Reference-Based Pricing: What Employers Need to Know Before They Try It

Traditional PPO networks work by negotiating discounts off a hospital's chargemaster — the inflated list price that bears little relationship to actual cost. A hospital might charge $80,000 for a procedure, the PPO network negotiates it down to $40,000, and the employer pays $40,000 feeling like they got a deal. The problem is that the same procedure might cost Medicare $12,000 to $15,000 to reimburse. The employer is still paying two to three times what Medicare pays, just with a discount label on it.

Reference-based pricing replaces the network discount model with a direct payment methodology. Instead of paying a percentage of the hospital's chargemaster, the plan pays a defined multiple of Medicare rates — typically 140 to 200 percent of Medicare — for the same service. At 150 percent of Medicare, the employer pays $18,000 to $22,000 for that same procedure. The savings are real and substantial.

Hospitals are not required to accept reference-based pricing. Most large health systems have built their financial models around commercial insurance reimbursement rates that are two to four times Medicare. When a self-funded plan pays 150 percent of Medicare, the hospital may bill the employee for the difference — a practice called balance billing.

This is the central challenge of reference-based pricing. If your plan does not have a robust member advocacy and balance billing resolution program, employees can receive large unexpected bills and have no support navigating them. That erodes trust, generates HR complaints, and in some cases leads to employees avoiding care — which defeats the purpose of having a health plan.

The quality of your reference-based pricing vendor's member advocacy program is not a secondary consideration. It is the primary consideration. Before implementing RBP, you need to understand exactly how the vendor handles balance bills, what their resolution rate is, how long resolution takes, and what happens if a hospital pursues collections against an employee.

Reference-based pricing tends to work best in markets with multiple competing hospital systems, where employees have genuine access to alternative providers. In markets dominated by a single large health system — common in rural areas and mid-size cities — employees may have limited ability to choose providers, which reduces the leverage that makes RBP effective and increases the likelihood of balance billing disputes.

It also works better for planned, elective procedures than for emergency care. Emergency situations require immediate treatment regardless of the provider's willingness to accept the plan's payment methodology. Most reference-based pricing programs include carve-outs or special handling for emergency care, but the details matter.

Primary care and specialist visits are generally less contentious under RBP than hospital-based care. Physician practices are more likely to accept reference-based payments, and the dollar amounts at stake are lower.

The No Surprises Act, which took effect in 2022, provides federal protections against balance billing for emergency care and certain non-emergency care at in-network facilities. However, these protections do not fully resolve the balance billing exposure that reference-based pricing creates in all situations. The interaction between the No Surprises Act's independent dispute resolution process and reference-based pricing methodologies is still being worked out in the courts and through regulatory guidance.

ERISA preemption provides some protection for self-funded plans against state balance billing laws, but this protection is not absolute and varies by state. Employers implementing reference-based pricing should work with ERISA counsel to understand their specific exposure.

The employers who succeed with reference-based pricing treat it as a program, not just a payment methodology. That means investing in member communication before the plan goes live, training HR and benefits staff to handle employee questions, selecting a vendor with a proven track record in your specific market, and monitoring member experience data throughout the plan year.

It also means being honest with employees about what the plan does and does not cover. Employees who understand why the plan works the way it does — and who have a clear path to support when they receive a balance bill — are far more accepting of the model than employees who feel blindsided.

Reference-based pricing is not right for every employer or every market. But for self-funded employers in competitive hospital markets who are willing to invest in the member experience infrastructure, it is one of the most effective tools available for reducing the single largest cost driver in most health plans: hospital claims.