Many small employers are turning to self-funding to provide economical group health benefits to employees. A growing number now use reference-based pricing to lower costs.
Reference-based pricing is a way for employers who self-fund their benefits to limit costs by paying a fixed amount for health care. To understand this method of cost control, it helps to understand self-funding.
The Appeal of Self-Funding
Previously, only large corporations could afford to self-fund their employees’ group health benefit coverage. With self-funding, the employer pays for employees’ claims out of pocket instead of paying a pre-determined premium to an insurance company for a fully insured plan. The employer assumes all risk. Employers can customize a plan to meet the specific health care needs of their workforce. A third-party administrator (TPA) often processes the claims and
collects the premiums for the plan.
The biggest advantage of a self-funded plan is the potential for employers and employees to save money. Self-funded plans fall under ERISA (Employee Retirement Income Security Act) guidelines and are exempt from many of the Affordable Care Act regulations — especially those that caused premiums on fully insured plans to climb substantially. Employers also do not pay state health insurance premium taxes, which can run two to three percent of the premium.
There are risks. If employers truly self-fund their group health benefits, they assume the risk of paying the health care claims for employees. It’s imperative that the company has sufficient financial resources.
However, there is another, less risky option — level funding. Employers who level-fund their healthcare plans pay a regular monthly fee based on what the insurer thinks the company’s claims will be. They also buy stop-loss insurance premiums to cover claims above a specified dollar level.
The Appeal of Reference-Based Pricing
A provider’s bill does not necessarily indicate the service’s actual cost, nor is it always a true reflection of market value. Reference-based pricing is a way for employers to cap the amount they’ll pay to cover claims.
Many employers reimburse providers 150 percent of Medicare’s reimbursement. Medicare reimbursement is used as a guide because it is the only universally accepted payment rate. Medicare reimbursement is enough to cover the service with some extra for the doctor or hospital. By pricing reimbursement at 150 percent, providers generally react positively because they typically receive less from Medicare and about the same amount from most insurance carriers.
Some plans only cap the cost of certain medical procedures — procedures that vary greatly in price but not in outcome, such as hip or knee replacements. Employers usually work with a reference-based pricing vendor or third-party administrator to set fixed payment levels.
Employees who have this plan do not have to see doctors in network, since there is no network. They can go anywhere the reimbursement is accepted. Depending on the plan, employees might or might not have to pay a balance bill for the difference in price.
The main advantage of this payment system is that it adds transparency to health plan pricing and saves employers money. It also keeps premiums lower for employees.
On the downside, employees may have to search to find providers who accept the
reimbursement level. Employees also may be liable for balance billing if the care provider insists on more than the set price. This is most common with hospital stays. Some plans make it the employer’s responsibility to pay for any balance bills they cannot negotiate. A reference-based plan also requires more employee education so they know what to do if they are balance billed.
In general, providers accept the payment or a final negotiated price that is below the cost of traditional payments about 95 percent of the time.
If you are interested in self-funding and reference-based pricing, talk to your agent or broker to learn if these plans and pricing would be good for your workplace.