Reference pricing: Not as scary as it sounds

Several times in the last few days, I’ve seen versions of an article titled something like this one – “New Obamacare loophole shows failure of for-profit health system.”  Another is titled “In health care, ‘reference pricing’ could end up costing unwary consumers thousands of dollars.”  Scary stuff, huh?

Except really, it’s not.  Here’s the FAQ sheet from the Department of Labor that started all of the rumors.   Scroll down to question 4 and you’ll see that reference pricing structures apply in the large group and self-insured group markets.  And even among large employers, only 12 percent were using reference pricing in 2013.  So the vast majority of large group plans and self-insured group plans aren’t using this method yet anyway, and neither are individual or small group carriers.

Large employers offer pretty great health insurance.  That’s why much of the focus of the ACA was not on them.  Most large employers already offer health insurance, they subsidize a good chunk of the premiums for their employees, and they offer solid coverage that was already meeting most of the guidelines that the ACA imposed on the individual and small group markets (prior to 2014, the individual market in particular included plenty of plans that were far from good.  It was in dire need of regulation, and that’s what the ACA delivered).  In addition, large employers tend to have HR departments staffed with people who are there to help employees navigate their way around the company’s health insurance offerings.

People who purchase their own insurance in the individual market (and the small group market) finally have access to plans that are comparable to those offered by large employers.  And depending on their income, they also have access to premium subsidies that mirror what a lot of large employers provide to their employees.  All of this is very good.

And although there are certainly loopholes in the ACA and things I wish were structured a little differently, the articles I’ve seen about reference pricing seem like fear-mongering without a lot of substance.

What is reference pricing?

In a nutshell, it means that carriers – working together with providers – determine a “reference price” (ie, what they will pay) for a given procedure.  At this point, it still has to be limited to fairly straight-forward procedures that are performed often, with consistent results from one provider to another, but with significant variation in pricing (for example, knee and hip replacements, MRIs, cataract surgery, colonoscopies).  If a provider bills an amount above the reference price, the patient can be billed the additional amount and it doesn’t have to count towards their annual out-of-pocket maximum.

But allowing plans to use reference pricing while still staying within the confines of the law regarding out-of-pocket maximums is not a done deal yet.  DOL is accepting public comments on the issue until August 1 (email them if you have thoughts you’d like to share).  For the time being, DOL is saying that plans that are using reference-based pricing will still be compliant with out-of-pocket maximum guidelines – even if the insured has to pay an additional amount because the provider billed above the reference point.  Their reason is that those providers would be considered out-of-network.  The concern is how to balance the reference pricing with a need for all insureds to have access to an adequate network of providers whose costs do not exceed the set price for the procedure, and high quality care.  That makes sense, and it’s something that all carriers have to constantly balance.

But when it comes to reference pricing, it’s really just a version of network negotiated rates.  All health insurance plans have networks.  And going outside of those networks means you’ll pay more for your care.  The maximum out-of-pocket limits on ACA-compliant plans are all referring to in-network charges… if you go outside the network, all bets are off.  And with the resurgence of HMOs this year, plenty of plans don’t cover any charges at all if an insured goes outside the network, unless it’s an emergency.

reference pricing not so scaryDOL is specifically saying that for now, they’re viewing providers who charge rates higher than the reference price as being out-of-network.  Insureds should look at it the same way, and unless they’re happy paying the additional charges, they should steer clear of those providers.  This is all old-hat for just about everyone who has had insurance in the US in the last several decades:  Go to the providers with whom your insurance carrier has contracted, and your regular benefits apply.  Go elsewhere, and you’ll pay more.

Especially for all of our individual market clients, don’t stress about the reference pricing stories that are circulating in the media this week.  In the individual market, it’s still all about in-network and out-of-network (although you do need to be aware that in Colorado, a lot of networks are significantly smaller than they were last year – if in doubt, be sure to double check that your provider is in-network before obtaining any healthcare services).

With regards to reference pricing, the one caveat I would note is that however this gets sorted out, regulators need to make sure that there is no additional burden placed on the consumer.  It needs to be worked out in arrangements between providers and carriers, and the carriers need to clearly inform their insureds with regards to which providers will perform the required services for a price that will be covered at the health plan’s regular benefit level.  Several years ago, Jay had knee surgery and we ended up paying a $400 charge in addition to our $3000 deductible, even though we were careful to inquire as to whether all of the providers who would be working on the knee were in-network.  It turned out that the medical devices (crutches, ice machine, brace) that the hospital used were provided by a company that wasn’t in our network, and we didn’t know we needed to ask about that prior to the surgery.  Patients shouldn’t be caught unawares by out-of-network traps.  I firmly believe that if a facility and the lead provider are in-network, everything else associated with the patient’s care should be in-network .

But with reference pricing, it appears to be more straight-forward.  They’re only dealing with clear-cut procedures that are done in basically the same way all across the country, by many different providers.  As long as the patient is aware of which providers and facilities are meeting the carrier’s pricing requirements, all is well.  The patient simply needs to select an approved (ie, “network”) provider.  A patient who chooses to go to another facility or provider will be responsible for additional charges (just as when you go outside the network on any health plan) and those charges don’t count towards the regular out-of-pocket maximum on the policy (just as with out-of-network charges).

There are certainly some parts of the ACA that are cause for concern.  But in my opinion, this isn’t one of them, regardless of what the headlines might say.

Edit 5/21/14:  I just came across another article about reference pricing, and we can tell from the title that it’s written to try to sway opinion against Obamacare instead of objectively looking at the facts.  One sentence in particular stood out to me:

If a patient needed a $40,000 operation but the insurer only had a $30K reference price on it, the patient would have to cough up the other $10,000 plus all of the deductibles and out-of-pocket expenses otherwise under the cap.”  

Except no.  That’s not how it works at all.  If a patient needs an operation that has a $30,000 reference price, there will be network providers available to perform that operation for $30,000.  If the patient chooses to instead go to a provider who charges $40,000, then yes, the patient will pay the extra charges.   That sounds a lot less scary, doesn’t it?  The key point of all of this will be that we need to make it as simple as possible for patients to determine which providers they should use.  But to toss around sentences like the one I quoted is simply alarmist and irresponsible, especially since most readers aren’t particularly familiar with how health insurance works. 

About Louise Norris

Louise Norris has been writing about health insurance and healthcare reform since 2006. In addition to the Colorado Health Insurance Insider, she also writes for,, Verywell, Spark by ADP, and Boost by ADP, and Gusto. Follow on twitter and facebook.

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