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  • February 19, 2020

    Health Plan Reference-based Pricing: Is It Really a Bargain?

    With rising health plan costs, employers are seeking alternatives to the traditional provider networks, such as reference-based pricing. Angela Rust explores this health care payment model – and offers advice for health law attorneys with clients exploring reference-based pricing.

    Angela M. Rust

    Journey with me back to your 1L contracts law class, to discussions of carbolic smoke balls, offers, acceptance, and the “meeting of the minds.” My contracts law professor had a habit of referencing horses in nearly every hypothetical, which is a topic for another time. She also had a habit of using the language of the Restatement to describe deals between parties as a “bargain.”

    More on that later.

    These days, in health care, it seems a bargain is hard to come by. Health care spending continues to outpace economic growth and costs continue to climb. Employers are the largest purchaser of health care. More than half of the nonelderly population is covered by an employer-sponsored health plan, and 61% of such covered workers are covered by a plan that is partially or completely self-funded.

    Employers with self-funded plans directly realize the benefits of cost savings achieved and have implemented a variety of strategies to try to control their spending.

    Angela Rust Angela Rust, Marquette 2007, is Chief Legal Officer and Strategy Implementation for NOVO Health, Oshkosh, and is Of Counsel to McCarty Law in Appleton, representing ambulatory surgery centers and independent health care clinics.

    Ins and Outs of Traditional Provider Networks

    Traditionally, a key component of an employer’s strategy has been the development or selection of provider networks. Historically, employers often “rented” a provider network formed when a commercial insurance company or its affiliate entered into fee-for-service payor contracts with various health care providers. Unfortunately, these traditional provider networks did not offer much transparency or control, and left employers at the mercy of the network to negotiate “discounts” off master charge lists generated by providers.

    However, master charge lists seem in many cases unrelated to the true costs of delivering a service, and employers have experienced wild fluctuation in reimbursement rates accepted by providers. Steep discounts promised by networks did not always result in cost savings, in part because a 60% discount off one provider’s charges might still result in a higher actual price than a 20% discount off the charges of a provider down the road.

    It is no wonder employers are seeking alternatives to this maddening scenario.

    Traditional provider networks have not always served providers well either. This is because negotiating leverage might default to characteristics like the size of the provider’s practice, rather than the value the provider can deliver. In this way, providers sometimes lacked opportunity to showcase superior quality, accessibility, or cost-efficiency, and their reimbursement has not necessarily been aligned to these objectives.

    Reference-based Pricing: A Bargain?

    Enter “reference-based pricing,” sometimes known as “open network plan design,” or “Medicare plus pricing” (RBP).

    In the RBP model, an employer-sponsored health plan sets its own cap on the price it pays a health care provider for a health care service.

    The manner in which the pricing is established varies, but is typically a percentage of an established benchmark, such as Medicare rates, “average wholesale price,” or a blend of Medicare and a third-party advisor’s proprietary claims data.1

    With the RBP model, there is no traditional “network.” Employees select the provider of their choosing and the health plan pays the rate it has determined to be appropriate. Some employers report considerable savings with this approach, as much as 20-30%.

    What a bargain! Or is it?

    The Problem: Recall 1L Contracts Law

    Let’s go back to my equine-loving professor and the Restatement (Second) of Contracts § 17 (1981), which states: “formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and consideration.”

    At section 24, it goes on to describe that an “offer is a manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.”

    Let’s suppose a description of the RBP landed on the dreaded blue book exam, addressing these core contract principles. It seems the problem with RBP would be obvious even to a first-year law student.

    Health care providers generate charge masters (essentially a menu of services and prices). Ideally these are based on the true cost of delivering the services, plus an appropriate sustainable margin. Of course, we know that sometimes these charge masters are the equivalent of the charges posted on the back of a hotel door that bear little connection to cost or reality.

    In any event, like the posted charges on the back of the hotel door, it is likely no one pays these rates. While the provider may be offering to sell services for such a price, the real price paid is typically based on negotiated contracts with a payer or provider network that is, in turn, sold or rented to a payer (like an employer’s self-funded health plan).

    The rates agreed upon in those participating provider contracts may be based on any number of factors, including benchmarks like Medicare rates, but at the end of the day, they are the product of the payer and provider’s negotiation – there is an offer and acceptance. Providers may offer a going “cash pay” rate intended to accommodate uninsured patients, but that offer is specific to those patients who will be paying entirely out of pocket and not using any health plan.

    With the RBP model, health plan benefits will be used, but there is no negotiated rate, and the only rate the provider has offered is the general charge master.

