Reference-based Pricing vs. PPO

Because companies spend significant portions of their budgets on employee healthcare, traditional coverage models—with premiums that mimic skyrocketing healthcare costs—are far less appealing these days. 

Instead, reference-based pricing (RBP), an alternative healthcare reimbursement method, is gaining traction among employers as a highly effective cost containment strategy. It helps combat rising healthcare costs so employers can pass the savings on to members—which also makes it popular with employees.

But what makes it different from more common healthcare models like preferred provider organizations (PPOs)? If you’re looking for a comparison of RBP vs. PPOs, this article will provide an in-depth description of their differences and explain how RBP could positively influence your bottom line.

What is Reference-based Pricing?

To understand the differences between RBP vs PPO, we must first establish clear definitions of each. Reference-based pricing is not insurance, but a method of healthcare reimbursement that uses a benchmark—or reference—based on a database of average prices for similar services. An RBP model uses this reference point to negotiate lower prices from healthcare providers instead of accepting service prices traditionally set by hospitals.

Historically, medical bills ignored price transparency and health service details that could help patients make informed choices about their treatment. Though many consumers would welcome the chance to compare healthcare prices, it’s important to remember that HIPAA laws and many provider contracts prevent access to such data to protect patient privacy. 

Used by self-funded healthcare plans, the RBP reimbursement method uses proprietary software to produce pricing benchmarks. It increases flexibility and access to medical services and functions as an effective cost containment method for businesses, as well. 

Companies employing an RBP reimbursement model can help members find the best services at the lowest potential costs while increasing the integrity and transparency of healthcare billing. The enhanced flexibility gives patients more agency over their healthcare while saving them money. 

What is a PPO?

In contrast to self-funded plans, a preferred provider organization, or PPO, is a popular private health insurance plan for families and individuals who become members via corporate subscription. PPOs use networks of insurance companies, healthcare facilities, and providers—or preferred providers—to provide medical care to policyholders. Preferred providers charge members for medical services at specific rates defined by their contracts and conventional reimbursement methods are embedded within the plan’s administrative system. 

This kind of managed healthcare plan uses a cost-sharing method wherein both the member/employer and the insurance company pay for medical services. Called a co-pay, it typically splits the cost 80/20, in favor of members. On top of co-pays, PPOs and other private insurance plans often come with varying levels of deductibles and coinsurance. 

PPOs work by paying for services in full to the hospital or provider after they are rendered. The remaining share of the co-pay is then billed to the patient and they assume responsibility for full  payment.

RBP vs PPO

Given that reference-based pricing is a valuable component of self-funded healthcare plans as well as a tool for containing costs, it differs significantly from a traditional PPO plan. For example, while PPOs charge patients a fixed amount after insurance has paid their portion for a service, a reference-based pricing model will negotiate prices before payment has been made.

This important distinction highlights the agreements private insurance companies commonly devise to pay providers pre-set amounts for medical services. Such agreements can incentivize providers to increase billing amounts because the insurance company is contractually bound to pay them. Regardless of how much services cost providers to perform, they can increase their charges, knowing they will be paid. While insurance companies give members an ostensibly discounted rate, the rate before the discount is entirely arbitrary. 

Reference-based pricing establishes benchmark prices for procedures and uses that information to negotiate more reasonable prices from a position of knowledge. Instead of being bound to a bill after a procedure, patients not only save money but also find they have more options to receive medical services.

This is another important difference between the two methods: PPOs often punish patients for receiving care outside their network. Some plans charge patients the full, non-discounted rate or refuse to pay for a service altogether, which can be extremely costly. 

This table summarizes the advantages reference-based pricing offers over a traditional PPO plan:

It’s worth noting that reference-based pricing does not have to serve as a complete replacement for a PPO. Reference-based pricing offers another layer of flexibility with the capability to “wrap around” existing coverage models—to complement them or to assist in areas of weakness for those not ready for a full network replacement.

6 Degrees Health for RBP Solutions

Now that you know the differences between RBP vs. PPO, you need the right partner to help you navigate the increasingly opaque and costly world of healthcare. 6 Degrees Health is an industry leader in cost containment solutions. We were founded with the mission of mitigating outrageous healthcare costs and helping patients receive better care. 

Using a data-driven approach, we help ease healthcare from the constraints of aging coverage models. Our expertise leads to reasonable prices and greater freedom in a healthcare landscape that has seen prices soar to unjustified levels from a lack of transparency and integrity. Our powerful reference-based pricing solution uses Medicare costs as a benchmark for price negotiation and could save you up to 40% on healthcare spending.

Want to know more about RBP vs PPO? Speak to a representative today to find out how our reference-based pricing model can help you realize the true benefits of healthcare.