Healthcare costs are one of the largest expenditures for any employer, ranging from 15-20 percent of an employee’s salary. With the cost rising every year – PwC’s Health Research Institute projects a six percent increase in 2019 – employers of all sizes are focused on ways to curb costs without jeopardizing employee retention and recruitment through stripping away benefits.
That’s why self-insurance, a coverage model that 80 percent of companies with more than 500 employees utilize, is rapidly becoming a popular option for midsize and smaller firms. According to the Employee Benefits Research Institute, from 2013 to 2016, the share of self-insured companies with 100 to 499 employees rose to 29.2 percent while companies with 100 or fewer employees jumped to 17.4 percent.
What is fueling this trend? It’s the ability for organizations to embrace a more entrepreneurial approach to benefits, taking greater control of claims handling, professional partners, stabilization and reduction of the cost of risk, and ultimately, a return on underwriting profits and investment income.
One cost-shifting strategy gaining popularity amongst self-funded employers is reference-based pricing. With this model, an employer agrees to pay a fixed amount or reimbursement for a defined medical service, rather than using a traditional insurance carrier to negotiate discounts from the provider. An employer partners with an administrator that targets reimbursement rates based on a percentage of what Medicare would pay the provider for this same service, which is typically lower than the discounted rate negotiated by the insurance carrier.
Because this allows the organization to set and better control costs, there are several financial benefits associated with reference-based pricing. In fact, a common reference-based pricing plan that sets costs to 160 percent of Medicare could save up to 60 percent more than a traditional PPO plan, according to an article by Benefits Pro.
When considering a move to a reference-based pricing model, employers need to consider the impact on its employees, the plan’s members. Employees may be required to cover the difference if the cost from the healthcare provider exceeds the amount agreed upon by the employer. To avoid this, employers need to ensure employees are educated on how to select a provider that offers services at the reference price in order to receive full coverage. Partnering with a reference-based pricing vendor that eliminates the difference for employees should be a key component in moving forward with this approach in the New Year.
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