In a reference-based pricing model, the employer (or insurer or Association Health Plan) sets a maximum amount that they’ll pay for a claim. If you could walk into the local grocery store and negotiate for what you buy rather than pay the list price, reference-based pricing might gain popularity there as well.

While there are variations of the payment system, most reference priced vendors reimburse claims based on what Medicare (in the USA; the term is not universally applicable only to the US public health program) pays plus a specific percentage. A few deals I've been asked to analyze actually want to pay 25% of what Medicare pays. Most of these offers are met with ridicule and laughter and sent packing. It is the new definition of "chutzpah".

Reference-based pricing is meant to help plan sponsors and insurance companies cut costs by capping what the plan covers for some medical procedures where fees can vary widely. Some for-profit health systems charge up to 10 times what Medicare pays but that's because of our quirky rules and regulations about Medicare and Maximum Allowable Charges, and so much more. The rule, in layperson's terms is that a provider may not charge another a "price" lower than it charges the Medicare Program. Therefore, the price is artificially raised to always be above Medicare and then a discount is applied to reward certain health insurers and employers for steered volumes of business. The economic equation is related to the book of business and cash revenue potential that comes from that payer and/or employer. A payer with 30k lives to steer in a market doesn't get the same discount as one with 3500 lives to steer.

It is impolite and unreasonable to expect that you should get the same discount as a high volume buyer as an individual or a group with only 50 lives, and one who may not be known for paying your bills on time.

Typically, Medicare raises its rates to physicians and hospitals and other suppliers in the program by only 1-3% each year. But for some insurers, 5-7% increases are typical. Also, some of my clients' payer contracts haven't had an increase in 11 years, and many haven't seen any increase in at least seven. So, trying to establish a narrative that asserts that a 1-3% increase is the norm for healthcare is unrealistic...unless the other years also had similar increases annually.

If it's been 11 years or 7 years, the provider usually hires me to get them an increase. I've got about 4500 clients across the USA that hire me to help them with negotiating increases to old contracts. Disclaimer: It doesn't always work out that you get the level up adjustment all at once, because often the health plan simply can't afford it all at once. And it isn't the health plan's problem that my clients didn't ask for the increase annually or mind their business appropriately and adequately.

When payers just stick a finger in my clients' eyes and say here's what I am paying, without negotiation - without a contract, often the provider will balance bill the patient for the difference. After all, you come into their house and start dictating the rules, you should be prepared for that as a response. This is one of those situations where honey trumps vinegar and poke in the eye.

Employers should negotiate directly with the hospital or clinic if they want to start using reference-based pricing, not try to shortcut through HMOs, PPOs, TPAs, and ASOs. It's really easy to do. You pick up the phone, call the provider, ask to speak to a manager or the CFO at larger organizations, tell them you are an employer with buying power for X# of lives, and that you would like to negotiate a direct-to-provider contract. Use a stopwatch to see how long you are placed on hold... it won't be long.