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Moving beyond PPOs — How RBP is cutting healthcare costs and protecting employees

November 2019

As someone who’s been in the healthcare business for 30+ years, I’ve seen it all, including the promise and disappointment of the once beloved Preferred Provider Organization (PPO). I was there when it was hailed as a major step forward — a way to deliver quality care by qualified providers to privately insured members.

Over the years, the PPO has changed. As the model gained popularity, more providers wanted in, so the networks got larger and less “preferred” with diminishing attention paid to quality, cost and efficiency. Rates became hidden behind a wall of secrecy with exorbitant penalties for out-of-network care. Costs began to rise uncontrollably — a 200% per capita healthcare increase since 2000! — forcing employers to pass the cost burden on to their employees in the form of high-deductible plans.

And here we are today, with the majority of American workers on PPO plans and more of them declaring medical bankruptcy than ever before. Premiums continue to rise while cost increases now run an average of four times wage increases.

PPO plans are not serving employers or employees anymore, plain and simple.

40% of Americans under 65 with health insurance have difficulty affording healthcare.

The two root problems: lack of transparency and high cost variability

Before we find a solution to rising healthcare costs, we need to identify the root problems. First, PPOs don’t support transparency. The PPO model starts at the top with a network of providers that agree to deliver services at a negotiated price to an insurer who then remarkets that price to employers. The prices that the employer sees are based on the provider’s chargemaster list, but chargemaster lists are usually a confusing mix of medical codes, abbreviations and bundled charges. And even if the provider offers a discount, that dollar figure can’t be assessed in any meaningful way because no one other than the provider knows the actual costs involved. There is no cap on charges and costs can vary wildly from one provider to the next.

That brings us to the second challenge: PPOs inability to manage cost variability. Medical charges vary wildly across health systems, hospitals and procedures. Childbirth at one facility can cost 500% more than the facility across town — for the same care, in the same network. PPOs do not have the mechanisms in place to control rampant variabilities within their health plans. Today’s PPOs include so many providers that the cost advantage is gone. Employers are paying for access but without any way to control variability or measure value. It’s a broken system.

A commonsense solution

Now that we understand the problem — PPOs’ lack of transparency around a wildly erratic and inflated pricing structure — let’s focus on how to fix it. I believe the best solution is Reference-Based Pricing (RBP).

As one of the founders of ELAP, the nation’s leading provider of RBP solutions for self-funded employers, I know a lot about the subject. I’ve spoken about it at conferences. I’ve introduced the concept to thousands of brokers and their clients. Most importantly, I’ve seen first-hand the impact that RBP can have on employers and their employees, the people who actually pay for care. In most cases, RBP can lower healthcare spend by up to 30% in the first year. In a world of 10-25% annual healthcare increases, a 20-30% decrease is welcome news to anyone who is struggling to pay for healthcare.

How RBP works

The goal of RBP is to promote responsible management of healthcare costs in a way that’s fair, effective and sustainable. Here’s how it works.

1. Start with transparent data

RBP removes the ambiguity and uncertainty around the cost of care. To do that, the model uses reliable reference points to establish cost benchmarks. The most common reference point is Medicare. Since institutional providers that accept Medicare are required by law to submit an annual cost report to the government, Medicare rates are available online and open to the public. As the healthcare industry is slowly becoming more transparent and pricing data becomes more readily available, the actual cost of care is also used as a reference point.

2. Establish a reasonable cost for care

With cost benchmarks in place, we’re better equipped to determine a fair, reasonable cost for care. RBP uses a bottom-up, transparent approach that starts with actual cost figures and then adds a reasonable profit margin (typically 12-20%) to the bill.

3. Pay the providers a fair rate

After a thorough review and audit of the claim, the provider is reimbursed at a fair profit margin. Historically, providers have a high acceptance rate for RBP-adjusted payments.

4. Protect and guide employees

Successful RBP programs offer hands-on support if an employee has a pricing question or receives a balance bill (the difference between what insurance reimburses and what the provider chooses to charge). Support teams manage any negotiations around claims and guide employees through the process when bills arrive. Step-by-step management, from claim review and audit to hands-on negotiation and advocacy, helps support and protect companies and their employees.

The RBP model works

After 10+ years of implementing RBP solutions across thousands of health plans, the results speak for themselves. Companies are able to dramatically lower their healthcare spend and, ultimately, decrease out-of-pocket costs for their employees — without cutting corners or limiting access to care. Best of all, employers (and their employees) have control of their healthcare and a clear view into their healthcare spending.

One of many tools

While RBP is a popular way for self-funded companies to manage costs, it’s not the only tool in their tool chest. Innovative healthcare companies, like Imagine Health, are incorporating RBP solutions into their health plan solutions alongside other strategies, including:

  • Using data to identify high-performing providers.
  • Establishing direct contracts with those high-performing health systems and providers.
  • Working with independent third-party administrators (TPAs) to expertly manage billing and confirm claim integrity.
  • Providing nurse navigators who can guide members to the right care.

There are a lot of ways to tackle the challenges of today’s healthcare system — the rising costs, the price variability, the lack of transparency. I’m proud to be part of a team offering new solutions and tools to see that everyone pays a fair, reasonable price for quality care. The RBP model is making an impact where it matters most: in the lives of our members. They are gaining access to quality care from qualified providers who are paid fairly for the care they deliver. It’s a winning solution that’s driving change across the healthcare landscape.

Steve Kelly

about the author

Steve is a recognized expert and frequently called-upon public speaker in the insurance, employee benefits and risk management industry. He brings more than three decades of experience solving his clients’ complex healthcare challenges. Steve co-founded ELAP Services to address the national issue of employers being overburdened by skyrocketing healthcare costs and lack of representation in the ongoing healthcare debate.


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