Pandemic Could Drive Health Plans to Adopt Reference-Based Pricing

Plans control costs by setting top price they’ll pay for drugs and procedures

By Lin Grensing-Pophal May 13, 2020
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As companies around the country struggle to address the sudden negative economic impact of the coronavirus, many are looking toward health care costs for potential savings. Reference-based pricing (RBP) is one option that could help to control costs for employees and employers alike.

While RBP offers potential savings, its adoption in the U.S. has been slow. According to a 2019 survey of more than 1,300 U.S. employers by Lockton, a benefit broker and consultancy based in Kansas City, Mo., only 2 percent were using RBP, and 10 percent were considering it.

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How RBP Works

With RBP, insurers or payers identify a cost they are willing to pay for a specific procedure, prescription, or other health care service or product. Employees can choose to receive treatment at a higher cost, but they will be responsible for the price difference.

Typically, RBP uses the Medicare allowable payment for a service as a benchmark, with some percentage above this payable to health care providers.

Organizations also may use increasingly transparent pricing data from hospitals and other facilities to identify services that are both cost-effective and proven, establishing the price point for those services as the baseline for reimbursement.

According to the American Academy of Actuaries, savings from RBP could reduce total health care spending (excluding prescription drugs) by up to 12 percent. Achieving the higher level of savings, they say, "would require large changes in behavior, especially substantial price reductions among high-priced providers, but also consumers shifting to lower-priced providers."

A Case in Point

Louisville, Ky.-based Signature HealthCARE, which owns and operates nursing homes in 10 states, adopted an RBP solution in 2016. Now is a good time for others to explore the idea, said Nick Porter, the company's vice president of total rewards.

"My journey to find a better health plan actually started with seeking out direct contracts with health systems and hospitals near our facilities," Porter said. "I thought if I could work directly with a health system, a fair price and reimbursement model could be beneficial to our organization."

As he researched, he said, he came to recognize that he could achieve more cost savings by using RBP instead of a traditional, preferred-provider organization plan with standard cost-sharing.

Signature HealthCARE rolled out its new payment model over a couple of years. "We wanted to make sure employees were happy with the plan," Porter said.

The savings have allowed the company to offer additional benefits for employees, he noted. "We now offer tuition forgiveness, free ride-share to work and much more as a result of our RBP plan."

Small businesses that have lost revenue because of COVID‑19 "have to look at their health care spending now more than ever," Porter said, noting that Signature HealthCARE achieved savings of approximately 20 percent in the first year of using RBP. "We were able to save over $10 million dollars with our new plan," he said.

[SHRM members-only toolkit: Managing Health Care Costs]

RBP and Prescription Drug Costs

RBP can also help rein in the costs of prescription drugs. According to a study published in the Journal of the American Medical Association (JAMA) based on an evaluation of 3.3 million prescription insurance claims, RBP prompts physicians to prescribe lower-cost drugs and saves money for employers and employees. The study found:

*Employers saved 20 percent annually on pharmaceuticals "immediately upon implementation," with savings growing over time.

*Employees saw their cost-sharing expenses decrease by 24 percent after five years.

ActiveRADAR, a company that specializes in prescription drug cost-reduction programs, uses advanced analytics to compare the pricing of brand-name and generic medications in 65 therapeutic classes, such as oncology drugs. This information allows plans using RBP for prescription drugs to adjust co-pays and drive patients to choose the lowest-cost alternatives.

"We identify what therapeutic alternatives there are and which ones arep equal," said Dave Teckman, ActiveRADAR's executive chairman. The company then embeds clinical algorithms into the plan's claims-processing system, which alerts pharmacists to a low-cost alternative available to the consumer. This, said Teckman, "saves both the plan sponsor and the individual money."

"COVID‑19 could have increased employers' interest in plans using RBP," said Janine Cummings, SHRM-CP, an HR business development consultant with strategic HR inc., an HR outsourcing firm. "Employers will begin to look at any way to reduce the costs around this disease, including RBPs."

Communication and Education

With plans using RBP, as with many other types of benefits, success requires ongoing communication and education to ensure employees understand how it works and, importantly, how they can personally benefit. Without that knowledge, Cummings said, there's the potential for disenchantment and backlash.

"The challenge with this is that employees can go to any health care providers that are in-network, but that network can be incredibly limited," Cummings noted. If employees don't understand which providers are in their network, they can incur much higher costs, so "communication is absolutely integral when rolling out this program to reduce any further confusion."

Providers and pharmacies need to be educated, as well, said Teckman, to ensure that maximum savings are being achieved through RBP-driven prescriptions and drug choices.

At a time when companies are challenged to respond to COVID‑19, RBP may represent an option worth exploring.

LinGrensing-Pophalis a freelance writer in Chippewa Falls, Wis.

Related SHRM Articles:

Employers Cut Health Plan Costs with Reference-Based Pricing, SHRM Online, May 2019

Small and Midsize Employers Can Contract with Health Providers, SHRM Online, May 2019

Reference-Based Pricing: Another Self-Insured Option for Employers,SHRM Online, June 2018


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