How We See It – Industry Update
Jul 9, 2018
The Referenced-Based Pricing (RBP) reimbursement model in health insurance (does not include Rx, by the way) is an evolving self-insured plan/claim cost control model that has been in the market in various forms for about a decade. While there are some true believers in this pioneering pricing model, others fear the possible repercussions from the healthcare delivery side (i.e., provider backlash). However, a recent July State of Colorado District court ruling has been a win for those in support of an RBP approach for their healthcare benefit plans.
Background
The Reference-Based Pricing model puts the self-insured plan sponsor in a healthcare claims cost “price maker” role instead of a “price taker”. Simply, instead of health claims passing through a traditional PPO network with ambiguous “discounts” from an undisclosed starting price of a hospital bill, the claim reimbursement price for a provided service (e.g., spinal fusion) is based upon a starting point “reference value”. In many cases, healthcare providers have little incentive to disclose their starting prices where discounts are provided.
The most common reference value used in RBP is Medicare’s reimbursement to healthcare providers for the same procedure at the same hospital in the specific market. By applying an RBP approach, the Medicare reimbursement amount is considered the baseline, and the self-insured plan dictates the reimbursement to the provider/facility at a percentage above that baseline to provide a reasonable operational margin to the healthcare facility (e.g., 150% of the Medicare reimbursement). Why Medicare as a reference value? Because CMS is the most efficient healthcare pricing mechanism in the US as a universal standard and is in many cases much lower in total cost than provider “discounts”.
Example:
In this approach, the billed amount from the provider, which is based upon the hospital chargemaster, is not factored into the determination of the reimbursement amount. This formula is compared to the traditional PPO network discount reimbursement model in which the insurance carrier has negotiated a specific discount from an undisclosed price or starting point (many times highly inflated amount above the Medicare reimbursement) it will reimburse the provider. This discount is on a percentage basis (e.g., 40%) and applied to the billed charges.
Recently, the proponents of Referenced-Based Pricing won a favorable court ruling when a jury declared the billed charges by the provider were unreasonable. The hospital, St. Anthony’s North in Westminster, CO, a Centura Health hospital, filed a suit against a patient over unreimbursed medical expenses in the amount of $229,000. In the court ruling St. Anthony’s North was awarded $776.
To shed further light on the determination by the court that the charges were unreasonable, court documentation indicated the hospital’s cost for the implants used in the procedure was approximately $31,000. The billed amount for those implants was $197,640, a 624% markup.
If you consider a standard network discount (let’s use 45%) which would be applied in traditional PPO insurance plan, the reimbursement to the provider based upon the billed charge for the implants would equal $108,702. That is a nearly 350% margin added on top of the hospital’s $31,000 cost for the implants. These very reasons contribute to why many employers are giving an RBP approach significant consideration. However, this approach carries with it its own challenges as the healthcare delivery side is pushing back (as seen in the lawsuit filed by the Colorado hospital).
If you have any further questions regarding this ruling or are interested in furthering your knowledge of Reference-Based Pricing, reach out to your Account Executive or IMA representative.