Choosing how to fund your employee health plan is anything but straightforward. With so many funding strategies available, it can be difficult to know which one is right for you. Reference-based pricing (also known as RBP insurance) is an option that allows you to negotiate prices based on other reference points, such as Medicare rates.

But is this bold approach right for your company? Let’s investigate.

What is reference-based pricing?

Reference-based pricing is a funding strategy, typically paired with a self-funded health plan, in which employers negotiate healthcare prices using a reference point. Instead of using a carrier’s negotiated rates, prices are typically based on a percentage of what Medicare would pay. With reference-based pricing, employers can also set a cap on what they’re willing to pay, enabling them to have more control over healthcare costs.

For example, if Medicare pays $1,000 for a procedure, your plan might set the maximum price at $1,400 (140% of Medicare). This becomes your reference pricing, hence the name.

While an effective cost-saving strategy, it’s important to note that reference-based pricing is usually only available for specific portions of an employee health plan, like facilities claims.

The pros of reference-based pricing

Many HR leaders love the ease of reference-based pricing for several reasons:

• Significant cost savings: Companies can save money on their healthcare spending by capping prices. These savings can be reinvested into other areas of the business or used to enhance other employee benefits.
• Transparency: Prices are clear and consistent, making healthcare costs more predictable for both employers and employees.
• Potential for better care: With price no longer being a differentiator, providers compete on quality and service. This shift in focus can lead to improved patient outcomes and higher satisfaction with the overall healthcare experience.
• No network restrictions: Employees can typically see any provider who's willing to accept the reference price. Having the flexibility to choose providers can be especially helpful in areas with limited in-network options, or for employees who frequently travel.
• Data-driven decisions: Reference-based pricing offers plenty of data on what your employees are spending money on, which can help you make informed choices about your health plans. You can also use these insights to tailor plans to the specific needs of your team, leading to better health outcomes and a more efficient use of your resources.

The cons of reference-based pricing

Despite its benefits, reference-based pricing can also come with a few downsides:

• Employee education burden: Understanding how to use a reference-based pricing healthcare plan can be difficult. You’ll want to be prepared to explain exactly how the system works and offer plenty of employee education opportunities (your broker can help with this!). Providing ongoing education can be time-consuming and resource-intensive, potentially requiring a dedicated staff or external support.
• Potential for balance billing: If a provider doesn’t accept the reference price, they may bill the employee for the difference. This can lead to unexpected out-of-pocket costs for employees, causing financial stress and potentially damaging morale.
• Employee satisfaction risks: Some employees may be unhappy about having to negotiate with their providers or deal with balance billing. Being responsible for negotiating healthcare costs can put undue stress on employees, especially when they’re unwell.
• Legal considerations: Working with an experienced reference-based pricing broker can help you avoid benefits compliance consequences.
• Administrative complexity: Implementing and managing a reference-based pricing plan can be more complex than traditional insurance. This can strain HR resources, especially for smaller companies.

What types of companies should consider reference-based pricing?

Reference-based pricing isn’t a one-size-fits-all solution. It tends to work best for:

• Self-funded employers: RBP is typically used in conjunction with self-funded health plans.
• Midsize to large companies: The administrative complexity and potential for employee pushback make it less suitable for smaller companies.
• Companies in high-cost healthcare markets: The potential for savings is greatest in areas with inflated healthcare prices.
• Organizations with a culture of transparency: Reference-based pricing requires openness about healthcare costs and quality.
• Employers with an appetite for innovation: RBP is still considered cutting-edge, so it’s best for companies that are comfortable with being early adopters.
• Workforces with higher healthcare literacy: The more employees understand their healthcare costs, the smoother the transition to reference-based pricing will be. (Technology that aids in employee education can be highly helpful.)

The most important element of your reference-based pricing strategy: choosing a vendor

When going down the path of reference-based pricing as a funding strategy, it is absolutely essential to choose the right vendor. Because RBP can potentially be more complicated for your employees, choosing a vendor who will support employees from beginning to end will ensure a smooth experience for everyone involved. Here are some tips for vetting RBP vendors:

Understand employee support and billing services

How an RBP vendor supports your employees should be the first and last thing you look at when making your decision. How do they adjudicate denied claims? How do they handle balance billing? What are their channels for customer service, and are they easily accessible? A great vendor puts the employee experience at the forefront.

Ask about regulatory and compliance standards

Any RBP vendor should be well versed in ERISA regulations. This is essential because compliance violations can result in hefty fines or legal complications for you.

Evaluate data privacy and transparency practices

With data, there are two sides to the coin. Data transparency from your vendor can provide insights around how reference prices are set, claims data, and savings data — all of which can help you make strategic benefits decisions moving forward. However, data privacy is paramount, especially when dealing with employee health data. You’ll want to understand what and how they share data, as well as how they keep it secure.

Talk with your benefits broker

Reference-based pricing is a new and innovative strategy, which means there’s still some uncertainty around it. If your broker understands your overall goals and benefits strategy, they can help guide you toward the best vendor to fit your needs.

Is your benefits strategy priced right?

Reference-based pricing could be the game-changer your employee health plan needs. However, as a new model, it often gets overlooked in benefits discussions.

A proactive benefits partner like Nava can help you explore all of your funding options to align your healthcare strategy with your company's vision.

Ready to see whether reference-based pricing could be your ticket to better benefits at a better price? Let’s crunch the numbers together.

Next Steps

To continue learning about reference-based pricing, watch our benefits funding masterclass.