Reference-based pricing in health insurance creates incentives for patients to select providers who charge relatively low prices and still offer high quality of care. Insurers offer a maximum price for specific procedures and a network of providers who agree to it. 

Patients who choose providers charging more than the max are required to pay the difference. Leader’s Edge sat down with Rod Cruickshank of The Partners Group to discuss the pros, the cons and what providers might think.

Let’s start with the basics of what we expect from reference-based pricing.

We’re trying to bring some normalcy or common language to something that has become complicated. The typical consumer, broker or consultant is lost in the effort of trying to determine what is truly being charged.

Most folks have a different understanding about reference-based pricing. Working toward a common language would be a great start. Look at it from the hospital standpoint where you use a fee schedule based upon what CMS [the Centers for Medicare and Medicaid Services] established. Then you negotiate with your payors on what fees are going to be. This negotiation results in a unique and proprietary fee schedule. Ultimately, this makes it nearly impossible to unpack the true cost of pricing on what you charge for a clinical encounter. This work over time has grown in complexity. No surprise, the result is significant variance from one side of a city to the other.

If we all agree on the language of what a reference-based price strategy is, that means the floor is CMS. The government dictates what’s allowable, based upon Medicare, and then everybody plays up from that floor.

The movement to reference-based pricing is like the holy grail in our industry. Could you please make it simple for everybody to understand what the price of a procedure or an encounter is going to be? Can we just have confidence that when we are going to engage in a contract with this delivery system we know we’re not going to be overcharged for any procedure?
Isn’t that the hope?

For consumers, yes. What about providers?

You must understand the forces at play. We have delivery systems across America that play with these numbers to support internal strategies; maybe they’re trying to grow in some areas and are deemphasizing in others. They may need more money in orthopedics. They may need more money in obstetrics. They might need more money in the surgery center. As a result, they’ll inflate those numbers because they think they’re going to get more encounters there, while they’ll lower others.

You might take a huge tool, a huge differentiator, out of the equation of American healthcare if you remove negotiation on fee schedules. From a provider side of things, and from a payor side of things, you’re changing the game to nullify some of their strategy and their proprietary work.

And therein lies the pushback. If I’m a large, regionally developed facility, I’m going to probably argue that, if I do cardiology better than anyone else, that’s probably because I’ve attracted the best talent. We might be doing R&D or trying to push the envelope on procedures. And I would be able to build an argument that I might be able to charge more for that.

Wouldn’t you want an organization that is dedicated to a specialty to be able to play that game? We allow that game to be played everywhere else in America, right? It may not be attractive depending upon your thought of healthcare as a public service. Yet we want hospitals, clinics, doctor and facilities to just continue to improve and get better and get specialized. So, if they’re developing a center of excellence around a certain procedure, they’re probably going to want to demand a higher reimbursement for everything that goes into that. There might be 300 codes associated with that work, and they want all those to be at a premium to support their work.

If you understand business from their perspective, you start to see that there’s a reason for charging different fees for different specialties or procedures. It’s a business strategy. It’s not because they’re trying to pull one over on us. It’s not because they’re trying to gouge us, though there are cases where I’m sure that does happen.

What are the implications of reference-based pricing in the specialty business?

Here in the Northwest, which encompasses many rural areas, every hospital system has only so many areas of specialty it can afford to fund and build their entire identity around as they try to attract the very best talent. Then, they want those guys to have as many cases under their belt as they can get because, in the specialty business, it’s how many cases do you do a year? Not, can you do a case?

Do you want a surgeon operating on you who does 200 of those a year or 10? It’s a very simple answer: I want the doctor that’s doing 200.
 
So, this concept of reference-based pricing, it has a place and we need to support it. But it also needs to be flexible enough to afford more advanced strategies. We need to allow for major delivery systems to build centers of excellence and expanded programs to have the freedom to charge a premium because they’re just doing great work. And we ought to demand that there’s evidence-based outcomes that support it.

If we go in with the hammer and we pummel the delivery system universally to get reimbursement down, that may mean that, in your local marketplace, you can’t afford the talented specialist who can make a difference in the surgery room. It becomes real very quickly. Undoubtedly, one of the downsides of reference-based pricing controls might be that some systems wouldn’t have the dollars to invest in higher-quality talent to come in and do specialty work. That would be detrimental to your community and a local economy.

