Statistics Don’t Lie: Reference-Based Pricing Saves on Medical Bills

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?

Studies, such as the one shared by DirectPath indicates that employers that implement RBP plans have reduced health care costs by 5-20%.

How is that possible? Consider that the average self-insured plan using RBP pays 120% to 170% of Medicare. In comparison, RAND Corp. reported in May 2019 that the PPO prices paid to hospitals averaged 241% of what Medicare would have paid.

Advanced Benefit Consulting, an employee benefit consulting firm and health insurance agency, explains that a patient receives a 40% “top down” price in a traditional PPO. This is basically a discount from the “retail” medical bill price. However, if they have a RBP plan, they receive a “bottom up” plan, meaning that the plan starts at the Medicare rate and goes up. This is an important distinction. With a top down price, the rate could be astronomical and reducing the costs by 40% could have a negligible effect. And as retail prices go up, the value of the discounts lessen.

RBP plans save health plans money, help members save on their out-of-pocket costs and help stabilize costs for the long term by eliminating the inflation of retail medical bills.

If you’d like to learn more about Reference-based pricing, check out our other blogs!

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Allied National

Founded in 1970, Allied is one of the nation's oldest and most experienced third-party administrators. Allied National is a 90 Degree Benefits Company, a subsidiary of Blue Cross Blue Shield of Alabama. As the small group benefit experts, Allied works with small business employers to provide unique and affordable group health benefits.