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Approach allows employers to cap costs per health care procedure

T.J. Morrison is vice president of Cumberland County-based Benefit Design Specialists Inc., which has been offering customers a strategy designed to lower health costs. - (Photo / Amy Spangler)

Companies looking to cut health care costs often rely on high-deductible plans, health savings accounts and other tools. But there is a new practice at their disposal: reference-based health pricing.

The approach allows employers to cap what they are willing to pay toward specific health care procedures based on regional market averages.

A handful of companies are taking advantage of the approach.

According to the Aon Hewitt 2015 Health Care Survey, 6 percent of the more than 1,000 employers surveyed were using the approach. However, 53 percent were considering its use over the next three to five years.

Employers remain more likely to implement incremental changes such as increasing deductibles and co-pays rather than adopting bigger changes like reference-based pricing.

But the approach can help companies keep costs in line for their employees, said T.J. Morrison, vice president of Benefit Design Specialists Inc., an employee benefits firm in Upper Allen Township, Cumberland County.

Benefit Design Specialists is one of a few companies in Central Pennsylvania recommending the reference-based model to clients. On average, it has saved clients’ 30 to 40 percent under self-funded health care models, he said.

“We have found a lot of value for both employers and employees,” Morrison said.

Costs vary widely for many health care procedures. Under reference-based pricing, the final payment is usually in the middle of the price distribution scale for the local market.

Employees can select a provider that charges more than the employer contribution limit. However, they must pay the difference between the total cost and the limit, a process known as balanced billing.

For example, the employer may set a $1,000 limit for an MRI. An employee visits a local hospital that charges $1,500 for the MRI. The employee must pay the $500 difference, decide to go elsewhere for the procedure, or work with the employer and try to negotiate a new, lower price.

The practice saves employers money but also makes employees more conscious of costs. When faced with the decision, most employees shift toward lower-priced providers, as long as quality of care is similar.

Some critics argue the practice is unfair to employees. However, tweaks can eliminate the unfairness.

The California Public Employees Retirement System, which purchases health insurance for 1.3 million employees and their families, uses reference-based pricing, but it provides exceptions for when employees live more than 50 miles from a facility that offers the lower-priced service price, and it exempts patients if their physicians give clinical justification for using a higher-priced facility.

Morrison said balanced billing typically is the biggest issue for employees. But he estimates it is a problem no more than 2 percent of the time. He added that balanced billing “usually stems from confusion” and can be resolved.

Rob Glus, partner and consulting actuary for Conrad Siegel Actuaries in Susquehanna Township, Dauphin County, thinks that reference-based pricing “makes all the sense in the world, conceptually,” and “has significant value from a cost saving standpoint.”

But given the rural makeup of central Pennsylvania, which limits the number of providers, not many of his clients are interested in it, he said. He recommended that companies start on a smaller scale, say with just hip and knee replacements, then build on that as time goes on.

Because reference-based pricing is a relatively new concept, there are few vendors to work with. Morrison said it is important to choose an experienced vendor to avoid some of the problems that can arise.

“Nobody does this without guidance from vendors and others who have been there before,” he said. “I’ve seen a lot of bad brokers who have put reference-based pricing in place without a clue of what they’re doing. Look for references, do research on your own. If you set it up wrong, it can be a disaster.”