An increasing number of today’s employers are turning to reference-based pricing to save on their healthcare spend. The model has gained popularity at a rapid pace, with 60% of employers planning to use the model within the next 3-5 years.
Because this model uses Medicare as a benchmark for coverage costs, members can not only lower what they pay for procedure coverage, but also pull back the figurative curtain on a historically opaque process.
It’s easy to see why interest in reference-based pricing has skyrocketed: It puts employers and employees back in charge of their coverage, lowers costs, facilitates transparency, and removes network restrictions. But what do those savings look like in practice?
Read on for more detailed examples of reference-based pricing in which employers have saved millions of dollars.
Understanding Reference-Based Pricing
Reference-based pricing for healthcare resembles shopping for a new or used car using the Kelley Blue Book valuation as a reference point. Real estate serves as another analogy: when selling a home, real estate agents look for comparables, or “comps,” to set a reasonable selling price based on recent sales of similar properties. Both examples use reference points for prices, based on either an industry standard (autos) or on a reasonable average of similar items, in terms of size and location (property).
Absent such reference points, most hospitals approach billing from a profit-driven, cost-to-charge ratio.
Absent such reference points, most hospitals approach billing from a profit-driven, cost-to-charge ratio. This positions potential revenue as their only reference point. Hospitals inflate their costs when they charge providers for reimbursement, and these inflated costs are passed on to members.
The discrepancy between what a hospital bills and what Medicare pays for the same service can be enormous, which is confusing. The process, however, resembles the way retailers mark up the price of wholesale goods to cover their overhead—but with a vastly exaggerated overhead.
By using Medicare as a benchmark, or reference, and reviewing claims with a data-driven approach, reference-based pricing significantly reduces allowed payments from the original billed amount.
|If a claim’s billed amount is||$299,965.50|
|And Medicare’s payment for this claim is||$42,081.55|
|A reference-based approach would be able to|
negotiate the price to a final paid amount of
Traditional Pricing Model
Hospitals use strategic pricing to calculate the cost of a specific procedure by taking their cost-to-charge ratio and applying that to the billed charges for a service. This allows hospitals to inflate the costs of particular services to increase their reimbursement.
Take, for example, the billed charges of an MRI = $3,000
and the insurance carrier will pay 75%
of the billed charges, or $2,250.
This is called a percent of charge discount, which is written into an insurance carrier’s contract. The hospital knows what percentage of billed charges an insurance carrier will pay, which would be 75% in this case (the percent of charge discount).
To make up for this “discount,” the hospital raises the original charge. Instead of billing $3,000 for an MRI, the billed charge increases to $6,000—a 100% markup—knowing that insurance will cover 75%, or $4,500 (the percent of charge discount).
Company Success Stories: Examples of Reference-Based Pricing
As you can see, strategic pricing via traditional healthcare models allows providers to add unnecessary upcharges for clinical services. In comparison, reference-based pricing cuts through the inflated bills hospitals charge and lowers prices to a reasonable payment range using the Medicare benchmark. Let’s take a look at some specific examples of companies that used reference-based pricing to reduce healthcare costs.
This Washington-based company with 951 employees had previously spent $10,071,172 on healthcare coverage, with total billed charges of $14,205,020 that year. The traditional healthcare coverage model using a provider saved the company 29% annually. After switching to a reference-based pricing model, the company paid $4,059,343 on $9,593,244 in total billed charges: a total savings of 57.7%. These savings came with a smoother process that resulted in fewer balance bill attempts, and without changing any employee benefits.
This company in Lenexa, KS had a PPO vendor that promised a discount of 50% over a 12-month period with a total medical spend of $10,083,670. After adding a reference-based model, their healthcare spend lowered by $4.3 million, which resulted in an ROI of 20.0x. This increased their existing savings by 22% with a total of 72% in healthcare savings.
6 Degrees Health for Reference-Based Pricing
Many companies have partnered with 6 Degrees Health to leverage lower healthcare costs by cutting through inflated hospital bills driven by cost percentages that insurance carriers are contractually obligated to pay. Using a data-driven approach to compare the cost of services, we determine fair and reasonable payments (like comps) to providers that can lower healthcare spend by up to 40%.
As a service-first healthcare cost-containment company, 6 Degrees Health helps employers and employees navigate healthcare protocols to pay what is fair. Speak to a representative today to find out how our reference-based pricing model can help you realize the true benefits of healthcare.