August 2019, Volume XXXIII, No 5

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Reference-Based Pricing

Insuring cost transparency and a private medical marketplace

n April 28, “…the Washington State legislature passed a bill to create standardized [public] health plans…The hallmark of these new plans, and the foundation of their claim to the title ‘public,’ is they are required to cap provider reimbursements at Medicare-based levels [emphasis added] (Health Affairs, May 1, 2019).”

The new Washington State standardized plans are non-government, private health plans. They will base reimbursements on a Medicare-plus formula capped at 160% above the Medicare-allowable amount. Under this new law, physician payments must be at least 135% above Medicare, most likely to ensure that residents have access to nearby doctors.

The concept of reimbursing at a percentage above Medicare—Medicare-Plus—is nothing new. Though insurance companies prefer to tell their members they have negotiated discounts off physicians’ bills, in reality, their reimbursements are a percentage above Medicare rates, which may be adjusted upward or downward by geographical area. What is different about the Washington State idea is that government is setting the cap.

Here at home

Minnesota Gov. Tim Walz and the House of Representatives are working toward a similar goal, titling it ONECare. ONECare is a state-operated Platinum-level health plan designed to compete with private health insurance, but it sets reimbursements at Medicare levels. While state legislation did not pass in 2019, it will reappear before the 2020 session with hopes of being implemented in 2020.

Is this a wake-up call to physicians? If governments are moving to mandate caps on payments, is there an alternative that can head it off, ensure adequate payments for medical care, and enhance the professional relationship between physicians and their patients?

Is there a different payment system that allows patients to shop for medical care based on price, but also quality, and access? If patients come to understand that the price of care affects their own costs, by what means can physicians publish prices so that patients can understand them?

Would simpler price transparency improve the physician’s practice experience? In a larger context, can medical price transparency deliver marketplace discipline to reduce the high cost of health care? If any of this is desirable, a different way to pay physicians is needed.

Reference-Based Pricing ... turned [Montana’s] $9 million deficit into a $112 million surplus in two years.

A new model

Reference-Based Pricing (RBP) insurance policies provide an alternative payment system that is more affordable for patients. Adherents claim it will provide more competition in medical pricing while simplifying price transparency. Simply stated, RBP insurance pays physicians at a set rate above Medicare, specified in the health plan. The purest form of RBP plans do not tell physicians the maximum rate they may charge above Medicare—the plan simply sets the maximum it will pay for medical care. Existing RBP plans are administered by carriers and/or third-party administrators in some other states. Large, self-insured plans may also be able to use their leverage to implement RBPs.

The State of Montana launched an RBP health plan in 2016 for the 31,000 lives it insures as part of its state employee benefits. Ordered by a 2015 law to reduce health care spending for government employees, Montana turned to the RBP concept. In two years, it has saved the state millions of dollars.

Montana faced a projected $9 million deficit in its self-insured health plan. Marilyn Bartlett, the Special Projects Coordinator hired by Montana to find a solution to this problem, wanted to quit robbing state employees of pay raises as a way to close the gap. She set a new goal—to reduce the cost of health care.

Bartlett eventually devised a Reference-Based Pricing health plan that paid hospitals an average of 234% above Medicare. The new plan pays physicians and other medical providers not employed by hospitals about 165% of Medicare. The new Reference-Based Pricing health plan has turned the $9 million deficit into a $112 million surplus in two years, according to Bartlett. Since implementation of the Montana plan, Bartlett has not yet seen overall medical prices falling as she had hoped—she believes this is likely due to the short time the RBP plans have been in place.

Colorado and North Carolina officials have contacted Bartlett as they begin hopefully moving toward RBP plans. Colorado is also considering an RBP plan. A major business coalition in Indiana has retained the Rand Foundation to gather the data to learn how much above Medicare they have been paying. This new push for transparency and necessity to reduce prices, Bartlett believes, will see more self-insured plans moving to RBP payment systems.

Is RBP better?

Reference-Based Pricing is by no means a perfect payment model, if one exists. It is, however, superior to current payment models in many ways.

Insurance companies market their products as if they offer discounts from the physician’s billed fees, making them appear to be an indispensable player acting on behalf of their Members. In reality, insurance company reimbursements are built from the bottom up, from Medicare’s allowable amount plus a percentage above that amount. There is no discount, there is a mark-up.

The current payment system requires a complex matrix of tens of thousands of billing codes, incomprehensible to patients and understood by very few physicians. Patients entrust insurance companies to sort it out and negotiate for them—but this drives up insurance premiums to pay insurance company and clinics’ administrative expenses. Worse, it keeps health care pricing secret.

In most locales, insurance plans reimburse at rates significantly above Medicare. According to Minnesota Community Measurement, based on 1.5 million claims valued at $8.6 billion in 2017, insurance company reimbursements across the state averaged 187% above the Medicare allowable rate.

