Can RBP “Reference Based Pricing” help reduce premiums. Absolutely, but there are additional advantages, as well!

Reference Based Pricing “RBP” is a method or calculation for setting the reimbursement levels and thus the payments to providers on the services they provide. It is not new, in fact one could say it has been around since the implementation of Medicare back in the 1960s. But few people have heard of it, many people misunderstand it and no one is discussing it in Washington for addressing healthcare reform. So let’s see how it works and how it would help.

It’s referred to as Reference Based Pricing because the reimbursement to providers is determined (based) on a percentage relative to what the Federal Government would pay providers under Medicare. For marketing purposes some try to use clever descriptions such as Value Based Pricing or Virtual Pricing but the basic concept is fairly simple.

How reimbursement levels are set for Medicare
Medicare and Medicaid payments to providers are determined by CMS. The Omnibus Budget Reconciliation Act of 1989 introduced a new way to determine reimbursements to providers. It was called the resource-based relative value scale (RBRVS).

The intent was to create a uniform and objective payment system to address the large payment disparities produced under the traditional usual, customary, and reasonable (UCR) standard. The new scheme was adopted over a five-year transition period. The reimbursement level factors in both the CMS determined cost of a service rendered by geographic area plus a reasonable profit level for providers. Medicare and Medicaid (Medical in California) pay for healthcare for three large groups of Americans: Seniors (65+), folks under 65 who are qualified as disabled, and the poorest of our citizens (Medicaid). Due to the populations it covers, Medicare/Medicaid are the largest payers of healthcare services in the United States.

Obviously, Medicare wants to keep its claim costs controlled, at least tax payer hope so,  but Medicare also realizes that providers must be paid fairly  in order to  accept Medicare patients. This symbiotic relationship between payer and provider is a benefit for healthcare providers. In addition, the majority of providers will accept Medicare level reimbursement because providers don’t want to miss out on that huge base of potential customers. Finally, with this market power, Medicare can set its reimbursement levels lower than most if not all PPO plans and providers will still accept it.

Now apply RBP to private plans
If Medicare can control its costs as described above then why not apply RBP to private plans for the benefit of Individual & Family Plans and for employer group plans. RBP is being tried on Employer Self-funded or Stop Loss plans in many areas so it is not new but it is also not wide spread or common.

Typical reimbursement levels applied on private RBP plans are 125% to 150% of Medicare which means if a doctor would accept $100 from Medicare a private plan would pay $125 to $150 for that service. Sounds reasonable doesn’t it?

This RBP method may not save insurers a great deal on Office Visits or simple x-Rays compared to PPO plan discounts but it makes a huge difference when applied to expensive services such as MRIs & CT scans, surgeries and treatments for cancer and other serious illnesses. I have witnessed premium levels reduced 15-40% compared to similar PPO plans simply because providers would be reimbursed using RBP.

Remember from earlier posts in which we discussed the impact of access vs. costs. If premiums can be reduced simply by paying providers at a level 25% to 50% higher than what the same provider would accept from Medicare then don’t you think we should try it?

How have provider’s reimbursement levels been determined traditionally?
Applying discounts to provider’s retail charges in private plans has occurred in four general methods and date back to 1973 and in some circumstance even earlier.
Those three methods are:

