Employer-Paid Health Insurance: A Missing Piece?

High-cost health insurance is driving innovation in some unusual directions, including one called Reference-Based Pricing. But as an employer cost-containment strategy, it’s a game played with risks of its own.

For a generation, business leaders have called for solutions to the rising costs of health-care insurance they offer as a benefit to employees. For a decade, in the wake of federal insurance reforms under the Affordable Care Act, they have continued to call for more innovation to disrupt the standard employer-insurer-provider models.

“The employer market, they are fed up,they can’t continue to deal with rate increases that are burdening their businesses.” ­­— Brooke Runnion, vice president/producer, Lockton Companies

In recent years, that innovation has taken various forms, and one gathering momentum is called Reference-Based Pricing. It is being held up to employers as a means to dramatically bend the cost curve for health insurance. And true to its billing, it is disruptive. But in more ways, perhaps, than ini-tially designed. The tactic forsakes traditional insur-ance pathways, connecting employers with health-care providers who agree to sig-nificant reductions in the prices of their procedures.

Generally, those costs are pegged to service fees established by the Centers for Medicare and Medicaid. Those figures are used as baselines—the reference points that give Reference-Based Pricing its name. And they are generally more than 40 to 50 percent higher than a provider might expect when treating a patient covered by that government-funded insurance. The costs for care are significantly below the open rates hospitals, for example, might impose through a tool called a chargemaster—a list of procedures and prices that can run tens of thousands of items in length.

Combined with a federal requirement made effective in January, under which hospitals are required to make their chargemaster rates available to the public, the idea is that employees armed with better information about the costs of their care will make better decisions. What could possibly go wrong?

For some employers desperate to control their health-care spend, plenty. To realize the full potential of RBP, as it’s called, employees must engage in their health-care decisions in ways most simply never have. That lack of awareness about cause and effect has been a huge factor in the decades-long pattern of health-care costs that far outpace inflation.

History has shown, though, that employees like the low-cost message, but they don’t necessarily follow through with the com-mitment to fully engage in the process. That, says one Kansas City insurance benefits broker, who spoke only on the condition of anonymity, “is why I don’thave many good things to say” about Reference-Based Pricing. In fact, he has worked with companies that have taken the leap, but ran headlong into one major snag. That’s because the use of an insurance carrier is a risk-management tool.

Once that tool is removed—without an effective replacement—employees can be exposed to risk in ways they never imagined. The most glaring among them is when a provider declines to accept the reference-based price—there is no contract compelling that performance—and bills an employee directly for any procedure costs above the RBP. It’s called “balance billing,” and it’s a significant concern.

Significant enough, the anonymous broker said, that employers who tried RBP on for size soon scrapped it and returned to a traditional coverage model. The anguish inflicted on employees was creating human-capital concerns that outstripped the good will built among those workers through lower insurance premiums. That doesn’t mean RBP is inherently flawed—more large companies that self-insure are turning to it—but it does mean that its use require a new kind of corporate diligence. That’s what innovation does.

“The type of business we’re seeing interested in this model are ones where the entire leadership team, from the CEO on down, are frustrated with the way that the traditional health-care system is designed and the costs they are paying as self-funded employers for the care their employees are receiving,” says Brooke Runnion, a vice president and benefits producer for Lockton Companies. “It’s certainly not for everybody,” she said. “That said, the employer market, they are fed up, they can’t continue to deal with rate increases that are burdening their businesses with costs of the health care they have to offer.”

Lockton itself cites a success story with a rural client grappling with a $1 million increase in claim costs for 2015—a mid-size company that was reeling after employee premiums surged 23 percent. Using RBP, premiums flat-lined for two full years and deductibles fell.

But stories like that are countered by others who found it an ill-fitting approach and returned to carrier-based coverage. The lesson, Runnion says, is that not all innovation is going to work immediately and effectively for all corporate clients. But without some element of innovation, the system is on course for self-implosion.

“While this is disruptive to the traditional carrier market,” Runnion says, “we’ve got to be comfortable working with different businesses to work on ways to drag cost and inefficiency out of the system. We don’t see Reference-Based Pricing as a single solution, but as a way to have self-insured employers model in a different way and then learn from that, take that and give feedback to carriers to push them to be better.”

In the end, she says, “we all need to figure out how to drive waste, especially from the financial perspective, out of the system, and move to a reimbursement model tied to more value. “But we need to move a little faster.”