The cost of employer health care is an important topic in the broader health care debate. Unlike other countries, about half of our citizens get their health insurance through their employers. Given the steep increase in the cost of employer-sponsored health insurance, health benefits may impede an employee’s wage growth.
Still, too many employers struggle to afford the cost of insuring their employees, and employees struggle to afford the insurance offered by their employer. Many health insurance plans are fully-insured, meaning that they pay premiums to a health insurer to assume all of the risk for the pool of those covered. However, over half of the health plans are self-insured. This means that instead of paying premiums to an insurance company, the employer assumes the risk and hires an insurance company to process claims. Self-insured plans are ripe for cost-cutting.
I recently wrote a research update about private employers in Indiana that tried to get a handle on the rising cost of health plans by using their clout to shine a light on hospital prices. In partnership with the RAND Corporation in 2016, they commissioned a study that found that Indiana hospitals, on average, charged private self-funded plans 272 percent more than what Medicare paid for the same service. This prompted another study by the RAND that compared the hospital prices in Indiana with those of 25 other states. The study gives employers and researchers a considerable amount of data for examination. One conclusion to draw from this data set: employers need to take back control of their health plans.
The cost of an employer-sponsored family premium rose to $20,576 in 2019. Projections show steady increases in the future. Employers have an opportunity to take back control of their health care plans to lower costs in several ways. One of those ways is reference-based pricing. For those unfamiliar with reference-based pricing, you can read more about it here, here, and here.
How does reference-based pricing work, and how can this save self-funded employer plans money? First, consider how typical employer-sponsored insurance negotiations work. As an employer, you contract with a large insurer to administer your self-insured health plan. That insurer has an in-network group of providers that they have contracted with to pay for procedures at a pre-negotiated price. One of your employees goes to the doctor for a procedure, and the insurance company pays the in-network provider that pre-negotiated rate using the employer’s health funds.
But what if that in-network rate is far higher than the median rate for that market? What if it is upwards of five or six times more than what other employers are paying for the same procedure? This is what is happening with employer plans. The result is that employers end up paying more for the same procedures than they otherwise would if they had a different type of health-care reimbursement model.
Now consider if the company used reference-based pricing. The employer would set a maximum it would pay for any procedure. For example, an employer sets a maximum allowable amount of $750 for an MRI. If the MRI costs more than $750, the employee would have the pay the remainder, that is, the price for getting a higher-cost service. If the cost was less than the $750, the employee may be able to share in the savings of that procedure because it was less than the reference price for the procedure. The consistent element is that the employer, employee, and provider know what the employer will pay, and the rest is left to the market.
Reference-based pricing shifts the power away from the insurer and provider and to the employer and employee. As an employer, you know exactly what you are going to pay for each service. Negotiations and surprises after the fact don’t occur in this model. From the employee perspective, they have all of the purchasing power. They have a specific amount that they know the employer will cover and have the freedom to choose a provider based on the price given by the provider.
Some call this price setting. It is quite the opposite. The reference price is determined either by a percentage of Medicare rates or the median price paid by private insurers for the same procedure in that market. However, this may not be the final price paid to the provider. With the power to purchase in the hands of the patient, providers then must compete for the business of that patient, rather than rely on pre-negotiated contracts with insurers. This creates what is known as market-based rate-setting where the patient finds out exactly how little they can pay for the procedure, and the provider finds out the maximum reimbursement for services. This represents a much more functional market where patients have consumer power, and providers must compete for and respond to consumers.
Beyond Private Health Plans
Reference-based pricing was a popular term in North Carolina during the latter part of 2018 and much of 2019. The buzz around reference-based pricing originated with State Treasurer Dale Folwell’s push to bring transparency and lower costs to the State Health Plan. Treasurer Folwell wanted to use reference-based pricing in the entire North Carolina State Health Plan, the taxpayer-funded, self-insured plan for over 700,000 current and retired state employees.
Just like other large self-insured employer plans, the North Carolina State Health Plan faces financial troubles, doling out more than it takes in for the last several years. Like businesses that use reference-based pricing, public employee state health plans could implement something similar to save tax-payer money and reduce prices for plan enrollees. California experimented with this sort of pricing model with very positive results. Patients gravitated towards low-cost providers, low-cost providers saw their market share increase, and many high-priced providers lowered their prices. Most importantly, the state of California saved money on their plan, and their patients saw high-quality providers.
Whether it is a private or public plan, reference-based pricing has the power to give back patients’ purchasing power. It can simultaneously instill market forces that allow prices to reflect supply and demand more rather than unrepresentative pre-negotiated insurance rates. Low-quality, high-price providers are passed over for the high-quality, low-price providers in a given market with reference-based pricing. We should welcome any self-insured plan that has the power to provide patients more authority over where they get their health care, send their patients to better providers, and save money by knowing the price of a procedure upfront rather than after the procedure is over.