When Pacific Steel & Recycling CFO Tim Culliton realized his 750 employees were paying too much for healthcare, he knew the company needed a new plan.
So instead of renewing their current fully funded insurance plan, the Great Falls, Montana-based company, fired their third party administrator and switched to a self-funded plan with a PPO network. They also decided to try reference-based pricing — a highly debated method among benefits advisers for curbing employer healthcare costs.
Working side-by-side with their adviser, Scott Haas of USI Insurance Services, the employer instituted a reference-based pricing strategy in January 2014. So far, the program has led to a reduction in the cost basis of medical claims, Haas says. The pair were able to lower the company’s annual health spend to $3.5 million from $8 million, a savings of about $5 million.
“We saw a significant increase in hospital charges,” Culliton says. “We saw a 400% increase in those costs … that caused us to begin to investigate a different payment process. That ultimately was the beginning of us moving to a reference-based pricing program.”
See also:
Reference-based pricing refers to pricing outside what is set by traditional insurance carriers. Provider reimbursement is based on a percentage of what Medicare would typically pay the provider which often ranges from 120% to 170% of Medicare reimbursement, according to Business Benefits Group.
Some employers have been using reference based pricing as a way to
“I think it’s a really great idea. I love moving around the fee-for-service model,” he says. “[It’s easy] to understand in theory, but in its application it creates a lot of friction. I don’t know if the reduction in cost is worth it from an employee patient basis and what the long term impacts are going to be. You’re putting a huge tax on the administration of this, and you need really tight controls to be able to do an effective reference-based pricing program.”
But so far, the plan has been working for Pacific Steel. In January of last year, the company implemented what they are calling the “second generation” of reference-based pricing, where they vary the allowed Medicare percentage by the type and place of service, Haas says.
“What we attempted to do is create more fairness and equity in the marketplace between what the plan allowable is and what physicians, hospitals or other providers would otherwise expect to be reimbursed,” Haas notes.”
Going into the program, Pacific Steel & Recycling’s employees were able to choose any facility or any doctor they wanted, and were even able to cast the net a little wider than what was allowed in the PPO network.
“You are somewhat constricted to the facilities and doctors that are part of that PPO network,” Culliton says. “So from a provider perspective there was no change, there was an expansion.”
Pacific Steel employers were also given include one-off contracts. For example, one Pacific Steel & Recycling employee in Idaho needed a knee replacement and the plan paid about $63,000 for the claim then the employee paid 20% on top of that, Culliton explains. The worker’s next knee replacement would have been about $23,000. Working with Haas and another benefits group in Idaho, an agreement was made that Pacific would pick up 100% of the bill. The company saved about $40,000 on the claim and the employee paid nothing.
See also:
But this method does not come without pain points for employees. If a provider didn’t get reimbursed or didn’t feel they were reimbursed enough the employee might receive a balanced bill. For example, if the employer pays 160% of medicare and the provider wants 200%, the employee will be billed for the additional 40%.
“That’s where your outside providers [come in],” Culliton says. “We have legal support, we have our consultant Scott, we have a third party administrator. All of those are involved in working that process through.”
Over the last four years, the company has worked to build up a support team to work with employees hit with balanced billing. The employees are more engaged today than when the program started.
Haas sees reference-based pricing as a way to reduce the healthcare spend for employees. He says the offering becoming more common in the south and southeastern U.S. and moving up into the upper midwest, northwest and west coast.
“The movement toward reference-based pricing has been evolving for about 15 years,” Haas says. “If you think about it it’s almost a ‘Back to the Future’ type movement toward what was in existence prior to PPOs becoming the popular vehicle for establishing payment methodology between healthcare payers and providers back in the early 1980s.”
