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Reference Based Pricing – What Employers Need to Know

Background on Reference Based Pricing

Health insurance premiums have been steadily increasing for the past decade. So it’s no surprise that employers have been searching for less expensive ways to cover their workers. And recently, a promising new insurance model called Reference Based Pricing has been gaining popularity. So how does it work?

First, we have to understand that the primary driver of insurance premiums is the cost of medical care.

In essence, your rates are a reflection of how well your insurer negotiates with doctors, hospitals and other medical providers.

But with Reference Based Pricing, things work a bit differently. Under this system, payments to medical providers are based on a multiple of the already established and widely accepted Medicare reimbursement schedule. That can be kind of confusing, so here’s an example.

Let’s say that the Medicare schedule lists the reimbursement for a given operation as $10,000. And then a hospital performs this procedure on an employee covered by a Reference Based Pricing policy. The hospital would typically be reimbursed between 1 and 2 times the Medicare reimbursement amount.

So you may be asking, “how does that make the Reference Based Policy cheaper than standard medical coverage?”. There are a few primary reasons:

  • Its Medicare based doctors and hospitals reimbursements are often substantially less than commercial insurer’s reimbursements
  • They don’t have to negotiate contracts with each individual medical provider in an area which saves a lot of time and money

And most importantly, these policies fall outside the scope of the Affordable Care Act (ACA). Therefore they are allowed to ask applicants medical history questions. And they typically only accept employers with “healthy” employees. This helps keep their claim expenses far lower than equivalent small group ACA compliant policies.

The (potential) Problem

Reference Based Pricing plans often emphasize to potential customers that:

“You can visit any doctor or hospital that you like, since there is no network.”

And while it’s true that policy holders can visit any licensed medical provider, it’s also true that there is no limit on how much the providers can charge these patients. Since the doctors and hospitals don’t have a contract with the Reference Based Pricing company, they can legally balance bill its members.

Speaking of legal things, there is a major court case happening right now that may set the precedent for all of this. An employee covered under one of these plans had a heart attack and was admitted to a local hospital. The insurance company and the employee paid the hospital a combined $27,254. But, since there wasn’t a contract, the hospital balance billed an additional $83,861.

The employer sued the hospital stating that under their normal billing practices they would have accepted the $27,254 as payment in full from an uninsured patient. However the employee signed a “Consent for Services and Financial Responsibility” while under their care. And therefore the hospital claims that the normal billing practices do not apply. The case has made it all the way to the Virginia Supreme Court and a verdict is expected in the next few months.


The situation mentioned above is a cautionary tale. While we are always looking for new and innovative ways to save our clients money, it may be too soon to jump on the Reference Based Pricing bandwagon. After all, the point of health insurance is to protect employees from going bankrupt due to a major medical event. So until these policies can guarantee that protection, we recommend that employers think long and hard before signing up.

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