Not a Member?  Become One Today!

 
Employers Turn to Reference-Based Health Pricing
Reduced dependent subsidies and ‘gating’ strategies also on the rise

By Stephen Miller, CEBS  7/28/2014

updated 8/1/20/2014

While employee cost-shifting remains the most prevalent technique in employers' health strategies, there is growing interest in adopting new health tactics to mitigate cost and improve population health in the future.

According to Aon Hewitt's 2014 Health Care Survey of more than 1,230 employers covering more than 10 million employees, 52 percent of employers said their current health strategy is focused on traditional cost-mitigation approaches, such as employee cost-shifting. But just 21 percent said this would still be their preferred approach in three to five years.

Instead, employers are considering new tactics that require employees to take more action.

Reference Pricing

The survey found that 68 percent of employers said they plan to adopt reference-based pricing—where employers set a pricing cap on the maximum amount that they will cover for certain medical services that have wide cost variations, such as knee and hip replacement surgery. Just 10 percent of employers have adopted reference-based pricing as a health tactic today.

An April 2014 analysis of health claims data by the Employee Benefit Research Institute (EBRI) found that if employers had adopted reference pricing for the six health care services EBRI analyzed, it would have reduced their overall health care spending by 1.6 percent that year. Savings from reference pricing materializes through the combination of 1) patients choosing providers at the reference price, 2) patients paying the difference between the reference price and the allowed charge through cost sharing, and 3) providers reducing their prices to the reference price.

In practice, however, “Most of the employers who are going down this road are partnering with specialty vendors who have developed a structured process for determining the reference-based price, but also provide legal defense against providers who balance bill the patient,” Steve Purkapile, vice president for underwriting at HUB International Insurance Services in Denver, told SHRM Onlne.

“Over 95 percent of the time, the payment is accepted at the original price or a final negotiated price that is still far below what a traditional payment would have been,” he added. “On the rare times when a provider does seek the balance of the bill through litigation, almost every case has been won by the patient via the specialty vendor’s legal advocacy. In reality, very few patients are actually incurring any additional out of pocket costs beyond what the plan dictates in the form of deductibles, co-pays, co-insurance, etc.”

A Boost for Reference-Based Pricing

According to a report by the nonprofit Robert Wood Johnson Foundation, Exploring the Use of Reference Pricing by Insurers and Employers, the Obama administration recently indicated that the use of reference pricing by large group and self-funded group plans does not violate the Affordable Care Act’s cap on patients’ annual out-of-pocket costs. Some experts say this guidance is likely to encourage additional employers to adopt reference pricing strategies.

Early evidence suggests that reference pricing may be a promising cost-control strategy when applied to frequently performed, nonemergency tests and procedures where the prices charged vary widely across providers but the quality of results remains largely similar, according to the report. But some are concerned about the impact on consumers who unknowingly choose high-cost providers and incur thousands of dollars in medical bills as a result.


Narrow Networks

“High deductibles and reference pricing are fine, but do not always work in practice,” cautioned economists David Dranove and Craig Garthwaite of the Kellogg School of Management in a July 2014 blog post. “Chronically ill patients quickly exhaust their deductibles, and reference pricing does not work well for chronic diseases. In order to complement these tactics, some insurers are once again offering narrow network plans.”

Although some are now engaging in a backlash against narrow provider networks, the economists argued, “Make no mistake, restrictive networks are essential to cost containment. Through narrow networks, insurers can negotiate lower prices. More importantly, they can direct enrollees to providers who have lower overall costs and higher quality.”

Gating

According to Aon Hewitt's survey, in the next three to five years more than 60 percent of employers plan to "gate" employees to richer designs, where employees will be required to complete a "task" to access richer design options.

"Gating strategies are becoming an increasingly attractive incentive technique among employers as they look to improve the health of their employee populations," said Jim Winkler, chief innovation officer of health and benefits at Aon Hewitt. "For example, employers may offer a basic high-deductible plan to their entire workforce, but make a richer PPO [preferred-provider organization] option available to those employees who complete a health risk questionnaire or biometric screening."

"Despite the long-term promises of innovative strategies, employers are still gravitating towards existing cost control tactics because they can see immediate benefits," added Winkler. "However, these traditional cost-sharing approaches will not be as effective in the future, and employers will need to adopt multiple strategies to improve the foundation of how benefits are delivered, including funding, design, clinical and provider system changes."

Additional Plan Design Strategies

According to Aon Hewitt’s survey findings, employers are also considering implementing the following tactics to control health costs in the next three to five years:

72 percent of employers are or will be reducing subsidies for dependents.

52 percent of employers anticipate using unitized pricing—where employees pay per person and not individual versus family—up from 5 percent today.

42 percent of employers are considering making high-deductible health plans the only available option—implementing a “full-replacement” strategy—up from 15 percent today.

24 percent of employers plan to offer employees tools to guide decisions in plan selection and use, up from 19 percent today

92 percent plan to offer cost transparency tools, up from 49 percent today.

"The fundamentals of health care still matter, but employers are increasingly realizing that traditional approaches to mitigate health care cost trend need to be advanced," said Tim Nimmer, chief health actuary for Aon Hewitt.

"Over time, plan design strategies will evolve to be more requiring of employees, and individuals will be held more accountable for their health and for using health care," he added. "At the same time, we see that employers are increasingly committed to providing employees with decision support tools that provide greater transparency around the cost and quality of care, so that individuals can make more informed health decisions for them and their families."

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

Related External Articles:


Related SHRM Articles:

 

Quick Links:

Compensation & Benefits e-Newsletter:
To subscribe to SHRM's Compensation & Benefits
e-newsletter, click below.
Sign Up Now

 

Copyright Image Obtain reuse/copying permission