The emerging Reference-Based Pricing health insurance products take advantage of the current Medicare-plus methodology of determining physician payments. It formalizes it and makes it transparent.

Making the price totally transparent and relevant protects the private medical care system

For a medical care marketplace to emerge, patients must know and be concerned about the price they pay. Today’s insurance plans make price disclosure nearly impossible and seem to purposefully keep the price of care secret. The less the patient knows about price, the less they will question the cost, and the more they are dependent on insurance companies.

The insurance policies many patients own do not require them to know the price of care, unless the patient has a high deductible policy. Since someone else pays the bill, the patient has no incentive to know what it is. The current complaints about escalating, unaffordable insurance premiums, however, are generating a call for change—and some suggest “Medicare for All.”

“Medicare for All,” Governor Walz’s proposed Minnesota ONECare plan, and potential expansion of MinnesotaCare, all rely on physician payments lower than or equal to Medicare. If ONECare someday becomes an option, premiums will plunge, but so will access to physicians, hospitals, and all manner of medical care. Medicare rates will not support the current medical infrastructure. Cutting reimbursements from 187% to 100% of Medicare would put quality health care in jeopardy and likely motivate some physicians to find a new profession.

Would simpler price transparency improve the physician’s practice experience?

Can RBP be a better option than Medicare for All?

Price secrecy and the current reimbursement systems have spawned a maze of administratively expensive “provider” networks. A network is created by the price that physicians accept above Medicare. Multiple networks offered under the same health insurance brand pay different amounts for the same services based on a different mark-up above Medicare. In all this, however, the price is kept secret from patients and although recent legislation will require more price transparency, it will remain incomprehensible and confusing to most patients.

Reference-Based Pricing plans eliminate networks since the insured person can go to any physician who is willing to accept payment based on the rate allowed by the health plan. In its truest form, RBP plans also allow balanced billing but only with complete transparency and disclosure before services are rendered.

RBP discloses the percentage above Medicare that a physician accepts as full payment. This provides a direct mechanism that engages the patient in price considerations related to choosing physicians, hospitals, imaging centers, labs, and all medical products. RBP would incent patients to choose physicians based on price, quality, and access. Physicians, too, could learn what other physicians in their area are charging for the same services, but no one would sign onto an RBP network contract—there are no networks, thereby reducing physician overhead expense, and increasing time to practice medicine.

Simplify reimbursement calculations in RBP plans

The RBP plan’s percentage rate above Medicare is totally transparent to the physician and the patient. It stands in contrast to the secret pricing of today’s health plans.

Under today’s payment system, when Molly Smith has a 10-minute consultation with her primary care doctor, the doctor bills the insurance company $150. The Medicare allowable amount for this service is $58.85, but Smith’s network rate is $112.50—or 191% above Medicare. The insurance company tells Ms. Smith that they negotiated a 25% discount on her behalf, but the doctor’s retail price is irrelevant to the amount the insurance company will pay.

If Molly Smith had a Reference-Based Pricing Plan and had chosen a policy that pays 187% above Medicare, her insurance would pay the doctor $110.00. The doctor may choose to bill the insurance company or the patient. To collect that payment, however, would mean far less work and overhead for the doctor. Overhead expenses would be greatly reduced.

The physician determines the percentage above Medicare he or she will accept as full payment. The patient chooses an insurance policy that sets the percentage above Medicare that the policy will pay. When those two rates differ, the patient may choose to go to a different physician, or the physician may choose to accept the payment. Both parties are free to choose for themselves.

RBP insurance companies will offer plans with various percentage reimbursement levels above Medicare. The Medicare-Plus rate could be 120%, 140%, 175%, or maybe 200% of Medicare—possibly 250%. The greater the Medicare-Plus rate a patient chooses, the more premium they will pay.

What Medicare-Plus rate would be the most common in any marketplace? This will not be known until more information about today’s insurance reimbursements are fully-vetted. If the current prices average 187%, as Minnesota Community Measurement found, that could set the standard which the marketplace sets. Until there is full transparency on what today’s medical professionals and facilities are accepting as full payment, however, there cannot be a full understanding of what the most common Medicare-Plus rate will be.

Physicians, however, are at a fork in the road. Politicians hear the cries of their constituents and are marching toward government-set prices for all medical care. It is incumbent on those who believe in a private medical marketplace to find better ways to reduce cost and enhance the physician-patient relationship. Reference-Based Pricing plans may be the best, most viable alternative.

Dave Racer, MLitt, is the Communications and Executive Director for MEEDAH, an organization that strives to reduce the cost of health care in Minnesota by working with physicians, insurance industry leaders, legislators, and everyday individuals.

Greg Dattilo, CEBS, Policy Director for MEEDAH, has been engaged in the health care reform debate since 1992, doing research, working on legislation, and serving on state and professional advisory committees.

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