Expect Reference-Based Pricing to Get a Serious Reboot

February 22, 2020

Reference-based pricing is about to get a serious reboot, with even more healthcare purchasers engaging in the practice and those that are already using it reviewing existing contracts with increased scrutiny.

In August 2019, the state treasurer of North Carolina, Dale Folwell, used reference-based pricing to try to save the state and its employees on healthcare. This would have allowed the state to pay hospitals a flat 196% what Medicare would for services delivered to North Carolina teachers and employees. Some hospitals and health systems signed on, but many didn’t, prompting Folwell to compromise and allow resisters to remain in network.

This was a setback for reform, but it won’t be what happens in the years to come. In fact, reference-based pricing (RBP) is about to get a serious reboot, with even more healthcare purchasers engaging in the practice and those that are already using it reviewing existing contracts with increased scrutiny.

Pacific Steel & Recycling, a Montana-based employer of approximately 750 people, is part of that latter group. In 2013, the company decided to make RBP a part of its already self-funded health plan. According to Kaiser Family Foundation’s 2019 Employer Health Benefits Survey, 61% of American workers are insured by such plans, from which we can infer that the majority of employers are already one step closer to implementing their own reference-based pricing program.

Early on, Pacific Steel got some physicians to agree to a 160% Medicare reimbursement rate, but similar to what Folwell experienced, struggled to win over hospitals. And a short time later, its annual healthcare spend crept up once again.

Scott Haas, an independent benefits advisor affiliated with Health Rosetta, ran the numbers and helped Pacific Steel see that its 160% Medicare rate only made sense for some services/procedures. For others, 160% Medicare is higher than the average PPO, costing the company money. In other areas, the rate was too low for hospitals to profitably provide a service.

Moving to this new RBP system, Pacific Steel was able to save approximately $5 million (a reduction of over 50%), while having much more flexibility in its negotiations with healthcare providers. RBP became the conversation-starter that has led to approximately 5,000 direct contracts between the employer and healthcare provider organizations. In effect, RBP is the quasi out-of-network solution until the simple and fair direct contracts are signed.

This is an example of how a well-defined RBP system can be a win-win. And healthcare professionals should be prepared to see more reference-based contracts and reference-based revisions as success stories like this become more mainstream — especially as consumer satisfaction with the status quo continues to decline.

Hospitals are already struggling to compete with the many newly formed organizations looking to answer consumers’ calls for convenience and affordability in outpatient services — according to the American Hospital Association’s new 2020 Health Statistics report, 2018 saw fewer outpatient visits than the year prior, the first dip this statistic has seen in 35 years.

This dip reflects a larger healthcare trend: Patients moving away from hospitals, health systems, and traditional care settings in general. The people who pay for healthcare services—taxpayers, employers and the patients themselves—are no longer willing to accept care that costs much more than the benefit it provides. They realize that with the ability to access other options after only a few finger taps, they don’t have to keep waiting long periods of time to see their physician and don’t have to deal with the expensive hustle and bustle of visiting a hospital for most services.

To reverse this trend, healthcare providers have to give payers a reason to stay. That’s why RBP isn’t a threat, but an opportunity.

Even if they take some per-procedure pay cuts, in the grand scheme of things, healthcare providers are still getting reimbursed at a higher rate than Medicare and, in being cooperative, are more likely to secure partnerships with healthcare purchasers that have a long list of beneficiaries. Recall the 750-plus employees Pacific Steel’s contracted providers now have access to, then consider the impact of working with thousands of other employers eager to get a fair shake.

It’s not just hospitals and health systems that can benefit, though. Many healthcare purchasers are looking for independent physicians willing to participate in direct contracts that remove value-extracting middlemen. This is especially true when the healthcare purchaser is an employer, and the physician one that demonstrates substantial value.

For the 45.9% of physicians still in private practice, engaging in RBP and direct contracts while demonstrating low-cost, high-quality care delivery will reap rewards. Being supportive of healthcare purchasers’ strategies will allow them to maintain their competitive edge in a world where health system consolidation is making it difficult to keep the lights on.

Primary care physicians especially have a lot to gain. As primary care has lost its primacy and barriers have been put up making it difficult to access, individuals with pressing needs are left with little choice, resorting to suboptimal urgent care centers and emergency departments. Primary care can be revived if physicians are able to entice healthcare purchasers to send their beneficiaries to them by being upfront about outcomes and willing to negotiate rates. Then, to see the full benefits of the partnership, healthcare purchasers can incentivize beneficiaries to visit them by waiving counter-productive copays or coinsurance.

Between the early successes of forward-thinking healthcare purchasers and growing dissatisfaction with the status quo, RBP is a kickstarter to new healthcare conversations. Now, it’s up to healthcare professionals to determine what side of the conversation they want to be on—the side littered with stories of financial success for both healthcare purchaser and provider, or the side that sadly lags behind.