What is the difference between reference-based pricing and fair market pricing?

Welcome to Ask an Adviser, EBN’s weekly column in which benefit brokers and advisers answer (anonymous) queries sent in by our readers. Looking for some expert advice? Please submit questions to askanadviser@arizent.com. This week, we asked Arthur Chapman, a principal with Reliant Health Partners, to weigh in on the following: What is the difference between reference-based pricing and fair market pricing?

Since employee health benefits typically are in the top five of profit-and-loss expenses, the quest to lower this cost is intense. So-called usual, customary and reasonable pricing charged for services by providers in their particular area rise as they see the need to increase prices, adding to inflationary pressures.

In recent years, referenced-based pricing (RBP) has made inroads into self-funded medical plans, tying pricing to a Medicare base rate with an additional percentage added on. These plans have helped to bend the medical cost curve downward for self-funded payers. RBP may be included in the plan design as the method of paying out-of-network (OON) claims only or it may be used to replace the primary network. 

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With this positive impact on cost comes an offsetting disruption in many cases, as medical providers sometimes bill plan members for the payment balance, shifting the cost from the plan to the member. Depending upon the support provided by the plan and/or the RBP vendor, this can place huge financial pressure on the member, which can lead to dissatisfaction within the group.

Two hospitals across town from each other may have very different cost structures, resulting in a higher charge from one when the same service is performed. Applying Medicare’s rate, plus a percentage per the plan design to each of these, may provide a reasonable payment to hospital A but not hospital B, resulting in a balance bill.

Fair market pricing (FMP) provides an alternative solution for payment of medical coverage for members of self-funded plans and bends the cost curve downward as well. FMP can be employed to price only the OON claims or replace the network and reprice all claims. The basis for FMP is reported data, relying on geographic and provider-specific benchmarks. 

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In the case above with two hospitals performing the same procedure across town from each other, the claim pricing is customized to account for different cost structures. This leads to a higher acceptance rate and avoids some of the disruption that accompanies balance bills.

Employing FMP clears the way for the covered member to choose any doctor or facility without the constraints that may be in place with the traditional network or wrap network – and all at zero-cost to the beneficiary.