May 4, 2018

In recent years, surging health coverage costs have forced plan sponsors and industry vendors to explore new approaches to managing cost. As one pricing strategy, some self-insured health plan sponsors have begun to consider Reference Based Pricing (“RBP”). RBP comes in a variety of forms. However, at its core, RBP is designed to improve provider accountability, pricing transparency, and more tightly manage plan costs over a longer period by tying reimbursement for some services to a specific, predetermined price. However, the concept can be controversial. This article describes RBP, its advantages, disadvantages, and pitfalls and then discusses some of the current legal rules and challenges related to Reference Based Pricing.

Defining the cost

Most commonly, under RBP, the plan sponsor defines pricing limits on the amount they will cover for specified medical procedures, particularly those subject to the widest cost variations (for example, facility charges or imaging, like MRIs). The RBP vendor often defines acceptable plan cost by reference to historical payments for the procedure, or by using third-party statistics on healthcare provider costs. Some RBP vendors will use the Medicare payment schedule as a starting point, and then layer in an extra amount to bring the price closer to the retail price (for example, 150% of the Medicare schedule). In some markets, the health plan might even contract directly with medical providers that agree to prices based on the pre-established maximum limits.

The participant is informed of the maximum allowable payment, and because they stand at some risk for paying any excess, they are strongly motivated to “shop.” Many RBP vendors offer resources and tools to help participants find providers who will accept the RBP amount. Alternatively, they may encourage participants to seek pre-approval. RBP therefore fits especially well with consumer-directed plans, although it can be offered as a part of other plan types.

Example: Assume that pricing for an MRI ranges from $400 to $4,000 in a given city, depending on facility, even though the MRI-itself is objectively of similar quality. A plan uses RBP to assign $800 as the maximum payment. This cap will encourage participants to shop for an MRI priced at the target amount (or below), rather than risk absorbing costs of the higher amount.

Reference Based Pricing Advantages

  • Cost Savings: Negotiated RBP arrangements can save a significant amount of money and prevent excess costs for certain procedures.
  • Predictability: Because costs are determined ahead of time, the plan and participants are much better able to anticipate healthcare expenses.
  • Simplified administration: Cost and payment are more transparent making the initial claims payment more straightforward.

Reference Based Pricing Risks and Potential Pitfalls

  • Balance Billing: When a procedure costs more than the RBP maximum, the employee could be left paying the difference. Many RBP vendors address this with an automatic negotiation feature. This flags “balance bill” problems and initiates discussions with the provider to settle billing issues on behalf of the participant, sometimes with a payment over the RBP amount, but still less than what the provider originally charged. When it works, this shields the employee from being hounded by a debt collector. Some vendors may even give participants access to legal representation to protect them in case of a dispute.
  • Stop-Loss Coverage: Employers (or their RBP providers) want to make sure the stop-loss coverage will cover discretionary additional payments over the RBP amount. As discussed above, some plans will negotiate to pay more to avoid balance billing, but the typical stop-loss policy may not cover those additional payments.
  • Network Carve-Outs: If RBP is applied to in-network providers, then any items or services subject to RBP must be carved out of any network contract the plan’s third party administrator (“TPA”) has. Otherwise, the network providers will likely not accept the RBP amount instead of the network level of reimbursement. Some network providers (like the TPA arms of insurance carriers) may prohibit such carve-outs to their network contracts.
  • Provider Pursuits: Providers do not have to agree to any negotiation with the RBP vendor and out-of-network providers are not required to take the RBP amounts as payment. As a result, providers could sue (or threaten to sue) the employee or the plan to make up the difference.
  • Employee Relations: With balance billing and potential provider conflicts, employees and dependents can get caught in the middle and may ultimately blame the employer.

Reference Based Pricing and the Affordable Care Act

The Affordable Care Act (“ACA”) places an upper limit on an individual’s out-of-pocket expenses for an employer health plan. However, as a general matter, these ACA rules say non-network charges, like balance billing, do not count against the out-of-pocket limit. So how does an RBP arrangement fit into these rules?

The federal agencies overseeing the ACA issued FAQ guidance that addresses the interaction of RBP and these rules. Under those FAQs, plans can treat providers who accept the RBP negotiated price as “in-network” and others as out-of-network as long as participants have adequate access to quality healthcare. Specifically, the DOL does not want RBP to be used to restrict access to quality healthcare providers as a way of getting around the out-of-pocket maximum limits (and therefore reducing plan costs).

To figure out if there is adequate access to quality providers, the agencies will look at all facts and circumstances, including the following:

  • Type of service. Plans should have standards to ensure they offer benefits for services from high-quality providers at reduced costs. In the agencies’ view, RBP should be used for services where participants have time to make an informed provider choice. Under this view, RBP would not work for emergency services since the employee often does not have a choice of the provider.
  • Reasonable access. Plans should have procedures to ensure an adequate number of providers that accept the reference price are available. This could be particularly challenging in rural areas where provider options are limited.
  • Quality standards. Plans should have procedures to ensure providers accepting the reference price meet reasonable quality standards.
  • Exceptions process. Plans should have an easily accessible “exceptions” process. This process would allow services rendered by providers that do not accept the reference price to be treated as if they did (i.e., as if they are “in-network”). This process would accommodate special circumstances, such as where a provider that will accept the reference price is not available within a reasonable distance or with a reasonable wait time or to address safety concerns with providers.
  • Disclosure. Plans should proactively and transparently deliver RBP information to plan participants in advance and free of charge, such as including in the summary plan description. This would include a list of services to which RBP applies and the exceptions process. In addition, on request, plans should provide information about providers who will accept the reference price, those that will not, and data used to make sure an adequate number of quality providers are available.

Virginia Hospital challenges Reference Based Pricing

The nation’s first reported RBP case is now being litigated in Virginia. That case centers on whether a hospital can “balance bill” the difference between its $111,000 price for a procedure and the plan’s upper RBP limit of around $27,000 (an approximately $84,000 difference.) The case being litigated, but employers around the country are watching with keen interest because of the relative lack of legal guidance in the RBP arena. If the hospital wins, it could make RBP more difficult to implement since providers might be less willing to accept the reference price (at least in Virginia).

The hospital is arguing that the patient agreed to pay the full retail price by signing an agreement saying he was financially responsible for payment (a common practice). However, that agreement did not specify the price. Some legal experts assert that since the patient never agreed to a particular price, he did not know what he was agreeing to and therefore can only be charged a reasonable price. Whatever the outcome, the hospital has probably already spent considerably more than $84,000 on the case, so this seems to be more about winning the legal argument than the money.

HUB International will closely monitor the Virginia case, along with other Reference Based Pricing-related activities.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.


The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.