By: David Ostrowsky

A preferred provider organization, known colloquially as a “PPO,” is a network of contracted – or preferred – providers who offer care at a minimal out-of-pocket cost compared to rates offered by out-of-network providers. A PPO plan is a very popular type of health insurance in which the insurance plan pays its network of preferred providers a set fee to provide certain healthcare services, enabling plan participants to pay a reduced copay or coinsurance when they receive care within said network. Patients can still see providers out of their preferred network, but they will likely be subject to a higher cost-sharing amount and have to satisfy a separate out-of-network deductible.

In contrast to PPO arrangements in which select providers charge members for medical services at established rates as set forth in their contracts and conventional reimbursement methods are grounded in the plan’s administrative system, reference-based pricing (aka “RBP”) plans are based on a healthcare reimbursement methodology that relies on a benchmark (typically Medicare rates) to negotiate lower prices from healthcare providers. Generally speaking, RBP plans will pay claims based on a “maximum allowed charge,” which traditionally equates to a percentage above what Medicare pays the provider for the same service.

Large self-funded employers, in particular, have been increasingly inclined to incorporate reference-based pricing as part of their health plan coverage (sometimes as an option alongside PPO plans) as the model provides them with heightened autonomy in deciding what they will pay and can help them avoid unnecessary procedural costs. In other words, RBP plans, grounded in an objective, data-based methodology and reliant on proprietary software, can act as a safeguard against providers arbitrarily charging sky-high rates, resulting in upcharges that can grossly surpass what Medicare expends for the very same services. With RBP plans, healthcare facilities may still charge unreasonably high prices under the guise of convoluted cost structures and hidden fees but the reimbursement amount isn’t tethered to the charges. Furthermore, reference-based pricing doesn’t just benefit plan participants who pay lower plan contributions but also stop-loss carriers who have fewer claims that reach the specific or aggregate deductible, as the plan’s payment levels are lower. However, it should be noted that the RBP approach does still pose a significant financial risk to patients, who could unexpectedly get balance billed if the established reference price falls far below what the actual provider charges – even though the No Surprises Act (NSA) does prevent certain claims from being balance billed.

Aside from the potential drawback of unforeseen balance billing, RBP plans do present other obstacles for self-funded groups. There are, in fact, some RBP programs that will only reimburse a limited network of providers who have consented to RBP rates, which can make it difficult for employees to access proper care for their needs. Additionally, adoption of RBP plans can create a serious administrative burden as establishing and maintaining accurate benchmarks and managing contracts with provider networks can be quite time consuming.

That being said, RBP plans represent a viable alternative to the scarce price transparency inherent in PPO plans, which leaves many patients saddled with devastating bills after insurance has paid its portion for a service and unaware that there could have been a far more affordable option. In many cases, under PPO plans, the cost of the claim can be marked up to account for administrative managerial expenses and add-on premiums. Furthermore, it is often the case that different healthcare facilities charge wildly different prices for the very same services. (This is a trend that is particularly applicable to maternity services, which tend to be on the more expensive end.) When a self-funded health plan is encumbered by an unexpectedly high out-of-network cost, it is not just employees who are burdened but also employers who find themselves struggling to effectively budget for healthcare expenditures that could have a profound impact on their bottom line.

In addition to reaping potentially significant financial benefits, participants on RBP plans are often able to enjoy greater agency over their healthcare due to the inherent flexibility of the plans. RBP plans allow patients to maneuver around restrictive networks so if they deem that a particular provider is capable of performing higher quality work, there is no need to question whether or not the service would be covered. Conversely, PPO plans often require services to be performed within their respective networks to guarantee coverage. Thus, most patients on PPO plans are unable to analyze empirically-backed information delineating pricing options and quality metrics – concerning both providers and facilities – in order to make enlightened decisions about their healthcare.

Of course, neither RBP nor PPO plans are without their drawbacks and ultimately, it behooves a self-funded group to decide which approach most appropriately aligns with its employee population, total claims spend, and other financial factors.