  • PPO or Preferred Provider Network– This method was allowed by laws enacted back in 1973. These new laws allowed providers to group together to set pricing. That sounds simple but without the PPO Law of 1973 it would have been unlawful for providers to share and set prices due to anti-trust and collusion laws in existence.
    • As one expects in a capitalistic free market society new companies were started for the sole purpose of pulling individual providers together into a “network” which was then rented to health plans as a PPO Network. The health plans wanted to rent the PPO networks to make it easier for plans to set premiums and pay claims. A new market was thus created.
    • As more companies built their own PPO networks to rent to health plans it caused competition and helped keep reimbursements to providers controlled.
  • Retrospective Reimbursement– This method, created in the late 1980s, help’s control larger claims and is usually unseen by members. This method negotiates with providers after a claim is incurred in an attempt to further reduce the cost of claims  of a larger dollar amount. If a plan can negotiate a hospital/surgery bill down from $300,000 to $250, 000 then it is a worthwhile incentive.
    Again, companies were formed to help plans negotiate these larger cost claims.
  • UCR or Usual, Customary & Reasonable– this method, the oldest method, is applied by collecting what doctors charge in every zip code in the US for every service code under which claims can be submitted. In other words, in every zip code it is determined what the average provider charges for every service available. Of course, there are private companies that collect this information and sell it to plans.
    Then plans can use this information to determine how much their plan will pay on a claim by paying a percentage of the average cost for a zip code. It’s often called a “cutback” and if you have ever gone “out of network” on a PPO plan then you have seen this method applied to your claim.
  • Capitation- This is how HMO plans pay providers. A set amount is paid to a provider each month regardless if the provider sees any patients. As everyone knows, on HMO plans members declare their PCP (Primary Care Physician) which is the provider the member must see first before going to a specialist, etc. That PCP gets paid to manage the care for the patient and gets paid the capitation fee regardless if the patient is seen or not.

Those four methods of setting reimbursements to providers are still the primary tools for controlling what providers get paid. To an outsider it may seem odd to set reimbursement levels in a free market country but can you imagine what providers and hospitals would charge if there was nothing in place to set reimbursements. Yikes!

Now Back to RBP because there are advantages in addition to controlling costs
If RBP becomes more prominent among plans then we may see several additional advantages in addition to lower premiums. Here’s a couple:

  • When RPB becomes more prominent or even common then it will begin to function as a PPO by default. If providers accept the RBP reimbursement then you create a virtual PPO which will eventually provide more providers for your choosing.
    * Remember, “If you like your doctor you can keep your doctor”? Well in a virtual PPO setting its possible that you will be able to see any doctor you choose. That’s one.
  • Out of Pocket costs for members will be lower. Your plan will still have a stated OOP but if your provider of choice accepts lower reimbursements then your out of pocket on each service will be lower and your money will last longer. That’s two.
  • Over time providers learn to be more efficient and will set their budgets based on these RBP payment schedules which can further stabilize pricing. That’s three!

It’s a simple statement but the cost of healthcare can be reduced to the simple equation of “Unit Cost of Care” times the number of “Units consumed”. If we can reduce Unit Cost then its a start.

More plans are using the RBP method for reimbursement today than 5 years ago and the trend is toward even more. Most of the growth is in single employer plans that are self-funded by the employer. Clearly employers, which pay the lion’s share of healthcare cost in the US, are incentivized to control cost. So, just as the federal government is trying to control Medicare cost, employers are finding RBP helpful to control their cost.

If carriers could implement RBP on fully insured group plans as well as Individual & Family Plans then the growth in RBP would quickly establish a true virtual PPO Network.

Will legislators interfere in this RBP trend that is growing every year? Probably, but it’s hard to argue with the results. If healthcare cost is Unit Cost times Number of Units Consumed then we must either reduce the unit cost or the number of units consumed. Which do you think would be easier to reduce?

Let me know what you think.
And remember, we’re all in this together!

Mark Reynolds, RHU
559-250-2000
mark@reynolds.wtf

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2 Responses to “Can RBP “Reference Based Pricing” help reduce premiums. Absolutely, but there are additional advantages, as well!”

  1. tom christian Says:

    Hey Mark,

    Great article! While helping a small group client who seems determined to use out-of-network providers I called around to see what carriers are using as “allowable charges” for Out-of-network providers.

    Blue Shield uses their contract rates, Blue Cross uses 100% Medicare and UHC uses 110% of Medicare. That’s a long way from UCR 80th or 90th percentile! And they all acted like this has been going on for years. Maybe because they’re all so much younger than me 🙂

  2. John Says:

    Seems like a simple fix; doesnt it? Don’t think the BUCA’s would like that. I think a more localized approach to fixing the ACA using RBP is the way to go. Building those RBP networks locally will be key. Enjoyed reading the update Mark and yes we are all in this together.

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