Reference-Based Pricing in Self-Funded Health Plans A key to cost savings


By Omar Arif and Mike Sigal with Dorothy Cociu 

Are we in a recession or a booming economy?  The answer to that depends on who you ask.  Democrats in Washington brag about a booming economy, with unemployment down after some horrendous years during the COVID pandemic. Republicans say that government spending has caused the United States to go deeper and deeper into debt, and we are in the midst of a recession. But do we care what the politicians in Washington say, when people are struggling financially, with the same goods and services we bought a year ago costing nearly $400 more per month now? Wages aren’t keeping up with inflation; that’s something that most of us can agree on. The cost of everything has gone up and not the 3 to 5% the politicians are spouting. Has anyone purchased a dozen eggs lately or bought meat or poultry? For appearances and perception, many food manufacturers are “solving the problem” by reducing the quantity they package for the same or just slightly above the cost we paid last year. But consumers aren’t idiots and know that the smaller package won’t go as far in feeding their families, so they have to buy two instead of one. So where are the savings?

For employers, some still have not recovered from the COVID downturn, and most are looking for effective ways to keep their own costs down overall. A large part of that is health insurance cost. Although fully insured rate renewals stayed fairly level in 2020-2021 (they had to, as no one was seeing a doctor or getting elective surgeries or other procedures), 2022 and beyond are now seeing double-digit increases quite often. For many employers, who see these increases year over year, it’s just not sustainable.  So how do we fight it? By looking at alternative ways to finance your health plan.  

The keys to overall health care cost stability are tied to the actual cost of health care. Health insurance cost goes up when healthcare costs go up, and medical costs continue to rise. 

Now, with added pressures on providers due to the No Surprises Act, which restricts providers from balance billing for emergency and other services, and Transparency in Coverage (TiC) rules which now require providers and health plans to post their prices for common services, many employers are finally beginning to understand what self-funded employers using reference-based pricing have been saying for about a decade now.

The number one key to keeping costs down is transparency in health care spending. Health plans using reference-based pricing have been doing that for many years now, and it works! 

What is Reference-Based Pricing?

Reference-based pricing (or RBP), is a health plan financing strategy leveraged by self-funded employers that can result in significant reductions in claim costs. They are still providing the freedom of choice of providers and complete transparency of the true costs of hospitals and facilities. An RBP model replaces the traditional PPO model with a fully transparent and sustainable pricing mechanism, by using a percentage of Medicare rates, or tying the cost of the claim to the actual provider cost of the service.  

PPO contracts have certainly kept plan costs down over the years, but the problem is, the PPO model of discounting is unpredictable and varies greatly by provider and service. PPO contract rates have historically been generally hidden, arbitrary numbers. Although the TiC is changing this (finally!), there was no consistent starting price, or base price. So the question was often asked: What is the starting point that you’re discounting from? Before the TiC requirements for providers and health plans went into effect, that was a question that no one would or could answer. 

An RBP plan reimburses providers, commonly hospitals and facilities, and sometimes physicians and professional services providers, based on a multiple of Medicare rates. These range from 125% to 200% of Medicare in many cases, or on a percentage above reported provider costs.  Because this rate is a rate above Medicare rates, which already have a profit margin in them, these rates are generally accepted by most providers; generally 95 to 98% of all providers accept this rate without issue. 

Many plans use RBP for hospitals and facilities only. Others use it for hospitals, facilities and physician and professional services providers. A PPO network for physicians and professional services providers can be used, and employ RBP for non-PPO claims, in place of Usual and Customary Rates (UCR) for non-network services and charges.  

How does RBP compare to traditional PPO contracts?

RPB plans can have “open access” to all facilities, or a self-funded employer could lower out-of-pocket costs for select facilities known to accept RPB without issue, by plan design. So, no more PPO network for hospitals and facilities. As a comfort level to employers, RBP plans can still use a PPO provider network for physicians and professional services providers if they choose. This is quite common. Some popular PPO networks, however, won’t allow plans to purchase the doctor only network currently, so changes in physician networks may be required. 

But why would you want to get rid of the PPO contract?

Many PPO contracts have shown consistent decreases in claim cost, there is no question there. Some of the largest PPO networks tout 40% to 65% off of the billed rates. But, the question is, forty to sixty-five percent off of what rate? What is the base rate that the provider charges? That is a mystery to us all. And it changes based on whose PPO contract covers the patient. A hospital traditionally hasn’t wanted to tell us up front what the cost of the charges will be when someone calls in for insurance verification.  

Yes, the patient and the carrier or administrator can know what their co-pay is, or if there is coinsurance involved, but no one knows the cost until the bill arrives. Then we see this PPO write-off number, so we can see the tremendous “savings” to the self-funded health plan. 

But if five people with different health plans had the same service at the same hospital, you would likely see five different facility charges (base rate), before the “discount” was subtracted.  In some hospital PPO contracts, the “discount” is taken off of a contracted rate. Some have per diem rates, or sometimes, it’s taken off the billed rate, which, again, varies GREATLY, depending on who is providing the health coverage. 

As an example of PPO vs. RBP, in the most simplistic case, a hospital charges $75,000 for a procedure and offers a 40% discount off of the billed rate, allowing $45,000, or a PPO contract rate of $45,000. This is traditional PPO discounting. In contrast, if the RBP plan pays 140% of Medicare, it would pay $22,250 for the same procedure. This results in a savings of $22,750 (PPO cost of $45,000-RBP amount of $22,250) for this procedure

Procedure by procedure, this adds up quickly for real savings. Keep in mind, most providers already accept Medicare patients. These percentages are ABOVE the Medicare rates. Other examples of RBP pricing may be a percentage above the actual provider reported cost (reported to Medicare), such as 130% of actual cost, and some RBP vendors use the lower of the two.  For a 5-year plan performance case study of ClaimDOC, LLC, an RBP vendor, go to:  Brokers – ClaimDOC, LLC (

Provider Push-Back

Be advised, however, that 2 to 5% of the time, you could have provider push-back, where the provider refuses to accept this rate, and sometimes won’t accept a patient whose health plan uses RBP.  This can often be resolved with a phone call from the RBP vendor or TPA’s resolution team that walks the provider through the numbers and explains how RBP works. Most often, after this explanation, these providers accept the RBP rate. However, there is still a 1 to 2% chance of providers not accepting the RBP rate, and perhaps generating a balance bill to the patient. 

This is where the quality of the RBP vendor’s patient advocacy team comes into play, as well as the upfront and ongoing education the employer and its plan participants receive. Who you use as your RBP vendor, and the level of pre-implementation training and education, as well as ongoing education, can make a huge difference in the patient satisfaction of an RBP plan (ie, the employees and their dependents on an employer’s health plan). Brokers can play a significant role in making sure all parties understand their options and the nuances of their plans. 

Author’s Note:  ClaimDOC would like to thank health benefits broker and self-funded and RBP expert and plan consultant Dorothy Cociu, president of Advanced Benefit Consulting, for her assistance with this article as a contributing writer.

For more information on this topic, you can listen to her weekly podcast series,
Benefits Executive Roundtable, Season 4, Episode 12, where Dorothy interviews Mike Sigal and Omar Arif on Reference-Based Pricing, available on all podcast platforms, or at:









Omar Arif                                  

SVP of Growth                        

469-939-7286 cell                           


Mike Sigal

V.P. of Business Development

714-916-4210 cell


Look for PART 2 Reference Based Pricing in the next issue.