About 15 years ago, the California Public Employees' Retirement System sought to standardize the pricing methodology for an abundance of knee surgeries by pegging it to Medicare plus a profit layer over and above that rate as part of an any-willing-provider contract. Much has happened since the creation of that strategy known as reference-based pricing (RBP), according to Tom Bartlett, VP of customer solutions for the reference-based pricing segment at UMR.

The earliest version of this arrangement was fairly aggressive and disruptive – with self-insured employers threatening litigation if their suggested prices weren't paid. Nowadays, he explains in an insightful interview, reasonable rates are proposed vs. unilaterally demanded as part of a strategy that's more responsive to providers and keeps employees from being caught in the middle of any pricing disputes. Elective procedures can be scheduled with a narrow network of providers to lower the cost and contracts can prohibit balance bills.

The chief advantage of RBP is that it generates a known number that health plan sponsors can expect to pay for a particular type of medical treatment. Moreover, significant improvements in data and technology have enabled employers to identify which providers and facilities will accept RBP. While this transparent strategy can eliminate a great deal of unit costs associated with healthcare facilities, Bartlett notes that it may not be right for all organizations. For example, some companies may fear too much disruption among employees who are accustomed to a turnkey PPO solution and prefer not to become involved in the pricing methodology. Whatever the decision, he predicts that RBP will help elevate the future of value-based care.