An alternative to reference-based pricing

Reference-based pricing sets what a plan will pay as a multiple of a public benchmark, usually Medicare, and pays that amount regardless of what the provider billed. It is a genuine attempt to solve the right problem, and employers who adopted it were right about the diagnosis: the chargemaster is not a real price, and paying a discount off it is not real cost control.

Its weakness is structural rather than a matter of execution. The provider never agreed to the number.

Where reference-based pricing breaks

Because the payment is set unilaterally, the provider can bill the member for the difference. That is a balance bill, and it is the member — not the plan, not the consultant, not the broker who recommended the model — who receives it, opens it, and panics.

The employee experience of an RBP plan is frequently defined by the one bill that went wrong rather than the many that went right. This is not irrational on the employee’s part. A benefits arrangement is judged on its worst outcome, because that is the outcome people fear and the one they tell colleagues about.

Defending balance bills requires patient advocacy services, legal support, and a tolerance for member anxiety that employers routinely underestimate at the point of adoption. The advocacy is usually competent and the bills are usually resolved. The abrasion still happened.

What agreement changes

The alternative is to get the provider to agree the price before the care happens. A contracted price cannot produce a balance bill, because there is no gap between what was billed and what was paid — there is one number, agreed by both sides, paid at the time of service.

This is less clever than a pricing formula and considerably more durable. Nobody is being told what they will accept and nobody is discovering their payment after the fact. Both parties consented to the same figure, which is the ordinary condition of every other commercial transaction either of them takes part in.

It also changes who carries the uncertainty. Under RBP the member carries it, because the member is the one exposed if the provider disputes the payment. Under a contract there is nothing left to dispute.

  • RBP: the plan decides the payment; the provider may bill the member for the rest
  • Direct contract: both sides agree the price up front; there is no remainder to bill
  • RBP: member friction and advocacy cost are known, budgeted parts of the model
  • Direct contract: the member sees the price before booking and pays it then

What RBP still does well

It is worth being fair to the model, because an employer choosing between them deserves a real comparison rather than a demolition.

Reference-based pricing needs no provider to agree to anything, which means it applies immediately and everywhere, including to care the employer could never have contracted for in advance. It requires no network build. For unscheduled care at facilities with no relationship to the plan, it is doing something a direct contract structurally cannot.

That is precisely the domain where it should stay.

Running both, deliberately

The two coexist well when the boundary is drawn on purpose. Reference-based pricing governs the unscheduled and unshoppable spend where no contract exists. Direct contracts cover the planned care where a price can realistically be agreed in advance and a member can realistically choose.

Moving the shoppable categories to contracted prices does not just save on those categories. It reduces the surface area where balance bills are possible at all, which is where most of the member abrasion and most of the advocacy spend were coming from.

On Mishe the contracted prices are public, so an employer already running RBP can quantify that reduction before changing anything: look up the procedures that generated last year’s balance-bill disputes and see whether a published price exists for them.

What to ask before you switch or stay

Whichever direction you are moving, the same three questions decide whether the change is real. How much of last year’s spend was on care that could have been scheduled? For that spend, does a published price actually exist at a provider your members can reach? And who absorbs the difference when something falls outside the arrangement?

The third question is the one that separates the models. Under reference-based pricing the member absorbs it, at least initially, and the plan spends money on advocacy to put that right afterwards. Under a contract there is no difference to absorb, because there was no unilateral number to disagree with.

An employer who can answer all three has enough to decide without a vendor in the room. An employer who cannot answer the second should find that out before signing anything, because provider reach is the constraint that most often turns a good model into a disappointing plan year.

Common questions

Does a direct contract eliminate balance billing entirely?

For care delivered under the contract, yes — the agreed price is the whole price. Care delivered outside it is governed by whatever arrangement applies there, which is why the boundary matters and should be communicated to members.

Is a contracted price higher than a Medicare multiple?

Sometimes higher, sometimes lower. The relevant comparison is not the headline rate but total cost including administration, advocacy, member abrasion and the balance bills you end up defending.

Can we move gradually?

Yes, and gradually is the normal path. Employers typically contract the highest-volume shoppable procedures first and leave everything else under the existing arrangement.

See it for yourself

Every price on Mishe is public. You can check what a procedure costs, and which providers offer it, without an account and without talking to anyone.