The Relationship Between Pharmacies and Reference-Based Pricing

Pharmacies-and-Reference-Based-Pricing Health care costs continue to rise, a longtime trend that pushes organizations to lower expenses at every opportunity, though confronting the affordability challenge is no easy task.  Many organizations are looking for new ways to reshape their strategies to create a meaningful impact for both their employees and their bottom line. The International Foundation of Employee Benefit Plans found that employers are projecting an average 7% hike, up from an average 6% increase in 2023 for health care costs in 2024, amounting to more than $15,000 per employee per year.

One strategy being evaluated by many employers is reference-based pricing (RBP) strategy. This method enables employers to set spending limits on certain medical services, shifting the cost-analysis burden onto employees. Employees are now tasked with shopping for healthcare more mindfully, seeking more affordable, results-driven providers and services.

Reference-Based Pricing: How it Works

Reference-based pricing works by setting spending limits on certain procedures or services—meaning an individual would only be covered up to the established limit for these services and would have to pay the cost difference out of pocket; however, many limits are only be set on “shoppable” services. These are services where an individual can take time to make a decision based on price and quality, for example, shopping around for their prescriptions, diagnostic imaging, or even something more complex, such as a joint replacement procedure.

Employers adopting reference-based pricing models typically work with a third-party administrator (TPA) to establish the most reasonable limits for procedures and medications. The selected TPA will help conduct market research and negotiate the most appropriate deals with providers. For many employers, it is crucial to finding a reliable vendor that works well with your organization and has a shared goal of negotiating the best prices for your employees within your defined market.

Reference-based pricing is most effective when applied to procedures with fluctuating costs. For instance, colonoscopies may range from $400 to $6,000, depending on the physician, location and treatment center. In this case, an employer using a reference-based pricing model may set the spending limit to the median price of the procedure, based on market findings. If an employee selects to use a health facility that charges above the spending limit for a specific procedure, then the employee would need to cover the difference of the approved amount and the total difference out of pocket.

RBP Impact on Pharmacy Spending

The same concepts of reference-based pricing can be applied to pharmacy spending. In an effort to curtail the significant increases in prescription drug costs, some employers have started to apply the reference-based pricing model to their prescription drug plans. By encouraging employees to be active participants in their healthcare journey, it can enable them to take control of some of the costs that come along with it.

More accessible pricing for medications can increase the adherence to medications for many employees, ultimately resulting in improved healthcare outcomes long-term. Adherence to medications can be one of the most influential factors in the overall success of medical outcomes for many employees, and an even stronger influence on their financial bottom line.

It is important to note that there are several disadvantages for employees who fail to adhere to their prescribed medications:

• Reduction in Medication Effectiveness – for many medications, consistent and continued use is required for their full effectiveness to benefit the patient.
• Side Effects and Complications – non-adherence to medications can lead to a potential increase in the number and/or severity of the side effects that patients experience.
• Increased Healthcare Costs - According to the CDC, nearly 50% of adults in the United States suffer from chronic conditions requiring continued prescription use. Lack of medication adherence contributes an additional $100 billion in preventable medical spending annually. Prescription non-compliance can also contribute to an increased risk of hospitalization.
• Decreased Employee Productivity – As a result of worsened conditions, a direct correlation can be seen with decreasing productivity, and increased employee absenteeism. The University of Michigan's Center for Value-Based Insurance Design has reported that if treatment adherence in a group of 1,000 employees with diabetes collectively improves by just 10 percent, short-term disability days and lost work time could be reduced by as many as 441 work days and save the employer approximately $94,000.

Employer Value

There are benefits to reference-based pricing models that employers can stand to gain. Employers who use these models have the potential for two main benefits:

• lower total health care expenses and
• higher employee engagement in health care decisions

Health coverage typically extends to any in-network procedure, regardless of cost. With reference-based pricing, employers do not risk paying higher prices for services that could be performed at a more reasonable price point. By setting a limit on certain procedures, employers are empowering employees to take charge of their health care decisions and become educated consumers of healthcare.

Having established limits on specific services means employees must consider cost, in addition to quality, when choosing where to have a procedure. This does require research on the employee’s part, encouraging active participation in their overall healthcare journey. It is estimated that low health literacy and employee engagement costs the United States $238 billion annually. By encouraging employee engagement in healthcare decision-making, an organization is simultaneously helping to educate employees, while lowering overall health costs.

Things to Keep in Mind

There are a number of considerations to make when implementing a reference-based pricing strategy. It is important that an organization partners with a RBP vendor who is reliable and experienced in the reference-based pricing implementation and administrative process. The vendor must be able to ensure a smooth transition into this model, otherwise an organization could risk disrupting highly utilized providers. If an organization selects a vendor who is inexperienced, their reference-based pricing limits might be too low for the services your employees need, making the plans unaffordable. In addition, not using a vendor (and its legal advocacy) could potentially leave an organization vulnerable to providers who may be attempting to balance bill employees.

Reference-based pricing can be an innovative strategy for organizations looking for ways to lower healthcare costs. As the market continues to evolve, employers are tasked with developing creative strategies for minimizing the impact that healthcare costs have on their bottom line, while minimizing disruption to their employees. This model is unique in its ability to reduce costs while simultaneously promoting employee health literacy.

To learn more about reference-based pricing, and to see if it is a good strategic fit for your organization, contact your AssuredPartners account team.