Medical Pricing Option Brings Negotiation Into the Process

MEDICINE: Savings Can Be High, But Physician Networks May Be Limited

Originally published in the January 23, 2017 issue of San Diego Business Journal. Reproduced here with permission.

Tim Carter, a local benefits consultant at insurance agency Barney & Barney, offers all kinds of health plan options to his clients. But he reserves something special for just the right customers — the ones who are fed up with insurance premium hikes.

It’s a little radical, Carter admits. Employees who go to a hospital for medical care might receive a sizable bill in the mail. Plus, there’s a “fairly extensive educational process” involved for executives and employees alike, he said.

Consider the upside, though: Annual savings average in the neighborhood of $100,000 for every 100 employees covered, he said.

The option is called reference-based pricing (RBP), and it’s far from popular locally. A big reason RBP hasn’t caught on in San Diego is that it works exclusively with self-funded insurance plans, whereas the region is dominated by managed-care insurance products.

Savings Over Simplicity

Carter and others say employer interest in such arrangements is growing and that for all its complications, RBP can be a strong option for companies ready to take a big step toward saving money.

Reference-based pricing typically sets a ceiling for how much money an employer pays — for instance, 20 percent over standard Medicare charges for health care services provided by contracted physician networks.

The model gets trickier in reimbursements for hospital visits, which are often negotiated after services are rendered.

Skeptics see the arrangement as focusing on price over quality, and they note that the patients are ultimately on the hook for hospital services not fully paid by their employers.

For one of Carter’s clients, AIDS Healthcare Foundation, reference-based pricing costs about $500,000 per year less than what the Los Angeles-based nonprofit was paying when it transitioned several years ago from a fully insured product, estimated Suzanna Prestin, the group’s associate director for compensation benefits. The organization employs about 1,600 people nationwide.

“The reason we decided to change was because every year we were getting these incredible rate hikes,” she said. “We couldn’t keep taking these on.”

Negotiating Bills

While it’s true employees receive bills for hospital services, she said, they have learned to forward them to a third-party administrator the company contracts with to negotiate lower bill totals. At the end of the negotiation, the company pays 80 percent of the charges, and individual employees pay 20 percent.

“It’s really working out for us,” Prestin said. “I’m actually surprised that there aren’t more employers that are … going down this path rather than continuing to stay fully funded.”

Two local hospitals declined to comment for this story, saying they had little familiarity with reference-based pricing.

Xavier Serrano, a San Diego benefits consultant with CBIZ Inc., said RBP is “definitely a growing trend,” and that he and other brokers are working to introduce the concept more widely across the region.

‘Great Fit’

Generally speaking, he said, RBP may be best-suited for employers with 1,000 or more workers, in that the model can require a large volume of patients to persuade physician networks to agree to what can be substantial discounts for services.

These networks may also agree to discounts because these arrangements tend to be tied to prompt reimbursements.

An added benefit for employers is that, because prices are pegged to Medicare charges, they rise slower than most commercial fees.

Limited Networks

One drawback Serrano cited is that the physician networks available to patients tends to be rather limited. Overall, though, he calls such arrangements “a great fit” for large employers.

Tom Sounhein is less enthusiastic about reference-based pricing, which he sees as a kind of half-step toward the bundled, all-inclusive pricing some outpatient surgery centers offer for procedures such as joint replacement.

To Sounhein, CEO of San Diego independent physician practice association XiMED, the RBP model does too little to promote quality of medical care.

“It’s, I think, something that is just meant to impact pricing,” he said. “Those things, I think, have very limited shelf life.”

Not for Everyone

Carter, the benefits consultant at Barney & Barney, acknowledged reference-based pricing is not for everyone, but said it’s something employers large and small should consider.

He said they need to be prepared for the world of self-funded insurance, which requires stop-loss insurance and a lot of other potential complications.

Since he started promoting the model locally about two years ago, he has managed to sign up no more than a handful of employers on RBP plans. If premiums start increasing sharply, he expects a surge of interest.

“The employer needs to feel the pain, probably, to be (interested in) something like this,” he said.