Whether you refer to it as Reference-Based Pricing (RBP), Medicare Reference, Cost Plus or something else, the important thing is to understand what it is and why it’s being used to lower health plan costs.

​Level-funded health plans with reference-based pricing provide high quality coverage at a lower cost by using Medicare fee schedules as a base. Then they negotiate with hospitals and physicians to determine an acceptable percentage margin over and above Medicare. Margins often fall within a range of 25% to 65%. 

Health care costs have been trending upward for a number of years. Employers in the U.S. expect the cost for medical plans per employee to raise 5.6% on average in 2023, according to Mercer, a human resources consulting firm. This has led many employers to search for affordable insurance options to lower expenses without sacrificing quality for their employees.
 
With traditional group health insurance plans, employers use their bargaining power to purchase coverage from insurance companies at a lower rate than individuals usually pay, and they cover a majority of employees’ premiums. The insurance companies pay employees’ claims using the premiums paid by the employer and keeping all unused premiums for themselves.
 
Level-funded group health plans allow employers to pay for claims themselves, saving money on profits that typically go to insurance companies and are protected by stop-loss insurance that caps their total claims exposure. These plans have become increasingly popular among small employers because they set level monthly payments, the same as a tradition insurance plan. These payments go towards covering the estimated costs of expected claims, administrative costs and stop-loss insurance. But with a level-funded plan, employers can actually see money returned when their group has a healthy, low-cost year.

It’s no wonder small businesses are confused when they are told they need to file Form 5500 with the Internal Revenue Service (IRS) and pay PCORI fees. For instance, if you look up 5500 filing requirements on the Internet, most sites say something like, “Form 5500 is required on behalf of any welfare benefit plan that has 100 or more participants as of the beginning of the plan year or is funded through a trust, regardless of participant count.”

Clear as mud to the average employer, right? WRONG! Let’s break it down.

​For many, the end of the year is a time to slow down, relax and reflect on the year behind us while setting resolutions for the year ahead. At Allied National, our employees are busy paying claims, providing agent support, closing new business and booking renewals. But we still have time to look back at what we accomplished in 2021 and share with our readers what’s ahead for Allied National in 2022. And be sure to take our quick survey at the end for a chance to win an Amazon gift card! 

Reference-based pricing (RBP) is touted as the economical alternative to Preferred Provider Organization (PPO) pricing and statistics bolster that claim.

RBP is a reimbursement methodology primarily used by self-funded employers. Instead of carriers negotiating a fee directly with a provider (usually through a PPO network), employers reimburse providers and facilities according to a reference point – such as a percentage above of Medicare rates. For instance, Allied National’s self-insured Funding Advantage Freedom Plans reimburse physicians at 125% of Medicare and facilities at 150%.

The question many people have is whether RBP really can save employers and employees a significant amount of money on group health plan premiums and member out-of-pocket costs.

The answer?

Although Preferred Provider Organizations (PPOs) have been a popular group health benefit plan feature since their introduction in the 1980s, their shine is starting to fade.
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PPOs are supposed to be a great way to lower health care costs. Providers agree to a discounted rate in exchange for insurers steering members to their services. The problem is that retail prices charged by hospitals and physicians continue to rise steeply. 

Ned Schaut, President at Agency Leverage, and host of Benefits Influencer - a podcast highlighting thought leaders in the Employee Benefits industry – recently interviewed Allied National Executive Vice President Gary Ashley. 

The Affordable Care Act (ACA) has had a profound impact on small group health insurance. Rates have increased significantly as a result of the ACA. These rate increases have been particularly difficult for small groups.

This is where a level-funded health plan could be a good fit for your small business.

Preferred Provider Organizations (PPOs) date back to 1980 when the first PPO was organized to provide contracted rate medical care to a health plan. For providing “steerage” toward the medical providers in the PPO network, the providers granted discounted rates for their services to the health plan.

Over the years, PPOs have changed and morphed into multiple variations, but the end result is the same – health plan members are steered toward PPO providers for their medical care and given favorable discounted rates.

The advantage of this type of arrangement is very obvious – it’s price.

In recent years, rising health care costs have forced small business employers to explore more cost-saving options like reference-based pricing (RBP) when it comes to offering group health benefits.

In BenefitsPro's recent article, How reference-based pricing is recalibrating buying benefits, they point out that "as health care becomes an ever-increasing portion of expenses, employers are no longer willing to rely on the hollow assurances of Preferred Provider Organization (PPO) contracts".

According to David Massey, Senior Vice President at Brown & Brown, “employers benefit options are limited; they can’t continue to absorb the increasing cost of benefits, passing costs on to their employees has run its course, paring down benefits is actively being considered or do they stop offering health benefits all together?”

Reference-based pricing (RBP), once considered a non-traditional option, is now gaining attention for small to mid-sized businesses.

It's a health plan alternative worth learning more about to make sure you’re spending your health care dollars wisely.

Read the full BenefitsPro article here.