Reference-Based Benefits Strategies: Control Costs and Maintain Quality and Choice

Oct 14, 2014

Often, benefits providers and advisors feel like they have to make a choice when designing health plans: lower costs or higher quality healthcare providers and services.

In the upcoming issue of Employee Benefit Plan Review, I took the opportunity to discuss how a reference-based benefits strategy can help answer this question in the best way possible: “It doesn’t always have to be a choice.”

What is a Reference-Based Benefits (RBB) Strategy?

An RRB strategy involves capping what an employer-sponsored health plan will cover for certain medical services and procedures. If plan members choose a health care provider or service that costs more than the reference-based price, they pay the difference.

Today we most often see this approach with imaging (MRIs and CT scans), labs, and certain nonemergent procedures such as hip and knee replacements. In the future we expect to see this approach applied to dental procedures and prescription drugs.

For example, the reference price is set at the 80th percentile where 80 percent of the providers will fall at or below the reference price. The percentile can then be lowered over time to further drive down cost.

Employees still have the freedom to choose their provider but they are responsible for any costs above the reference price point.

What Sort of Savings Can Employers Expect?

The potential savings are significant. In its April 2014 Issue Brief , the Employee Benefit Research Institute (EBRI) reported that if reference pricing was adopted for all individuals with employment-based health benefits for six specific services, spending would fall about 1.6 percent or $9.4 billion dollars (based upon 2010 claims data from three million individuals). The majority of the savings (about 40 percent) came from hip and knee replacements with an average savings of $10,367 per knee or hip.

A pilot project conducted by the California Public Employees’ Retirement System (CalPERS) from 2008 to 2012 focused on total joint replacements of the knee and hip. Analysis in 2013 showed that costs for the procedure dropped more than 25 percent, with no apparent drop in quality. The California state workers’ union has saved millions of dollars through its reference-based benefits program.

In the article, I go on to answer a number of questions around RBB strategies, including:

  • Where Do the Savings Come From?
  • Are Employers Settling for Lower Quality Outcomes by Setting a Reference Price?
  • Does the Cap on Consumer Costs Included in the ACA Protect Employees from Liability for the Amount Spent over the Reference Price?