Revolutionizing our Health Care Plan Through Reference-Based Pricing

The economics of modern healthcare have become a labyrinth for employers to negotiate, usually annually, where costs typically spiral out of control year over year. In the face of these perpetually and rapidly rising costs, at Stotz Equipment, we have been seeking a better path – both for us and for our employees – for some time now. A few years ago, we hit on an innovative strategy that is proving extremely effective and successful: reference-based pricing (RBP). RBP has garnered attention in recent years for its potential to rein in healthcare expenses while ensuring quality care, so we decided to give it a try.

In short, through RBP, which we began offering as an option for our employees just three years ago, we have seen significant savings. Specifically, this year, in year three, I would estimate that at Stotz, we saved about 65% on health care costs with this plan. At the same time, we have been able to provide high quality health care to our employees, without compromise. It’s made a staggering difference.

As you consider whether or not this might work for your company, let’s begin by establishing a clear understanding of what RBP is and how it works. I am leaning on my CHRO, Jared Nielsen, as I lay this out.

RBP represents a departure from traditional models. Instead of relying on complex negotiations between insurers and healthcare providers to set a percentage discount on a service whose price may fluctuate wildly, RBP sets a predetermined reimbursement amount for medical procedures. The reference point is typically based on a percentage of what Medicare would pay for the same service. At Stotz, we aim for 150% of Medicare costs. RBP plans are administered by a third-party administrator (TPA), and variations do exist across different groups and regions, where targets may differ based on local dynamics.

In the traditional healthcare model, in addition to the inability of an employer or an employee to control or predict the cost of a given service, lack of choice is a limitation. If your preferred doctor is ‘out of network,’ you are out of luck. And for the company providing insurance, it is nearly impossible to control costs. Any efforts to keep employees’ costs relatively stable can mean huge, unexpected increases in costs for employers, often every year.

What does RBP actually look like in action? It’s not complicated. The employer, with the help of a TPA, sets the reference price for various medical services. Employees have access to this information, so they know what to expect. When the need arises, the employee seeks treatment, from whichever facility or provider they like. The insurance plan pays the healthcare provider the predetermined reference price. If the provider accepts the reference price as full payment, the process ends here. Occasionally, the provider will push back, which can lead to a process called ‘balance billing.’ More on that in a moment.

How much below standard prices will the RBP prices be? It varies widely, but usually, it’s between a 300%-700% difference, when you’re talking facility costs. Providers tend to be a little lower than that unless they’re specialty providers. The savings are felt on both the employer and employee side, at least at Stotz. Because we are an Evergreen® company, we share our successes with our employees no matter how we are winning. Therefore, the windfall created by these significant savings didn’t go straight to the company’s bottom line. Rather, we passed a great portion of it on to employees.

With the traditional plan, we cover most of the premium costs for the employee – $200 of $250 for an individual. The employee pays the remaining $50. When employees elect to enroll in RBP (it is optional at this point), we cover 100% of their costs. They are saving $50 per paycheck, or $100 per month. The savings for families are even deeper; the traditional plan starts at $260 per paycheck for a family, but with RBP, it drops to $50. Those on the family plans are saving over $400 per month.

Why aren’t 100% of our employees enrolled in RBP? There are several reasons that can help you, as a leader, decide if and how to implement this in your company. First, it is new and different, and often, people are wary of radical change like this, especially when it comes to something as important as health care. In the first year, we offered it as an option and about 50% of employees elected to enroll. Secondly, although the TPA has set a rate for service, this doesn’t mean that all providers will accept this right off the bat. This is where balance billing can occur. It is not uncommon for a big bill to arrive, and then the employee has the responsibility to bring it to the TPA and start the process of negotiating for a better price. This period of negotiating – balance billing – can take time. Employees might find it stressful to receive a series of huge medical bills and wait for a long time to have the negotiations resolve. These employees might prefer the traditional plan.

On the employer side, there are some downsides as well. Occasionally, a provider refuses to accept the TPA rate, and then we have to fight it. This is rare, and only happens in about 1% of claims, but it does happen. My team manages this when it happens, so it means time, effort, and therefore money for us. Occasionally, our team decides to settle and pay over the 150% of Medicare, and that is also a cost we bear, but again, it’s rare. Even when there is not a fight, employees are inevitably going to come to Human Resources when they have claims or bills that arrive and they are not educated on the process yet. So it does cost us, but the costs go down over time.

Despite initial hurdles and trepidation, RBP is gaining traction within our team. In year three, enrollment numbers have grown to about 2/3 of the company. This evolution underscores the growing acceptance and efficacy of RBP in mitigating healthcare costs. Our progress with this initiative so far is encouraging. I can envision a healthcare landscape where RBP becomes the norm at Stotz, obviating the need for traditional plans. The benefits are palpable: reduced administrative burdens once everyone gets used to the new program, stabilized premiums, and empowered employees making informed healthcare choices.

For us, reference-based pricing has been a game-changer in a healthcare landscape fraught with escalating costs. We are self-insured, and that is an important part of why this makes sense for us. Beyond that, the tolerance of your employees to try something new and the expertise on your team to manage the transition are the only other critical ingredients. It’s a great program. By anchoring itself on transparent reimbursement rates and empowering employees with cost-effective options, we believe that RBP could be the path to vastly improved affordability and accessibility in healthcare, not just for us, but for many companies.