Reference-Based Contracting by The Alliance®: Benchmarking Prices to Lower Health Care Costs for Employers

As Americans, we generally utilize health care services at the same frequency and intensity as other developed countries, yet we continually pay more. A lot more.

My friend and colleague, Cheryl DeMars, President and CEO of The Alliance, has been quoted publicly quite a few times on price transparency and the rapid inflation of health care costs. That’s because health care inflation has climbed to a significantly higher level in comparison to other forms of inflation, and that disparity will continue to grow if we let it happen.

The best way to close this gap is to attack high prices; The Health Care Cost Institute found that increased prices accounted for 75% of health care cost inflation from 2014-2018. So how do we reduce high prices? That answer begins with tying those prices to an external benchmark. To quote Cheryl once again, “You can’t manage what you can’t measure.”

Specifically, benchmarking prices as a percent of Medicare – which is designed to cover hospitals’ variable costs and overhead at a standard rate – is becoming increasingly common among group purchasers. But not all approaches are created equal, so let’s take a deep dive into the different methodologies, including ours – Reference-Based Contracting by The Alliance®.

Reference-based benefits (RBB)

Reference-based benefit models set a maximum allowed amount for specific elective procedures. In other words, the health plan sets a threshold benefit for a procedure, finds providers willing to accept that price, then steers employees to those providers.

The best-known example of this strategy came in 2011 when the self-insured California Public Employees’ Retirement System (CalPERS) set a $30,000 maximum benefit for joint replacements for its employees. They saved $2.8 million (or $7,000 per patient) in a single year using this strategy.

So why isn’t everybody doing this? For starters, it requires a heavy administrative burden on the health plan. They must research the cost for specific procedures at different area providers (which, as Dr. Marty Makary recently explained, is not an easy task). Then, they must decide on an acceptable benefit threshold and get enough providers to agree to it for the strategy to make sense.

A secondary hurdle to the RBB strategy is that it requires vigilant employees who are highly engaged in their health benefits. If a single patient receives a procedure at a provider without the RBB agreement in place, its cost could prove catastrophic to the health plan.

Reference-based pricing (RBP)

Reference-based pricing, (or simply reference pricing,) is a pricing strategy where vendors partner with employers to reprice claims at a percent of Medicare without any provider agreements in place. (In some cases, health plans create “handshake” agreements for one-off procedures.)

Providers can then either accept the repriced claim or not; without a contract in place, providers might balance bill the patient for the remaining portion of the payment. From there, the patient is advised not to pay the charge. Instead, the RBP vendor will negotiate with the provider in an attempt to settle on a new, lower charge or to drop it altogether.

However, there are some obvious issues with the reference-based pricing strategy:

• It requires well-informed and engaged patients: If and when the patient is balance billed, they need to have the education and resources to understand how to best move forward.
• The patient risks unanticipated bills: If the patient does not pay their balance bill and the vendor and provider cannot reach a settlement, the patient is liable for the charge and can be taken to court for the remaining chargemaster price. Additionally, their credit score could be affected if their unpaid bill goes to collections.
• Lower provider access: The provider may simply choose to refuse servicing patients under a reference-based pricing model, and depending on the region, growing provider consolidation can further reduce the plan’s leverage to negotiate with the provider.

Reference-Based Contracting by The Alliance®

Reference-Based Contracting, as it suggests, uses actual contract agreements for specific procedures based on a percent of Medicare – the single largest purchaser of health care in the US. Medicare is used because it has established base rates for various services, and they adjust those rates by provider to factor in geography, patient mix, and quality metrics.

Reference-Based Contracting by The Alliance provides the baseline we need to pay a fair price for services, rather than simply focusing on a savings of total charges. Paying providers a percent of Medicare offers an appropriate benchmark to measure relative value. At the same time, it enables employers to use Benefit Plan Design to incentivize employees to utilize low-cost, high-quality providers.

Additionally, Reference-Based Contracting protects our members and their employees from unexpected charges and helps employers predict future health care costs. Our strength in numbers allows us to pursue payment reform using these unique contract provisions, and now, The Alliance uses this purchasing method with over 85% of contracted providers.

Our core philosophy on Payment Reform is simple: by aligning incentives, we can improve quality of care, expand access to high-value care, and reduce the cost of care for both employers and their employees – and it all starts with benchmarking prices.

Interested in shifting your workforce’s care to contracts based on a percent of Medicare? Contact our Business Development team.