As of 2018, 55.1 percent of Americans had employer-sponsored coverage. But, even with employers sponsoring such a large portion of American health care, they have surprisingly little influence over the price they pay. This week, JLF’s Jordan Roberts wrote a research brief on how reference-based pricing could change the health care market.
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…
Reference-based pricing is a tool that can be used by self-insured companies to reduce costs. Self-insurance works by – instead of paying premiums to a health insurance provider every month for a health care plan – employers set aside the money they would have paid in premiums to pay directly for their employees’ health care. Self-insured companies pay a third-party administrator to process health claims, but the employer pays out-of-pocket for these health claims, instead of the insurance company. The rates that self-insured employers pay for medical procedures, however, can be higher than companies who fully insure. That all could change if companies begin to adopt reference-based pricing. Roberts says:
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.
California tried a reference-based pricing model for its Public Employees’ Retirement System. Roberts writes:
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.
Roberts explains why this model has potential:
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.