I want to address a concept in health insurance that we are seeing more often and explain how and why it works, those who will be—or should be—a supporter of this concept and, *cue scary music”, those that will oppose this approach.
To understand Reference Based Pricing (RBP) at the simplest level, you need to understand what is being “referenced” for the pricing and how network discounts are determined between healthcare providers and insurance companies.
The traditional PPO / HMO Network World
In this space, there are several different insurers who negotiate independently with various providers to come up with a “discounted” network rate that insurance members get when they see a particular provider or receive a specific service. This exercise is probably most easily explained using a retail department store comparison. Retailers are always running promotions and sales to get people to come into their store and shop. Often, the “normal” prices are very expensive, which is why the sale is appealing. The “normal” hospital prices are like the pre-sale retail prices. Here is an example in the insurance industry:
Let’s say an MRI performed in a hospital costs $250. To come up with what they charge people without insurance, they mark that service way up. If a hospital decides to set the retail rate ten times the actual cost to offset labor and other expenses, the service increases to $2500. The marked-up price is where the provider feels they can make a profit. Next, the hospital sits down with an insurance company like UnitedHealthShield of Dallas to negotiate a rate that helps the hospital get more patients and also benefits the insurance company.
After negotiations, both parties decide the discount for UnitedHealthShield of Dallas is going to be 25%. The true cost—$250—was marked up to $2500, and with a 25% network discount, the hospital still charges $1875 for an MRI. That does not seem like a discount, but consumers do not know the base price; they only know the marked-up price, so $1875 seems like a good deal. There will be winners and losers regardless of how you look at this approach. Hopefully, the above example helps you better understand the “discounts” available in the networked insurance world.
Now, to discuss reference-based pricing. What RBP is “referencing” is the allowed Medicare amount for a service; it determines a set cost for services in a geographic area. Medicare typically does not pay well, so many hospitals and doctors do not accept the insurance. Consider the $250 MRI from the previous example. For RBP, the reference-based price is the $325—the allowed Medicare cost for that service for that area. If you break that down, that is a 30% markup which is still profitable in most business environments. With most RBP health insurance programs, the contract will pay about one and a half to two times the Medicare allowed hospitals costs. If your company insurance plan paid two times the Medicare allowed costs, the MRI would total $650 ($325 x 2). RBP plans tend to be 30% – 40% lower than your traditional insurance plan. This chart helps explain it better:
PPO / HMO Model
MRI Cost – $250
Hospital Charge Master – $2500
PPO Discount – 25%
Actual Cost for UnitedHealthShield of Texas Members / Policy Holders – $1875
Profit for Hospital – $1675 per MRI (750% profit)
MRI Cost – $250
Medicare Allowed Cost – $325
Reference Based Hospital Contract Provision – 2 times Medicare Price (the reference base)
Actual Cost for Employer / Policy Holder – $650 (260% profit)
Profit for Hospital – $400
Between the two models, you get the same service at the same location by the same machine and technician, yet, if your employer works with UnitedHealthShield of Dallas you would have to pay $1875 for the MRI. I hope this helps you understand why RBP based plans are so much more effective and affordable—they are not paying overinflated costs for hospital services.
Many RBP programs only have this provision on hospital services and still have a network in place for doctor’s offices. Remember, a doctor’s office does not mark-up services like hospitals. Successful RBP plans typically have a network in place for doctors and then the RBP in place for hospitals. More third-party administrators who build these plans are moving into smaller employer markets which is good news for employers and employees.
Employers and employees paying monthly insurance premiums benefit from this approach because insurance costs decrease when you are not paying expensive claims. Several insurance providers, third-party administrators, and forward-thinking employee benefits consultants believe in this approach to help everyone involved. Remember, even the hospital is getting paid in the RBP world, they were making a 260% profit.
Those opposed will typically be hospitals, doctor’s offices, and large insurance companies. The large insurance companies can only raise rates on their policyholders if claims run high compared to the premiums they are charging. Higher paid claims keep hospitals paid well so they can continue building hospitals and it allows companies to raise premiums on policyholders. Higher premiums = higher profits for hospitals and insurers.
Disrupters are popping up throughout the industry, and at some point, some of them will take hold, and until they do, we will keep making incremental changes for our clients, one step at a time. Like the old saying goes, how do you eat an elephant? Or should I say, how do you change an industry? Not one bite at a time, one change at a time.
Talk to you next month!