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Reference Based Pricing

Reference Based Pricing

Top Down

Plan networks are currently engaged with hospitals in a non-transparent, top-down approach to managing healthcare claims. Here’s how the system works:

Hospital charge masters set inflated prices for their services and the products that are utilized in those procedures. Working down from these exorbitant figures, healthcare networks fight to get a discount. That negotiated discount may be as much as 50%, but even at half-off billed charges the hospitals are still making huge profits; markups of 1000% are not unheard of. And if that set discount starts eating away at the hospital’s profits, they can always raise the price. A $5000 bill at a 50% discount means the hospital is getting $2500—not bad if that bill was marked up from $1000. If they deem that profit margin “slim” they could (and often do) raise the price. An increase to $6000—still with a 50% discount ($3000)—results in a further 20% profit.

On top of that, different hospitals charge wildly different prices for the exact same services. Getting treatment at a fair price may require a patient to travel not just across town, but across state lines. Problem is, the patient has no road map because the majority of states do not require hospitals to publicly disclose their rates for specific procedures.

So not only is there non-transparency, but even if that fair pricing was identified, you wouldn’t know where to find it.

Trending Up

Reference Based Pricing (RBP) flips the top down approach. RBP sets a benchmark by which payers and providers can negotiate fairly, often drastically discounting the over-inflated billed charges. The goal of RBP is fairness to both parties: affordable to the payer, and covering the costs (with a reasonable margin) for the provider.

Medicare-plus pricing is the new RBP on the block. This RBP leverages cost-to-charge ratios that are sent to Medicare (hospitals must report this data back to the Centers for Medicare & Medicaid Services in order to receive reimbursement from them). For example, if that ratio is 20%, that means a hospital service billed at, say, $2500 actually costs $500. Knowing that 20% figure you can build up from there. You might use a formula of cost plus 20%, or Medicare’s reimbursement plus 20% to 50%. Generally, a reimbursement rate of approximately 150% (between 120 percent and 180 percent) of Medicare is typical for an RBP plan. Medicare-plus pricing is especially useful for out of network claims since the in-network top down discounts are obviously not applicable.

There are other distinct advantages of Medicare-plus pricing, and RBP, in general, which include:

  • Cost savings: Plan pays the “real costs” of goods/services (plus a specified profit margin)
  • Lower administrative costs (time efficiencies)
  • Predictability: rates set up front
  • No credentialing
  • Flexibility: employee choices within pla

These points are clear improvements over the top down model. Still, being mindful of appropriate reimbursement is crucial. The perils of balance billing are one of the largest concerns of RBP. No employee wants to get stuck with an enormous bill because of plan limits. Similarly, no paying provider wants the bad publicity of a member-patient getting financially blindsided. Other concerns to be aware of include:

  • Lack of leverage for small employers
  • Insufficient pricing data
  • Dearth of established markets
  • Limited access to appropriate plan language/regulations/procedures
  • No option for covered benefits that Medicare excludes (Medicare-plus pricing)

In addition, not all services fit so easily under the RBP umbrella. RBP works best when the items or services are simple and routine. More complex services with the potential for costly variables are less likely to work so well.

Moving Forward

The black hole for RBP has always been specialty drugs and implants. The underlying reason is the same as the top down conundrum: non-transparency. What do these items REALLY cost? Specialty drug costs have been going through the roof. Implants can often comprise 50% of surgery bills. Yet there’s no reliable reference available to look up accurate pricing on these drugs & devices. Or is there?

PredictRx in Advanced Medical Strategies’ Predict Suite of solutions has taken an enormous step towards the goal of true transparency in the specialty drug world. The PredictRx online directory provides dosing, indication, and reasonable cost information on over 400 of the most expensive pharmaceuticals. With this tool, firms in the payer chain such as MGUs, Stop Loss & Reinsurance Carriers, Medical Management Firms, and TPAs finally have a reference by which they may create a discussion with the provider about fair reimbursement for specialty drugs—effectively creating an RBP scenario and drastically reducing their reimbursement from the stratospheric levels at which they often reside.

Likewise, actual costs for implants can be found in another module of the Predict Suite: ImplantDx. Currently, over 220,000 unique medical-surgical supplies and implants are easily accessible in ImplantDx, with low, average, and high provider-reported pricing by region (which includes supplier, category, and item or SKU). ImplantDx users can mine and benchmark implant provider charges with powerful pricing information to allow for reference-based reimbursements for costly implants.

Looking further ahead, AMS is currently working to create a Medicare reimbursement calculator in its PredictDx module that will allow users to estimate an RBP reimbursement given a rate above Medicare of their choosing.

If there’s a main lesson to be learned here it is that transparency is crucial. Having access to accurate reference prices with regard to drugs, surgical implants, bundled procedures or any other medical services affords tremendous advantages. Vetted RBP can be used as considerable leverage over providers. Reimbursement can be negotiated from a position of strength by using current treatment cost trends as a reference. Reliance on outside vendors can be reduced or eliminated entirely. Plan document limits can be accurately projected and efficiently managed. In short, costs are effectively contained.

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Brought to you by Jason Marcewicz, Special Projects Manager


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