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Reference-Based Pricing – A ‘New’ Old Idea

Reference-Based Pricing in Health CareIn healthcare, keeping costs reasonable is extremely important for employers and employees alike. Employers nationwide have a great deal of frustration regarding this particular issue.

Without question, the absence of timely and accurate healthcare cost information is, to put it mildly, dumbfounding. Due to extreme cost variations, employers and the general public have little knowledge of what each procedure will cost based on the provider performing the services, provider location, or the negotiated payment arrangement by the insurance company acting as the third-party payer.

Few clinicians know the cost of each component of care and how the cost relates to the outcomes achieved. There is virtually no accurate information on the full cycle-of-care cost for a patient – other than anecdotal historical charges that ‘ball park’ the costs per procedure. This is a complicated subject with seemingly few answers.

There is one concept, however, that appears to be gaining traction around the country. The approach called ‘Reference-Based Pricing’ (RBP), is not new.

Here’s how RBP works:

For the same procedure performed in a similar geographic area, the cost may range from a few hundred dollars to many times that amount. For example, to keep costs reasonable for prescribed medications, employers have been able to control cost variations by establishing a ‘reference price’ or a ‘cap’ that is set just above the price of the generic drug costs. The employee then has a choice of purchasing the more expensive name-brand drug or the generic-equivalent. However, if the employee chooses the more expensive drug, he/she must pay the cost difference above the reference price. The employee, one presumes, becomes more cost-conscious through this type of arrangement.

Once the reference price is set for a certain medical condition, an employee can choose a provider who charges up to the reference price, and consequently pays less through plan design responsibilities, or seek care from a provider who charges more than the reference price, but is then liable for the difference.

Can RBP work with other medical services, such as hospitalizations and physician visits? Yes, it can, but will require additional considerations to determine what services fall under the RBP. Employers who use RBP have a tendency not to cap emergency-related claims, as it is not practical for employees to shop the market while seeking emergency care.

Secondly, since certain locations – especially in rural areas, may have only a few healthcare providers – setting a reference price may need to be an ‘average’ of the providers within the area.

When using RBP, perhaps the greatest challenge for employers is to balance the maximized savings for employers while making sure employees have adequate provider choice within their geographical area.

Continue to pay attention to RBP’s future evolution. Under our existing healthcare ‘system,’ it does appear to be a win-win for employer and employee alike.

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