Understanding Claims Repricing: How Reference-Based Pricing Works and Where Employers Lose Savings

Introduction to Reference-Based Pricing

Reference-based pricing (RBP) is a payment model that allows employers to set a maximum allowable amount for specific medical procedures or services. Unlike traditional insurance plans that negotiate prices with providers, RBP relies on a benchmark—often derived from Medicare rates, regional averages, or other reference points—to determine what employers will pay for claims.

This model aims to reduce healthcare costs while promoting transparency among providers and patients. However, there are complexities in how claims are repriced, and employers often lose potential savings during execution.

How Reference-Based Pricing Works: An End-to-End Overview

Step 1: Setting the Reference Price

The reference price is typically established based on a percentage of a benchmark rate. For instance:

• Employers might set their reference price at 150% of the Medicare rate.
• If the Medicare allowable for a hip replacement is $20,000, the employer's reference price would be $30,000.

Employers need to ensure that this benchmark is competitive and represents a fair assessment of the market.

Step 2: Claim Submission

Once an employee receives medical services, the provider submits a claim to the employer's health plan. This claim includes the billed amount, which can often be inflated. For example, a hospital might charge $50,000 for a procedure that the employer has set a reference price for at $30,000.

Step 3: Claims Repricing

During the repricing process, the claims administrator reviews the submitted claim against the established reference price. The key actions include:

• Identifying the billed amount: In this example, $50,000.
• Comparing against the reference price: $30,000.
• Discounting the claim: The employer pays the lower of the billed amount or the reference price.

Step 4: Payment to Providers

After repricing, payment is issued to the provider. In our example, the employer pays $30,000 rather than the $50,000 billed. However, this process often encounters challenges.

Where Employers Lose Savings in Execution

While RBP can offer significant savings, several pitfalls can diminish the expected benefits. Here are the most common issues:

Lack of Education and Communication

Employers often fail to educate employees about how RBP works. Without proper understanding, employees may:

• Choose out-of-network providers who charge higher rates.
• Not understand their responsibilities regarding balance billing, where providers bill the patient for the difference between the billed amount and the paid amount.

Balance Billing Issues

Balance billing occurs when a provider bills the patient for the remaining balance not covered by the reference price. This can lead to unexpected out-of-pocket costs for employees. For instance:

• If a provider bills $50,000 and the employer pays $30,000 according to the reference price, the employee might be responsible for the remaining $20,000 if they are treated by an out-of-network provider.

Provider Acceptance

Not all providers accept reference-based payments. Many facilities have contracts with traditional insurers that might lead them to refuse RBP payments or bill patients for the difference. This can limit the network of providers available to employees and result in further costs.

Administrative Costs

Implementing RBP often requires additional administrative oversight. Employers might incur costs related to:

• Claims processing.
• Handling disputes with providers.
• Educating employees about the new payment model.

Inadequate Data Analytics

Employers may lack the necessary data analytics tools to effectively monitor and assess the performance of their RBP strategy. Without proper analysis, they may not:

• Identify high-cost areas that require renegotiation.
• Track trends in provider billing practices.

Bottom Line

Employers can achieve substantial savings through reference-based pricing, but success hinges on clear communication, education, and effective administration. To maximize savings and minimize pitfalls:

• Provide thorough education on how RBP works to employees.
• Ensure that employees understand their responsibilities regarding balance billing.
• Analyze claims data to identify trends and areas for improvement.

Employers must stay vigilant to avoid common execution pitfalls that can erode savings, ensuring they capitalize on the full potential of their reference-based pricing strategy.