The traditional health care system is broken. Under the typical model, insurance companies negotiate with hospitals and pharmaceutical companies over the cost of services and medication, and wherever they land dictates how much their plan members have to pay for health care. For employers, this means regularly enduring eight to twelve percent price increases each year. For consumers, this often means paying an inflated rate for care, though hospitals, pharmaceutical companies, and insurance companies make it difficult to itemize the bill before making a purchase. Reference-based pricing rejects the outdated methodology. Instead, it provides a roadmap to unlocking an optimal blend of price and care, delivering greater health and financial outcomes to your employees. 

Reference-based pricing works by evaluating a wide variety of data sets, including: 

  • the cost of hospital services
  • the price of medications in pharmacies
  • the quality of care provided by individual physicians

By using the data to mix and match better services and products from different vendors, employers can build plans that deliver the best care at the lowest price possible. 

To spur even more savings, reference-based pricing places an emphasis on strategically sourcing high-quality, low-cost care for the most expensive claims on a plan, especially issues involving:

  • Hospital stays
  • Surgery 
  • Pharmacy spend

With the right data in hand, employers can deliver greater results at a fraction of the costs they currently pay.

Emergency Room

Reference-based Pricing in Action

When compared side-by-side to the traditional health care model, reference-based pricing can deliver better care at a lower cost. Consider the case of an employee who tears a rotator cuff playing football in the backyard over the weekend and needs surgery to repair the damage. The size of the employee’s hospital bill depends entirely on whether they pursue care through the traditional model or with reference-based pricing.

The Cost of Traditional Health Care 

Under the traditional model, the employee decides to undergo surgery at the hospital conveniently located around the corner so that his family can easily visit him during his stay. While the location is convenient, the employee is stuck receiving surgery from a second-rate surgeon. After spending two nights in the hospital, the employee endures six weeks of physical therapy and an intense round of painkillers from a pharmacy down the street to manage lingering issues from the surgery. 

The total cost by the time the employee is completely recovered: $15,000 for hospital services, physical therapy, and prescription painkillers. 

The Cost of Reference-based Pricing

Reference-based pricing undercuts the traditional model by simultaneously eliminating excessive costs and improving the quality of care for plan members. Under the reference-based pricing model, the employee visits a higher-rated hospital in a smaller town 30 minutes away. Although the drive is farther, the employee receives the surgery from a highly-accomplished surgeon. With these two factors, the employee sees two immediate benefits:

  1. The smaller hospital offers lower prices on rotator cuff surgery. 
  2. The superior surgeon has a better track record for these surgeries.

After a successful surgery, the employee visits a nearby pharmacy to fill their prescription, which is only needed for a brief period of time because the surgery went so well. After four weeks of physical therapy, the employee is completely healed. 

The total cost by the time the employee is completely recovered: $8,000 for the same hospital services, physical therapy, and prescription painkillers. All told, the employee saved $7,000 when compared to the traditional pricing model. 

Good News Ahead

A recent executive order has pushed insurance companies and hospitals to publish their negotiated rates for individual services. The goal is to create transparency so that consumers can make informed pricing decisions when seeking health care options. These same pressures are now shifting onto pharmaceutical companies to make them equally transparent in their pricing practices. Although the industry has shown some resistance, it appears legislators have begun to target the issues inherent in the traditional health care model by demanding better data.

When employers have access to better data through reference-based plans, they can make better benefits decisions. In many cases, the resulting strategy is so effective, employers avoid the eight to twelve percent price hikes that are typical in traditional health insurance plans.