Maybe the government would allow hospitals to submit an application to build a center of excellence and get higher reimbursement through CMS. If you qualify by these criteria, they will allow you to charge more because they’re going to be following outcomes and encounters. I think that’s what it forces and would be a step in the right direction.

So, reference-based pricing might be the floor that we must set for all care and then CMS gets control over additional money based on quality, volumes of encounters, etc., and ultimately, this is why doctors won’t like it—you’re giving control back to CMS to determine when they pay more and when they don’t.

Do you worry that that opens the trajectory to a single-payer, Medicare-for-all model?

Sure. In a way, from a reimbursement standpoint, it is Medicare for all. That’s the other cautionary tale here, do we want to encourage that?

If CMS says why don’t we dictate that, in healthcare reform, it’s reference-based pricing for all, that would be a scary place to be. Large regional systems with scale will dominate, and the rural marketplace will fail. Can’t we all agree we need healthy rural delivery systems? Would any state be wise to accept a strategy that underfunds a rural hospital to the extent it fails and closes? Most rural hospitals are running close to the edge on profitability, and reducing commercial reimbursement would be the tipping point for their failure. This is happening as we speak in some markets.

What I would love to see is federal oversight on allowing communities to have more freedom to do what they need to do to improve the health of their population. In Oregon, we have experienced the success of community health delivery with Coordinated Care Organizations (CCOs). They are legislated systems to deliver for Medicaid populations, and they have managed the hardest populations by doing the right thing and being creative with funding.

What percentage of brokers do you think are actually deploying these types of programs?

I would say it’s a minority still. My guess is that not more than 10% are deploying. I would say maybe 20% to 25% are actively talking and using it as a wedge. And I’d say 75% are not doing it and are probably wary of it and avoiding it.

How have you seen reference-based pricing programs work in the market?

One of the hottest spots in the country around reference-based pricing might be Montana. The term reference-based pricing is pretty much well known to the hospital systems in Montana and to even some of the larger employers. This can be attributed to some area TPAs using it as a sales wedge. The upside of the movement is it opens a more sophisticated dialogue. Most hospitals and provider groups will argue against it. There is much more to cost than just reimbursement. The delivery system can educate us all that “cost” has other important elements beyond fee schedules, like outcomes, severity and recurrence rates, and ultimately quality.

Now if you bring a reference-based pricing model into a metro area, that’s where you end up with most of the drama…because there are a lot more options and a lot more variations in price. Providers will say, “You came in and received service from me. I need to charge you what my normal rate is, and you’re telling me that you’re not going to pay the difference between what your insurance company is paying and what I want to earn for this procedure?” And your answer to your doctor (who you love), is, “Yeah, I’m not paying it, and, if you push me on this one, talk to my attorney.”

When a marketplace hasn’t achieved enough volume in reference-based pricing, drama ensues, and the HR leader and the senior executives of that employer better be ready for the public relations work ahead. If you start to put the member in between the doctor, the health plan and the lawyers, you’re going to pay a deep price in terms of culture and relationship with your employees. And if you’re not really ready for that, brokers will get fired, and employers will move back to a non-reference-based pricing model. There are stories like that out there.

Do you think in these situations the providers just aren’t aware of the agreement or they just don’t care? Or maybe both?

A little bit of both. When you have a variation of reimbursement, some people get paid more and some people don’t get paid as much. But most docs know it’s out there, and if you’re part of large groups you’ve probably been educated on it. But none of them are welcoming it. So there’s going to be a burden of drama that’s going to have to take place to get to the tipping point.

I think reference-based pricing doesn’t become a usable language for us with our customers until a lot of people go before us and end up taking the pain. There’s going to have to be some people who really get their noses bloodied, and there’s going to be brokers that get fired and there’s going to have to be some drama in the marketplace before all of a sudden it’s the rule of the day.

In the end, reference-based pricing is the village that we must walk through to the destination of improving the health of the member. It’s not the destination. It’s just a point along the way.