Reference-based pricing: A guide for employers

Health care costs continue to vary widely, making it difficult for employers to predict spending and maintain consistency across their health plans. As a result, many organizations are exploring alternative strategies for benefits funding and structuring. Reference-based pricing is one approach that shifts how health care costs are determined and reimbursed.

What is reference-based pricing?

Reference-based pricing (RBP) is a health plan strategy in which employers set a benchmark payment for health care services instead of relying on traditional PPO network discounts.

Rather than paying a negotiated discount off hospital chargemaster rates, the plan reimburses providers based on a transparent reference point, typically a percentage of Medicare reimbursement rates. The benchmark is usually calculated by taking the Medicare-allowed amount for a particular service and multiplying it by a defined percentage, such as 120 percent. Some plans may also adjust the benchmark based on factors like facility type, service complexity or regional cost variations to help align payments more closely with market conditions.

RBP is most often used with self-funded employer health plans that are governed by ERISA and administered by third-party administrators or carrier platforms. Employers may apply RBP across the entire plan or limit it to select high-cost services, such as inpatient hospitalization, outpatient surgery or imaging.

Key characteristics of reference-based pricing include:

• Payments tied to a benchmark rather than negotiated network discounts
• Flexibility to apply broadly or to specific high-cost services
• Elimination of traditional in-network and out-of-network distinctions

How Reference-Based Pricing Works in Practice

Reference-based pricing follows a structured process that differs from traditional network-based plans, particularly in how claims are reviewed and paid and how providers respond to those payments. Here’s a quick overview of this process:

1. Choosing a provider. The plan member selects a health care provider for a needed service. Unlike traditional PPO plans, there is no formal provider network, though some RBP solutions include tools to help members identify providers with favorable billing practices or a history of accepting benchmark-based payments.
2. Receiving services. The member receives medical services, just as they would under traditional health insurance.
3. Provider billing. The health care provider bills the plan at its standard chargemaster rate, which may be several times Medicare’s rate.
4. RBP repricing. The third-party administrator reviews the claim and reprices it according to the plan’s reference schedule. This repriced amount represents what the health plan considers to be a reasonable payment based on the benchmark.
5. The health plan pays its portion based on the reference price, and the member pays their share. After payment, the health care provider decides whether to accept the reimbursement as payment in full or to pursue additional payment.
6. Provider response. If the provider does not accept the benchmark payment, it may issue a balance bill to the plan member for the remaining amount. However, this bill is not necessarily the amount the member will ultimately pay. Many RBP plans utilize vendor partners who work with providers to negotiate reduced balances, explain reimbursement methodology or reach a settlement.

Example: How a Hospital Bill is Repriced

A hospital bills $8,000 for an outpatient procedure. Instead of paying a discounted percentage of that bill, the health plan uses reference-based pricing and pays a set amount tied to a benchmark. In this example, the plan pays $3,500, based on 150 percent of Medicare, minus the member’s cost share.

Because the provider did not agree to that amount in advance, it may bill the patient for part of the remaining balance. At that point, the health care provider may choose to accept the plan’s RBP payment, negotiate a different amount or continue billing efforts, depending on its internal policies and financial considerations. Many RBP plans use vendor support services to help negotiate these balances and assist members if a bill is issued.

Cost Variability and Why Employers Use RBP

Health care costs in the United States can vary widely by facility and region, even for the same service performed under similar circumstances. This price variation is a key reason why some employers explore reference-based pricing.

Under some traditional health plans, employers may pay different amounts for the same service depending on where care is received, often without clear insight into how prices are set. Hospital chargemaster rates can be significantly higher than Medicare rates, and negotiated network discounts (such as those under a PPO plan) do not necessarily result in consistent or transparent pricing.

Reference-based pricing aims to address this variability by tying payments to a defined benchmark.

