Reference Based Pricing: The Reimbursement Standard for Self-Funded Plans

Reference Based PricingReference Based Pricing: The Reimbursement Standard for Self-Funded Plans

By Staci Martin


At the beginning of the movie Die Hard, John McClane receives “the secret to air travel” from his seatmate: “After you get where you’re going, take off your shoes and socks, then walk around on the rug barefoot and make fists with your toes.” “Fists with your toes?” John gawked. “I know, I know, it sounds crazy. Trust me; I’ve been doing it for nine years. Yes sir, better than a shower and a hot cup of coffee.” John’s seatmate was trying to comfort him from something he couldn’t control. What his seatmate soon found out was that John could handle himself. The art of security however, is something everyone has tried to offer at one point or another. It’s also the reason why people buy insurance. So, how can you make insurance feel more like that shower and a hot cup of coffee after a long flight? With Reference Based Pricing.

Wednesday’s Learning Academy Seminar was a building block from the prior week’s seminar about Self-Funded Medical Plans. This week we were joined by Mike Cody of Lovitt & Touché, Ryan Day of HST, and Dave Reynolds of Capital Administrators. “Reference Based Pricing: The Reimbursement Standard for Self-Funded Plans,” takes a look at how to reduce healthcare costs by introducing price accountability.

What is Reference Based Pricing?

Reference Based Pricing (RBP) is a method of reimbursement that collects data on prevailing costs for medical services and benchmarks them against CMS Medicare filings. Each procedure that has received Medicare funding had to be filed through CMS (Center for Medicare and Medicaid Services) so there is a public record of it that can be looked up and cross referenced with the prevailing cost. Referenced Based Pricing is saying “we can negotiate a rate around what Medicare paid, not 200% more.” There are four types of RBP: Out of Network Wrap, Medicare Factor Equivalent, Cost Plus (Physician PPO in place), and Procedure Specific.

Quality of service can also be an indicator for the plan to assess the appropriateness of the provider based upon criteria such as frequency of service, readmission rates, and top hospital evaluations. How these criteria compare to the national averages is considered before a provider is recommended.

The whole thought behind Reference Based Pricing is that the medical industry is the only place consumers purchase something or have a procedure done and two weeks later receive a bill for $50,000. However, if a consumer was to buy a $50,000 vehicle they would shop around a bit before they purchased it.

In February 2013, Time Magazine came out with a special report, “Bitter Pill: Why Medical Bills Are Killing Us”, by attorney and author Steven Brill. He investigated a few non-profit hospitals across the country over a seven month period and found that the hospitals were charging patients based off a system of how eligible someone is for Medicare and what hospital they chose to go to. “When you follow your money, you see the choices we’ve made, knowingly or unknowingly…We’ve created a secure, prosperous island in an economy that is suffering under the weight of the riches those on the island extract. And we’ve allowed those on the island and their lobbyists and allies to control the debate, diverting us from what Gerard Anderson, a health care economist at the Johns Hopkins Bloomberg School of Public Health, say is the obvious and only issue: ‘All the prices are too damn high’.”

How does it compare?

Our past healthcare market has been shrouded in a bit of secrecy due to arrangements of PPO “discounts” stemming from networks and providers coming to agreements that leave everyone else in the dark. Buyers have felt powerless and continuing on this path could be unsustainable if it is not reformed. To address such a dysfunctional market, CMS published price data online so that it is public data. In HCC’s issue of The Voice, its references, “This is a material development as CMS accounts for over 60% of US medical payments thereby establishing the de facto prevailing rates.”

Referenced Based Pricing uses an approach in which industries are forced to work together to establish a reference price for fair and reasonable payments for medical services. The goal is to ensure a collaborative approach for price visibility to sustain the market for the future. Don’t think that RBP hasn’t been met with the same dysfunction as traditional PPO contracts. RBP is a plan that has to be committed to with the right team and isn’t for everyone.

Because RBP can be met with the same antagonism as traditional plans, most RBPs have put Patient Advocacy Centers (PAC) in place to be an intermediary between members (patients) and providers. They help with all the same annoyances a member would usually have to deal with themselves. For example, instead of a member calling a provider for information about a surgery, the PAC will draft a member letter and handle any inquires the member may have about the upcoming surgery. If the provider has any issues they need addressed the PAC will handle it as well; including explaining reimbursements to the member, negotiating the agreement with the employer, and creating communication letters. They really serve as a customer service concierge.

How the RBP process is different…

When a company first decides to go with a Reference Based Price plan they would review and modify their plan language to support RBP. Then immediately customize a communication for members, the plan, and providers to be sent out. Next, the financial of it all: sitting down to determine benefit payment amounts, claim costs, and price validation. The biggest step is the clinical and coding review for facility and physician claims, which is the shopping around part to decide who will be in the plan’s network. Then the final pricing is returned to the client for review. The Patient Advocacy Center is initiated for members and providers. Lastly, the appeals process is managed by a third party administrator.

Reference Based Pricing or Traditional?

If you attended this seminar or read the blog series the last two weeks, the one thing we hope you walked away with is that you have to make the right choice for your company. While there are a lot of choices, there is no one size fits all. Lovitt & Touché is here to educate and give you the tools necessary so that you can make the best decision for your company. With that said:

Reference Based Pricing:

  • Uses local medical prices and compares them to CMS to create a reference point
  • Uses a network of physicians and facilities chosen ahead of time
  • Helps contain claims costs. If you are not using a reference to hold providers accountable you can be assured of one thing, your claims will continue to rise.


A special thank you to Mike Cody, Ryan Day and Dave Reynolds for sharing their expertise! If you have any further questions about Reference Based Pricing, please don’t hesitate to reach out to Mike Cody ( or your Lovitt & Touché representative.