In the pursuit of controlling soaring healthcare costs, employers who directly pay for their employees’ health claims are progressively pegging the prices to Medicare rates. This practice, known as reference-based pricing, is a novel method employers have been using to reduce hospitals’ high charges to commercial health plans, which are often significantly above what Medicare reimburses. Despite making incremental strides towards widespread adoption, whether or not these efforts will result in a substantial number of hospitals accepting the lower payments is undecided as of now. This approach was spotlighted when the California Public Employees’ Retirement System adopted it in 2012, but medium and smaller companies have also been increasingly embracing this innovation, say healthcare insurance brokers and benefit advisors. According to Bloomberg Law.
It is believed that the appeal of reference-based pricing is tangible due to the substantial savings potential for employers. These savings often result in the reduction of annual deductibles and other out-of-pocket expenses for employees. Employers are incentivized by the idea of paying the same rate as Medicare for identical services instead of multiple times more, as is often the case with commercial health plans.
However, this stance has been criticized as problematic by Molly Smith, Group Vice President of public policy for the American Hospital Association. Smith argues against the approach, claiming it could be unfavorable for hospitals, healthcare systems, and even patients, particularly due to patients’ potential misunderstanding of their coverage limitations and the absence of a comprehensive network of providers. She also highlights that patients on reference-based plans without network coverage are not protected under the No Surprises Act, which prevents providers from billing patients for higher out-of-pocket charges at out-of-network facilities covered by their health plan.
Illustrating the effectiveness of reference-based pricing, the Washington-based food manufacturer, Tree Top Inc. managed to bring down its annual healthcare spending from $14 million to $12 million for its 2,000 employees when it adopted the pricing program in April 2020. The practice has been reported to have provided employers more transparency into the prices they pay, while also minimizing the administrative burdens and speeding up payment processes for doctors and hospitals.
There have also been antitrust litigations initiated by businesses and health plans against healthcare systems that refuse to accept reference-based pricing. Notably, Team Schierl Companies and Advocate Aurora Health Inc. as well as an antitrust class action led by Team Schierl Companies against Aspirus Inc. These court proceedings showcase the ongoing tensions and possible legal barriers in transitioning to reference-based pricing in the healthcare industry.
While reference-based pricing can be a potent tool in tackling the financial pressures of healthcare, the complexities of its implementation and the resistance from healthcare providers are substantial challenges that need to be addressed. As the pricing model continues to evolve, its long-term impact on healthcare costs remains to be seen.