Potential Advantages of Reference-Based Pricing

Reference-based pricing can offer several potential advantages for employers looking to better manage health care spending:

• Cost control and transparency. Tying payments to a benchmark can help stabilize year-over-year increases and make health care costs more predictable and easier to understand.
• Plan design flexibility. Employers can apply RBP to selected services, layer it with care-steering strategies or implement it gradually, rather than making exhaustive plan changes.
• Potential member savings. Lower claim costs may support lower payroll contributions, reduced deductibles or member incentives tied to lower-cost, high-quality care.
• Market leverage. Moving away from chargemaster-based pricing may improve negotiating leverage with hospitals and health systems, depending on the local market conditions and provider concentration.

Considerations When Using Reference-Based Pricing

Reference-based pricing changes how providers and health plans interact and may affect both administration and the employee experience. These and other factors are important to consider before adopting an RBP model.

• Balance billing. Providers may bill employees for the remaining balance, sometimes through collections.
• Provider access. Some hospitals and physician groups may decline nonemergency services without a traditional network contract, depending on geography and market dynamics.
• Employee education. RBP typically requires more employee education, including how to verify provider acceptance and how to respond if a balance bill occurs.
• Administrative effort. RBP often involves multiple vendors, which may increase coordination, oversight and issue resolution responsibilities for HR teams.
• Employee expectations. Employees used to broad network access may feel uneasy with the added diligence around provider billing and care access.
• Provider alignment. Not all health care providers are willing to accept benchmark-based payments, which may influence access to care and billing outcomes for employees.

Direct Contracting and RBP Plans

Many employers choose to enhance a reference-based pricing strategy with direct contracting arrangements. Because employers are not tied to a traditional PPO network, RBP may create greater flexibility to negotiate directly with health care providers and facilities for select services. While RBP can be a strategy to help control general claims costs, direct contracting may help address higher-cost or more complex claims through negotiated pricing arrangements.

Direct contracting strategies could include fixed case rates, bundled pricing or other negotiated reimbursement arrangements with specific providers or provider groups. Employers may want to consider these arrangements for services that are typically high cost, high volume or subject to significant price variation. Some common examples include surgical bundles, independent imaging centers, infusion services, specialty drug networks and advanced primary care arrangements.

In some cases, combining RBP with direct contracting can help employers to create a more balanced cost containment strategy by pairing broad reimbursement benchmarks with more targeted provider agreements. Employers should work closely with their benefits advisors, third-party administrators and legal advisors to evaluate provider availability, contract structure and compliance considerations before implementing these arrangements.

Is reference-based pricing right for your organization?

Deciding whether reference-based pricing is a good fit requires a thoughtful review of your organization’s structure, risk tolerance and long-term goals. These questions can serve as a starting point for internal discussions and highlight questions or issues to address with your benefits consultant.

• Does our organization have the right profile? Factors may include workforce size and geography, employee comfort with nontraditional benefit designs, local hospital consolidation and leadership tolerance for balance billing or disruption.
• Where could RBP make the biggest impact? Review historical claims data with your benefits advisor to identify high-cost services and model potential outcomes under different structures, such as a traditional PPO, targeted RBP or broader RBP.
• How will local providers respond? Evaluate hospitals and physician groups within your organization’s footprint to understand how they typically handle benchmark-based payments, including if they are more likely to accept, negotiate or balance bill.
• What support will we need? Consider whether your organization has access to vendor partners that can assist with claims repricing, provider negotiations and plan member advocacy.
• How would we introduce it? Some employers start with limited applications, such as inpatient services above a certain dollar threshold, voluntary plan options or pilot programs that allow for gradual employee education.

Optimize Your Health Plan Strategy

The right approach depends on your workforce composition, the provider landscape in your region and your organization’s readiness for change. A benefits broker like Higginbotham can help you review your current benefits strategy, service model and organizational goals to determine the best plan design for your needs.

Connect with one of Higginbotham’s benefits consultants today to start a conversation about your organization’s employee benefits and cost-saving strategies.