Steep Health Costs Push Employers to Alternative Insurance Model (1)

Rising health-care costs are fueling the comeback of a strategy to limit hospital bills, but the evolving model requires employers to take on more work and risk in ditching the big insurance companies.

“Reference-based pricing” typically determines a provider’s payments from Medicare rates, plus a premium ranging from 25-50%. Those rates fluctuate depending on the market and provider type, but advocates say they usually shave around 30% off a plan’s annual costs.

The strategy is part of employers’ ongoing search for alternatives to traditional health insurance as they confront an expected 9% spike in costs next year. But hospitals say RBP vendors are just middlemen looking to profit at patients’ expense.

“The whole thing is very ugly from a patient perspective in the sense of it’s often not very clear what the rules are,” said Molly Smith, American Hospital Association’s group vice president for policy. “They often don’t understand whether or not they have a network.”

RBP companies blame the bad reputation on early iterations that sparked a series of lawsuits and left patients with steep bills. Many vendors today collaborate more with providers and protect patients, they said.

“The differences in the models is how you deal with access issues, how do you deal with balance bills,” said Scott Ray, founder of RBP vendor 6 Degrees Health.

Increasing Interest

The model is growing among self-insured, small- to mid-sized employers—and attracting private equity investors. 6 Degrees Health grew 190% over three years. ClaimDOC said it’s on track to grow 150% over 2024. Imagine360 said it’s growing by double digits annually.

Fifteen percent of companies with at least 500 employees surveyed by Mercer are planning to use some sort of “high-performance network” like reference-based pricing in 2026, while another 14% are considering it. A survey from Business Group on Health released earlier this month found 10% of employers plan to implement a version of a high-performance network.

“The status quo is not going to work long term,” said Imagine360 founder Jeff Bak. “There’s got to be a break somewhere, and we’re trying to be one of those break points.”

True RBP plans eschew the traditional provider network, allowing enrollees to see any doctor or hospital willing to accept the plan. The company can steer the patient toward friendly providers or can negotiate payment before or after the appointment.

If the patient receives a balance bill, RBP companies said they resolve it themselves, either by negotiating with the provider, reimbursing the patient, or—as a last resort—litigation. But balance bills and lawsuits only happen between 1% and 3% of the time, they said, and between 96% and 99% of providers accept their terms.

But the legal threat still exists.

“That is part of the nature of the arrangement, is some amount of litigation is expected,” said Derek Skoog, health actuarial and economics practice leader at PwC.

Employers can ink a traditional contract with any hospital that refuses the RBP terms, or they can use tiered cost-sharing to steer enrollees to preferred providers. They can also offer a “dual option,” allowing workers to choose between traditional and reference pricing plans.

The model works best in areas with the highest commercial rates, like California and Florida, where hospital payments average three times Medicare rates. It doesn’t work well in areas with less hospital competition—like West Virginia, where commercial rates exceed 300% of Medicare but a few hospitals dominate the state.

Grocery Chain’s Experience

Riesbeck Food Markets—a grocery chain in Ohio and West Virginia—switched to an RBP plan in April after finding the right consultant, said Co-President Jennifer Kiger. But employees were turned away from West Virginia University Health System for three months until Riesbeck signed a traditional contract with them, she said.

The company also negotiates case-by-case charges with another local hospital, which serves a small percentage of their employees.

“That’s the disheartening portion of it because you know that they’re writing off millions of dollars every year as charity cases, but they won’t accept something like this from a company that has low margins,” she said.

WVU argues the plans don’t qualify as insurance. Vendors also often confuse employers and instruct hospitals to balance-bill patients, said Ben Gerber, chief strategy officer of WVU Medicine. It’s also impossible to assess a company’s profits, he added.

“They have specifically chosen not to have a participation network at all,” Gerber said. “And so it’s not really WVU Medicine singling out an employer. It’s actually just the other way around.”

Kiger said Riesbeck is seeing reduced costs in other areas of Ohio, and the company lowered premiums this year based on projected savings.

New Era

Increased scrutiny on prices and plans’ fiduciary responsibilities are helping fuel the growth.

“Self-funded employers and the consultants/brokers that they work with are starting to really look under the hood and say, holy cow, we could be liable for things here if we’re not paying closer attention,” said Omar Arif, senior vice president of growth for ClaimDOC, pointing to recent lawsuits against employers like Johnson & Johnson.

The complexity requires savvy consultants willing to buck higher commissions and secret bonuses from big insurers, said Craig Gottwals, Riesbeck’s broker at the Mahoney Group who left a big firm to specialize in reference pricing.

“There’s just a tremendous amount of money that sloshes around for you to stay in that lane, for you to only sell the big four carriers, to put scare tactics out there,” he said.

RBP is not a “magic bullet,” Gottwals added, pointing to the need for broader changes like transparent pharmacy benefit managers.

“There’s so much incentive at the hospital level, at the Rx level, at the insurance brokerage level,” he said. “All of it’s aligned, and there’s a lot of good people that don’t want to be part of that, but they’re in this mechanism that really—macro-economically—almost just forces the behavior.”