Health care costs continue to rise, which means employers need to take every opportunity to lower expenses. One cost containment strategy is to employ a reference-based pricing model (RBP). RBP enables employers to set limits on certain medical services, shifting the cost-analysis burden onto employees, and offering price transparency to both employers and employees.

How it Works

RBP works by setting spending limits on certain procedures or services—meaning an individual would only be covered up to the established limit for these services and would have to pay the cost difference out of pocket. However, limits should only be set on “shoppable” services.

These are services where an individual can take time to make a decision based on price and quality, like for prescriptions, lab tests or joint replacements. In all of these examples, there are lower-cost options that are typically the same quality as the more expensive alternatives.

Employers typically work with a third-party vendor to establish the best limit for a procedure. The vendor will help conduct market research and negotiate the most appropriate deals with providers. Finding a reliable vendor that works well with your company is crucial for negotiating the best prices for your employees.

RBP is most effective when applied to procedures with fluctuating costs. For instance, colonoscopies may range from $400 to $6,000, depending on the physician. In this case, an employer using RBP might set the spending limit to the median price of the procedure, based on market findings. If an employee uses a health facility that charges above the spending limit for a specific procedure, he or she will need to cover the difference out of pocket.

Additional Notes About Reference-based Pricing:

  • RBP works in conjunction with self-insured health plans
  • Allows employers to have more control and cost transparency of covered care and their own insurance cards
  • RBP plans allow employers and employees to get an itemized bill so they can pay for only what services were used
  • Reduces the likelihood of paying for incorrect expenses
  • The employer covers the specified maximum coverage amount, and the plan should provide resources in the rare instance of a balance bill occurring

How Reference-Based Pricing Limits are Set

RBP limits are known price increases with a known starting price; 99% of the time, prices are based on Medicare coverage. Nearly all doctors and facilities already take Medicare, so this allows groups to use a starting price we know the providers already accept every day.

Doctors and hospitals report procedure and treatment costs to Medicare, and Medicare marks those prices up for profit. RBP traditionally takes that known profitable starting price, and marks it up yet again.

Employer Value

Employers who use RBP have the potential for two main benefits: lower total health care expenses and higher employee engagement in health care decisions.

Health coverage usually extends to any in-network procedure, regardless of cost. With RBP, employers do not risk paying exorbitant prices for services that could be done more inexpensively. By setting a limit on certain procedures, employers are empowering employees to take charge of their health care decisions.

Having established limits on specific services means employees must consider cost, in addition to quality, when choosing where to have a procedure. This requires research on the employee’s part, encouraging active participation in his or her health care. It is estimated that low health literacy costs the United States $106 billion to $238 billion annually. By promoting employee engagement in health care decision-making, you are helping to educate employees, while lowering overall health costs.

Potential Cons

There are a number of considerations to make when implementing RBP, given the complexity of the model. It is paramount you work with a vendor who is reliable and experienced in the RBP process. The vendor must be able to ensure a smooth transition into this model, otherwise you risk disrupting highly utilized providers.

If you choose a vendor who is inexperienced, your RBP limits might be too low for the services your employees need, making the plans unaffordable. Moreover, not using a vendor (and its legal advocacy) could potentially leave you vulnerable to providers attempting to balance bill.

Implementing Reverence-based Pricing

Employers who want to use reference-based pricing (RBP) should select an experienced vendor with a proven track record for cost savings and client satisfaction. Because RBP is different from the traditional payment approach, the different options presented by vendors may be unfamiliar, and employers may not know what questions to ask. Your Harbor Financial Group brokers can help you with this process.

Consider asking potential RBP vendors the following questions:

  • How many clients do you have, and what is your client retention rate?
  • What is your established benchmark (or reference price) for paying claims?
  • What design options do you offer for services and providers covered by RBP?
  • What is the average cost savings for your clients?
  • How are your fees calculated (for example, percentage of billed charges or per-employee fee)?
  • Do you negotiate with providers in advance of employees receiving care? If so, how do you make sure providers adhere to the negotiated amounts?
  • What types of support are available for employees who receive balance bills?
  • What is your average response time for employees who reach out with balance billing questions?
  • What percentage of claims under RBP result in a balance bill?
  • What is your limit on negotiations with providers over balance bills?
  • How do you identify lower-priced providers for employees to use?
  • What resources do you provide for employees to locate providers who will accept the plan’s reference price?


RBP is an innovative strategy for lowering health care costs. As the market continues to evolve, employers are tasked with developing creative strategies for saving money. The RBP model is unique in its ability to reduce costs while simultaneously promoting employee health literacy.

To learn more about RBP, and to see if it is right for your organization, contact The Harbor Financial Group today.

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