    Dealing with the Smoke

    If you recall the holding of the famous Carbolic Smoke Ball case, a unilateral offer may become binding, but only if the offer is accepted. Let’s assume the provider’s charge master offers to sell for X. The employer receives the claim (bill for services) and decides it will only pay Y.

    There is a fundamental lack of what contract law textbooks call “aggregation mentium,” the “meeting of the minds,” or as the Restatement put it, the “mutual assent” to the bargain. There is no bargaining and no real bargain. Unless the provider accepts it, the employer’s reference-based price is nothing more than an offer.

    This is where RBP gets messy. Absent a contractual agreement on price, the provider is legally free to balance bill the patient for the remainder of the price of the service, beyond the payment the health plan has provided. This creates a number of challenges, practical and legal in nature.

    For one, the relationship between provider and patient can become adversarial. Patients accustomed to traditional coverage may be surprised to learn they are responsible for the amounts in excess of those paid by their employer. Without the benefit of negotiated rates, not only may the patient’s proportionate share of the expense be greater than in the past, but the total bill for the services may be substantially higher than it would be under a more traditional provider network model.

    In other words, the employer saves money, but it may be in part on the backs of the employees. This can lead to adversarial relationships between employees and their employer, which is not helpful to workplace culture or the already tight competition in the labor market.

    Some organizations offer programs to assist patients in combating balance billing and negotiating waiver or reduction of the balances, but this process adds administrative hassle, uncertainty, and cost for everyone involved. Negotiating the deal after the fact is not efficient. Imagine how strange we would consider such an approach to buying equipment or other supplies an employer requires!

    Where You Come In

    Beyond these practical considerations, health law attorneys can assist health plan sponsors and providers who encounter the RBP model in understanding the following legal issues:

    • Health plan sponsors and providers must be careful that RBP is not used to end-run existing contracts. For example, if a plan has selected a provider network, it may not be able to simply “carve out” certain services and apply a RBP without violating the network agreement. Similarly, participating provider contracts between a health care provider and a network may govern the pricing to an employer with any form of access to that network.

    • Health plan sponsors should be sure that any disputed claims are properly handled with respect to ERISA requirements, particularly across plan years.

    • When providers identify a patient involved in an employer’s RBP program, the provider should establish and follow clear policies as to expectations such as patient payment up front, payment plans, or refusal to provide care. As always, providers must be mindful of medical ethics and legal issues such as patient abandonment, especially if the change to RBP occurs for an established patient.

    • Health plan sponsors should assure their handling of RBP claims is in conformity with federal guidance on out-of-pocket maximums.

    • Health plan sponsors should clearly disclose to health plan beneficiaries the manner in which RBP creates cost-share obligations for expenses above the price set by the health plan for a given service. Plan documents should not contain any statements that could mislead a patient into believing there is no exposure to balance billing, even if the plan has put processes in place to reduce the likelihood of such exposure.

    • Providers should review financial responsibility forms and assignment of benefit forms, and consider whether they are appropriate to address instances of RBP. Health plan sponsors should be aware that these types of forms have been used by providers as evidence of a contractual right to payment at billed rates, not RBP rates, and to assert standing to bring ERISA claims against health plans using RBP.2

    • RBP is different from having a legal contract to govern the transaction – there is no agreed-upon rate in a RBP model. If RBP rates are agreed to in advance, they should be documented in a network agreement or through a direct contract between the provider and the health plan sponsor.3

    Getting Clients Better Bargains

    As advisors to health plan sponsors and providers, attorneys can play a key role in addressing the problems presented by traditional provider network payment models.

    In that effort, we do well to remember what my contracts professor recited from the Restatement (Second) § 72 cmt. B (1981): “Bargains are widely believed to be beneficial for the community … as a means by which productive energy and product are apportioned in the economy.”

    Rather than avoid the bargain entirely with RFP models, we can assist our clients in negotiating and documenting better bargains. This may mean exploring regional networks that may have more community ties and flexibility, networks maintained by employer coalitions, provider-owned networks, or direct contracts between a health plan and a provider.

    In this way, we can assist our clients in avoiding the pitfalls that result from transactions without a strong contractual framework, and assist them in creating a more sustainable model of selling and purchasing health care.


    1 See Stephen Miller, “Employers Cut Health Plan Costs with Reference-based Pricing,” Society for Human Resource Management, May 17, 2019.

    2 See, e.g., Salinas Valley Memorial Healthcare Sys. v. Monterey Peninsula Horticulture, Inc., No. 17-cv-07076-VKD, 2018 WL 6268878 (N.D. Cal. Nov. 29, 2018).

    3 Direct contracting has gained popularity due to the various challenges referenced in the traditional provider network model. The rates in a direct contract may take into account any number of benchmarks, but are the result of a negotiated bargain, not determined unilaterally.

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