The Pros and Cons of Reference-Based Pricing
October 2, 2017
Nobody likes going to the doctor. Still, it’s a necessary part of remaining a healthy and productive member of society.
It’s not so bad having to take a trip in when you know how much your co-pay will be, but things can get worrisome very quickly when lab tests, prescriptions, and surgical procedures enter the conversation.
These things can be scary enough on their own, yet what makes them really frightening is never knowing how much they’re going to cost you.
Unfortunately, the doctor generally can’t even give you peace of mind by telling you the costs up front. Medical pricing is a mystery to everyone involved, and the end results can vary widely, whether you’re in-network or out.
This issue is particularly important for employers. Health insurance plans cost companies large amounts of money annually, and the uncertainty of medical pricing helps keep those costs high.
There’s got to be a better way to price medical procedures that doesn’t involve making patients feel like they’re placing high stakes bets on the possibility that this hospital won’t be as expensive as the one down the block.
Let’s take a look at one possibility for helping to fix this issue: reference-based pricing.
What is it?
Reference-based pricing is a benefits design where the plan defines the maximum amount it will cover for a particular healthcare service.
Agreements with in-network providers would ensure that as long as the insured party visits someone within the network, the total cost will be covered at the price already established. The patient could still choose to use another healthcare provider outside of the network, but they would be footing the extra portion of the bill on their own.
Healthcare and health insurance can be a bit confusing, so it might help to think of this in another light. For instance, say you take your car in because the air conditioning isn’t working. You take the car in, and the mechanic diagnoses the issue. You need a new air compressor. That’ll be $800.
It doesn’t matter if the mechanic starts working on it and things turn out to be more complicated than he expected. It doesn’t matter if it turns out to be much simpler. You’re still going to pay $800.
That is a type of cost certainty that doesn’t really exist in our current healthcare system.
As established in the previous section, one benefit is that a specific procedure will always be the same price. This means that insurers can save money, and they can pass those savings on to the people they insure.
Additionally, patients can have a better point of reference when choosing between treatment options and healthcare providers.
Reference-based pricing is particularly promising for things like lab tests and scans. As things are now, a CT scan can range anywhere from $260 to $4,000, depending on where you go. Eliminating, or at least narrowing, wide cost gaps like this would be beneficial to both health insurers and patients.
The same logic applies to (hopefully) one-off procedures like hip replacement or casting a broken limb.
Of course, each pro has its respective con.
For instance, while one-off procedures work beautifully, other types of healthcare don’t derive any particular benefit from reference-based pricing. Specifically, chronic illnesses don’t match well with this pricing system.
Also, while reference-based pricing does open up a lot of options for patients, most of them probably aren’t educated enough about how healthcare or health insurance works.
Lack of education is an important point in any healthcare discussion, but it’s particularly relevant when the consumers’ choices drive how much or little they pay out of pocket.
How to do it right
So, there’s some good and some bad. If you are interested in rolling out a referenced-based pricing option for your employees, here’s a 4-step breakdown that can help:
1.) Education. Most people spend more time planning their vacation than they do researching medical care. Make sure to teach your employees how to shop intelligently for healthcare.
2.) Soft launch. Introduce the idea of reference-based pricing early—a good six months before you plan to actually launch the new plan. Explain how it works and why it’s a good fit.
3.) Launch. Make the transition easier by providing your employees with transparency tools, preferably mobile, that help them check out pricing at different locations based on real data.
4.) Feedback Loop. Be sure to adjust communications and systems based on real results and feedback. Otherwise, the system could easily fail over time.
It would be great to walk into a doctor’s office and have them tell you exactly how much a procedure is going to cost. Our healthcare system doesn’t really work like that, though.
But, with a system like reference-based pricing, we can take some of the guesswork out of medical pricing. There are pros and cons, but it could be a good option for you and your employees.
This post is based on a podcast interview with Karl Ahlrichs from Gregory and Appel Insurance. To hear this episode, and many more like it, you can subscribe to Healthcare Simplified.
If you don’t use iTunes, you can listen to every episode here.