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Will Reference Based Pricing be in Buffet’s future … or yours?

The country is waiting with bated breath to see what three giants of industry are planning for health care. Warren Buffett said that health care costs have become a bigger issue for American businesses than taxes.

“If you go back to about 1960, corporate taxes were about 4 percent of GDP and now they’re about 2 percent of GDP. At that time, healthcare was 5 percent of GDP and now it’s 17 percent of GDP. “So when American business talks about taxes strangling our competitiveness,” he said, “they’re talking about something that as a percentage of GDP has gone down from 4 to 2.” Meanwhile, medical costs have exploded. “So medical costs are the tapeworm of American economic competitiveness,” he said according to an NPR article in May 2017.

The leaders of Berkshire, JPMorgan Chase and Amazon are joining together to attempt to address health care. They say that their new venture will be “free of profitmaking incentives and constraints.” Buffet already knows that “health care is complicated”. He has also stated that he could support a single payer system.

When I started in this business almost 40 years ago, health plans often had a $100 deductible. Social Security national average wage in 1978 was $10,556 making $100 about 1% of income. Today’s $1,000 deductible is 2% of the 2016 average wage of $48642, so clearly eating more of the household budget. Add premiums and additional out of pocket expenses and the numbers become more burdensome.

Plans reimbursed about 80% of the bill for services. In 1978, one would pay the bill, then submit it to their insurer for reimbursement. This created transparency in health care. Consumers knew what the procedure or office visit cost, because they had to pay for it and then get reimbursed from the insurer.

At that time, Insurance contracts included tables that related to Relative Value Schedule (RVS). For example the contract would assign $10 per unit of RVS. Then the contract would show common procedures and an allowed number of units that would be assigned to that procedure. One could look up how much the plan would pay for an appendectomy or an office visit.

Today, we use Preferred Provider Contracts where the insurer pre-negotiates reimbursement amounts for procedures. To determine in advance the allowed amount for a procedure requires combining the skills of Columbo, Inspector Clueso & the women featured in the movie “Hidden Figures”.

Reference Based Pricing (RBP) is a new twist on the old pricing approach. It is currently being used by some self-insured plans. The plan specifies a limit on the amount that will be paid for specific procedures. Often the starting point is what Medicare pays and the plan will pay something like 150% of the Medicare amount.

Typically the plan targets procedures and services that have widely different costs in a geographic area. For example, cost of an MRI might range from $400 to $4000 in a particular city. The plan will assign $800 as the limit. This requires the insured to shop for a vendor that will accept the price. Transparency and price predictability plus simplified plan administration add to the overall cost savings. This is a very simple overview of the process.

There are multiple challenges to this approach. When care is needed urgently, there is no time to “shop”. The plan administrator will often provide a list of providers who will accept the payment schedule in advance.

Most hospitals and providers require that the patient sign a “statement of financial responsibility” before delivering care. This means that the ultimate financial liability belong to the patient. Problem cases can result in negative backlash to the employer as well as severe financial penalties to the employee. In the event of balance billing to the insured because the amount was not accepted by the provider, the plan administrator will assist in negotiations and even go so far as to provide legal assistance.

Clearly, this approach is not to be taken lightly by an employer. But will the Big 3 who represent 850,000 employees carry enough clout to implement something like this?

Further I suspect they will integrate the medical portion of their Workers Compensation plans with the health plan. Even though the systems have different broad goals, both are well served by delivering quality medical care to the participants. Eliminating the incentive for a Monday morning “trip & fall” accident will go a long way toward reducing heath care costs, as will cutting out the incentive to not treat the individual.

I am most intrigued to see how they will approach Rx, since this represents about 25% of claims costs.

For now we simply wait for them to unveil the plan and then see how and if it works.

Margaret R. Beck

Margaret R. Beck

Margaret Beck CLU, ChFC, CEBS started her insurance practice in Redding in 1978. She is the founder of Affiliated Benefit Services where businesses and individuals are assisted in choosing proper products, compliance with complex benefit laws and claims issues once coverage is placed.

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