By Julie Ross, Gregory & Appel
Wellness is about increasing health and reducing costs. Business leaders are hoping for more controllable costs and high-quality services in their health care plans. The capping of what employers will pay for certain medical procedures – called a reference-based benefits strategy – is expected to grow now that the Obama administration has sanctioned this tactic, something that groups representing large employers have long advocated. Wellness plans can work alongside these strategies.
What are reference-based benefits?
Simply put, it’s about surveying and setting a fair maximum price per medical procedure. With reference-based benefits, plan sponsors pay a fixed amount or limit their contributions toward the cost of a specific health care service. If plan members choose a health care provider or service that costs more, they must pay the difference in price. A good example would be parents setting an annual limit on how much they will pay for a car for their child. The child can purchase any car they wish, but will carry any additional costs from their choice. Reference pricing is receiving more attention and consideration today because of growing plan sponsor interest in managing health care costs.
For example, a pilot reference-based benefits project by the California Public Employees’ Retirement System (CalPERS) from 2008 to 2012 focused on total joint replacements of the knee and hip. Analysis in 2013 showed that costs for the procedure dropped more than 25%, with no apparent decrease in quality. The California state workers’ union has saved millions of dollars through its reference pricing program.
The key is to do good research (i.e., use a large enough sample), set a standard for a quality outcome and then see where most of the good outcome hospital prices fall. An employee doesn’t have to stick to the cap, but is responsible for the difference in cost.
Employers have tried to implement the “defined contribution” concept for health benefits in a number of different ways. The Revenue Act of 1978 started it with Sec. 125 and flexible spending accounts and “cafeteria plans.” An April 2014 Employee Benefit Research Institute (EBRI) Issue Brief outlines some of the more recent history, which includes the introduction of health reimbursement arrangements (HRA) in 2001, health savings accounts (HSA) in 2004 and the more recent trend toward private health insurance exchanges, where employers provide a fixed amount of money for workers to use toward the cost of health coverage.
How might such an approach impact cost? EBRI’s analysis indicates that the potential aggregate savings could reach $9.4 billion if all employers adopted reference pricing for the health care services examined in the paper, some 1.6% of all spending on health care services among the 156 million people under age 65 with employment-based health benefits in 2010.
Savings can come from several sources – through patients choosing providers at the reference price, patients paying the difference between the reference price and the allowed charge, and providers reducing their prices to the reference price.
From an employer perspective, the approach establishes a cost threshold for the services selected, but plan sponsors should consider several issues as they weigh adopting reference pricing, including how the reference price is determined and how providers may react. In the CalPERS study, it was felt that the reference approach “possibly created a tipping point in hospital pricing strategy,” resulting in lower costs. Communication to plan members is also key to a successful reference pricing approach. For plan members, it could represent the potential for expanded choice with some pricing context – but members will likely need more data on prices and quality in order to make truly informed decisions, which is where modern transparency tools and effective benefits communication will make a difference.
The government is deciding how to handle reference-based benefits but will let plans use it for now. The officials – at the Centers for Medicare & Medicaid Services, the Employee Benefits Security Administration and the Internal Revenue Service – have discussed those topics and others in a new set of answers to questions about the Affordable Care Act (ACA).
Federal officials fear some plans could use reference-based benefits to limit patients to using a tiny number of doctors and hospitals that charge rock-bottom prices. Officials are hedging their bets, asking for comments about how to allow reference-based benefits while ensuring individuals have “meaningful access to medically-appropriate, quality care.”
But until agencies release further guidance on the topic, a plan can use reference-based benefits as long as the plan uses a reasonable method to ensure it provides adequate access to quality providers. In another answer, officials say insurers and employers can use the templates the agencies posted in April 2013 to develop new “uniform glossaries” of health insurance terms.
Plans do not have to let patients include any of the cost of care from out-of-network care providers in out-of-pocket spending calculations, but plans can use any reasonable method to let patients include part or all of the cost of out-of-network care in out-of-pocket spending totals.
In summary, we feel that reference-based benefits can be part of an effective strategy for some modern organizations, and case studies show promise on delivering lower costs and maintaining choice without lowering health care quality.
*What the Obama administration agreed to:
Large or self-insured employers can use reference pricing in designing health plan benefits. Employers can also establish reference prices for generic drugs. Again, employees can opt for a more expensive drug, but they pay the cost difference.
Does the cap on consumer costs included in the ACA protect employees from liability for the amount spent over the reference price?
The health law caps what consumers can be required to pay annually toward in-network care through deductibles or other cost-sharing to $6,350 for an individual, or $12,700 for a family. But costs incurred by workers who choose providers that charge more than the reference price will not count toward that limit. It will be the same as going out of network for these consumers, and employers should communicate this to employees very clearly.
What sort of savings can employers expect from reference pricing?
When large employers apply it to high-cost, often-performed procedures, the potential savings percentage is large. As employers gather additional information about more regular medical procedure costs, they will be able to set reference prices for more areas where costs can vary widely. This strategy relies on market pressure, so it will be less successful in areas with only a few medical providers or where price and quality information is not made available (either by the providers or the employers).
Are employers settling for lower-quality outcomes by setting a reference price?
No. There are several studies that show very little relation of cost to quality of the outcome. But the reference price selected should include a quality/outcomes component because, of course, employers want employees to receive good treatment so they can return in good health to the job.
Is the administration done with changing the guidance on reference-based benefits?
No. Stay tuned.