Traditionally, employers use Preferred Provider Organizations (PPOs) to sponsor their employees’ health insurance programs. However, rising healthcare expenses and a lack of pricing transparency have led to frustration with traditional PPO insurance workflows. As healthcare costs continue to outpace wages and inflation, rising about 50% per capita in the decade from 2013 to 2023, employers seek strategic, technology-driven approaches with a proven employee benefits consultant.
Reference-based pricing (RBP) can provide a more flexible, cost-effective, and transparent strategy for employer-funded healthcare plans. However, they are not ideal in every situation, highlighting the need for an employee benefits consultant to make sure the transition aligns with the business’s long-term goals.
| In This Article: The reader will learn about how RBP plans compare to traditional PPOs and why so many cost-aware employers are switching to this newer model. We will also highlight the best use cases for RBP solutions to help employers decide whether this updated model makes sense for their healthcare needs. |
Define Reference-Based Pricing Compared to Traditional PPOs
A traditional PPO gives employees access to a carrier-defined network with lower costs for in-network care. They may negotiate discounts with these providers, but a rising issue in recent years has been a lack of transparent pricing. The result is that employers rarely know the true cost of health services until after they have been rendered. Even in-network discounts, traditionally the biggest draw to PPO plans, are often inflated benefits that do not recoup rising healthcare costs.
RBP solutions, in contrast, are provider-reimbursement programs rather than in-network contracts. The difference is that, rather than paying for in-network services at a discount, RBP plans pay providers based on a percentage of the provider’s cost or the Medicare rate (this Medicare-based amount is the benchmark). This can reduce reliance on network restrictions, though provider acceptance and member support become more important.
Here’s a chart comparing a basic overview of the benefits of RBP vs PPO plans:
| Factor | Reference-based Pricing (RBP) | Traditional PPO |
| Payment Method | Providers receive a fixed percentage for provided services based on market value or Medicare costs | Insurance company sets provider pay based on in-network discounts |
| Budget Predictability | High, due to the benchmarked pricing model | Low, due to variability in renewal rates based on yearly renegotiations of carrier discounts |
| Cost Transparency | High, since reimbursement rates are always pre-determined | Low, since negotiated discounts are often kept between insurance companies and providers |
| Employee Outcome | Additional education is required to assure recognition and compliance in new provider negotiations | Additional education is rarely required since most businesses have used PPOs for years |
| Network | Usually wide network; strongest incentives and protections are in-network | Usually wide network; strongest incentives and protections are in-network |
Comparison Takeaway: RBP plans offer greater cost visibility, which can give employers a less restrictive way to find qualified providers for their employees compared to PPOs. However, PPO networks are more familiar and straightforward to most employers and providers. The right plan depends on the area and the employer’s financial goals.
Potential Challenges with Reference-Based Pricing
RBP can improve cost visibility, but acceptance varies by market. In areas where benchmarked reimbursement is familiar, transitions are often smoother; in higher-cost regions or certain specialties, providers may resist, which can create friction without strong plan support.
Because RBP doesn’t rely on contracted network rates, there’s also a chance a provider won’t accept the reference amount and bills the member for the difference. That’s why strong employee education and advocacy support matter, and why RBP tends to work best for groups with fairly stable claims rather than highly volatile, specialty-heavy utilization.
What are the Best Use Cases for Reference-Based Pricing Models?
Though RBP solutions offer advantages over traditional PPOs, not every employer seeking an employee benefits consultant should switch automatically. The best use cases for RBP models are small businesses that check these boxes in their current healthcare workflows:
- The business’s healthcare plan spending is outpacing budgets: With healthcare premiums increasing year over year, PPO discounts and traditional pricing models cannot keep pace, even with annual contribution adjustments. RBP plans can reduce overall claims costs and smooth out renewal volatility by tying payments to a known benchmark.
- The business has stable claim utilization: RBP plans help businesses capitalize on predictable utilization patterns. While benchmarking the budget for Medicare or market rates has become challenging with traditional PPOs, RBP plans give employers more control and visibility into where their healthcare dollars are going. This helps them prepare their budgets for typical claim usage without relying on unclear carrier discounts.
- The business has an effective chain of employee communication: A change in benefits structure can make employees nervous. Businesses of any size that switch to an RBP solution should make sure their communication chain clearly visualizes the benefits and potential procedural changes that will impact their employees.
- The business is in a market with high RBP utilization: Though RBP plans can be more widely supported than in-network PPOs, not all areas have made the transition. Businesses in areas with low RBP utilization should factor these restrictions into their adoption plans.
Takeaway: In some markets, reference-based pricing plans can offer higher cost visibility and more flexible plans over traditional PPOs. However, results vary by region, with many employers experiencing greater friction with the less familiar plans. Employers should weigh potential cost savings against practical considerations, such as whether they can provide a strong employee communication structure to transition their plans. Ideally, a benefits consultant will help guide the process to make sure employers choose the right plans for their region, employees’ needs, and financial goals.
Connect with an Experienced Employee Benefits Consultant
For HR professionals, CFOs, and other healthcare decision makers, the reality of rising healthcare costs and reduced network benefits has made traditional PPO plans more limited and frustrating. Many employers have switched to reference-based pricing (RBP) plans to gain more pricing transparency and avoid the pitfalls of relying on in-network discounts for their healthcare budgeting.
Though RBP is not ideal in every market, depending on provider adoption, it could be a viable, cost-effective alternative to traditional PPOs for your organization’s health benefits strategy. At New City Insurance, our experienced team of employee benefits consultants provides businesses with a customized healthcare plan that not only reduces costs but also strengthens employee retention and satisfaction by offering clear advantages and transparent pricing every step of the way.
Contact our team today to learn how to make your business’s healthcare benefits a new competitive advantage with reference-based pricing models.