The medical insurance industry is wrestling with one of the most basic issues it has faced in a long time, and it has nothing to do with the Affordable Care Act.
The issue is reference-based pricing. Under reference-based pricing the insurance policy and/or certificate defines the allowable amount of charge under the insurance program to be a percentage of the allowable amount of charge under Medicare.
While these numbers vary dramatically by geographic location, here is an illustrative example of reference-based pricing. Assume, on average, that retail medical charges are 400% of those allowable under Medicare. The actual percentage varies between 200% (Wyoming) to 1,000% (Texas). A mediocre PPO (Preferred Provider Organization) contract today may achieve a 30% discount on retail, or 280% of Medicare. An excellent PPO contract may achieve a 50% discount on retail, or 200% of Medicare. Reference-based pricing plans may set the allowable charge between 125% of Medicare and 150% of Medicare.
One can see that reference-based pricing achieves much better prices than even the best PPO’s. However, companies that use reference-based pricing in their contracts have no contractual relationship with the doctors or hospitals. That means that the doctors and hospitals are not legally bound to accept the price that the insurance company is paying. They could bill their patients for the remaining balance (called “balance billing”).
Balance billing is a scary thing that nobody wants to happen. Patients don’t want to receive a big bill from the hospital. Further, hospitals don’t want to try to collect big bills from patients. Finally, insurance companies don’t want their customers dealing with big balance bills. One way that some companies are dealing with this problem is to put the allowable percentage of Medicare on each member’s ID card. Thus, the doctor or hospital knows from the very beginning what the insurance company will pay. That seems to have avoided over 90% of the problem.
However, problems do arise with reference-based pricing. Sometimes the doctor or hospital will refuse to treat the member once they understand the fee arrangement of the insurance coverage. Also, balance billing does occur. Insurance companies are tracking those doctors and hospitals that fight back and trying to negotiate with them. Members can also be a big help in the process. Doctors and hospitals are often more inclined to compromise with members than with insurance companies.
I believe that reference-based pricing will soon become the norm, rather than the exception, for medical insurance contracts. We will then deal with the next innovation in the ongoing battle over hospital and doctor fees.