and tells providers to accept them. While this may appear beneficial for employers, it’s obviously less sustainable for providers. If the set rates don’t cover costs adequately, the provider may be forced to stick to lower cost options, even when higher cost options could yield better healthcare outcomes, and that’s not in anyone’s best interest.
Coming from this perspective, it seems like employers and providers are misaligned – but that’s not really true. Employers and providers both want to deliver quality care to plan members, and they both want to control costs and reduce red tape.
So why can’t they work together? With a direct partnership, they can.
The Shift Toward Direct Partnerships
Before founding Health2Business, I worked as an employee benefits advisor. During this time, I became interested in reference-based pricing and captive insurance structures as a way to help employers manage costs. I worked with Berkely to create the RB EmCap using reference-based pricing, and it was a success. However, over time, some employer members began to realize that even though they liked reference-based pricing, it was advantageous to set prices with providers, rather than impose prices on providers. They began negotiating prices directly with community healthcare providers.
This led to A-Frame EmCap, a group captive in which all members use direct partnerships, along with independent pharmacy solutions for prescription drug coverage. Reference-based pricing is still used, but only when plan members receive care outside of the contracted provider options.
Creating a More Sustainable Healthcare Model
When a health plan model doesn’t work for one party, its long-term viability is in jeopardy.
With reference-based pricing, the risk is that some providers may not accept the rates. If they’re not contracted with the employer, they’re under no obligation to accept the rates that the employer offers. When this happens, the provider often bills the plan member for the difference. These surprise bills can be large, leading to medical debt and financial distress, as well as overall dissatisfaction with the company’s health benefits.
A direct partnership plan avoids this issue. Employers and providers negotiate a rate that works for both parties, resulting in a sustainable system that meets the needs of everyone involved. And because employers are cutting out carriers, they can take control of plan design and control costs.
Could Direct Partnerships Work for Your Organization?
Direct partnerships are not limited to large employers or captive structures. In many cases, small and midsize organizations can also benefit from a more transparent and collaborative approach to healthcare funding.
For employers already using reference-based pricing, direct partnerships may represent the next evolution in cost management by creating stronger alignment between employers, providers and plan members. And for organizations frustrated by rising premiums and limited flexibility in traditional health plans, direct partnerships may offer a more sustainable path forward.
Learn how Health2Business helps employers build more transparent, sustainable healthcare strategies through direct partnerships.
