ACA Rule Review Targets Out-of-Pocket Cost Calculation

Plans make the case that what patients pay above reference price for services should not count

Some health plans and employers have embraced reference pricing, or what some in the industry are calling ‘reference-based benefits,’ as an innovative way to control costs for expensive procedures like knee replacement and colonoscopies. Regulators in Washington have sharpened their focus on this practice as possible subterfuge. The FTC’s Bureau of Economics says it is ‘simply a tool health insurers and employers can use to harness whatever provider competition may already exist.’

The Employee Benefits Security Administration (EBSA), the Department of Labor agency that enforces provisions of the Affordable Care Act (ACA) for employer plans, is weighing comments on existing regulations that define how plans calculate out-of-pocket costs. At issue is members who choose providers that charge more than the reference price plans negotiate as a ceiling that other providers accept as payment.

At last count, 34 letters and e-mails from consumers, health plan lawyers, employers, America’s Health Insurance Plans, Planned Parenthood, the AFL-CIO, and the California Public Employees’ Retirement System (CalPERS) that knock reference-based benefits have ended up in the agency’s inbox.

Elusive definition

Any discussion about reference pricing needs to start with a definition, and that’s not so easy, according to James Robinson, PhD, MPH, the Leonard D. Schaeffer Professor of Health Economics at University of California–Berkeley. ‘The term reference pricing is often confusing, and it’s really a bad term because it suggests the insurer or the employer is actually setting a price, which they’re not,’ he says. ‘Prices are negotiated between insurers and providers.’ He suggests that ‘reference-based benefit limit.’ is a better term.

‘There’s so much confusion about reference pricing because it sounds like employers and plans are setting prices,’ says James Robinson, PhD, MD, of the University of California. That’s not the case.

Likewise, in her letter to the Department of Labor, Justine Handelman, vice president for legislative and regulatory policy for the Blue Cross & Blue Shield Association, uses the term ‘reference-based benefits.’

Reverse deductible

In a Health Affairs article last year, Robinson described reference pricing, or the reference-based benefit limit, as a ‘reverse deductible’ in which the insurer or the employer picks up the first part of the cost, then the enrollee pays the rest. He called it a ‘defined contribution’ plan for health care procedures. In this respect, it is analogous to defined contribution among competing insurance plans, in which the employer sets its contribution limit toward the premium and the employee pays the difference if he or she selects a plan with an especially high premium.

Plans can use reference-based benefits for selected but not all services, Robinson says. For example, CalPERS, which uses Anthem Blue Cross as its PPO plan administrator, started with reference pricing in 2011 with elective knee and hip joint replacement surgery in three of its PPO plans, setting a contribution limit of $30,000. It identified more than 50 facilities in the state that charged less than this amount, offered acceptable quality, and were distributed across the state. In 2012, CalPERS added outpatient cataract surgery, colonoscopies, and arthroscopic procedures to its menu of reference-based services. The goal was to make patients sensitive to the two- to three-fold differences in prices charged by hospital outpatient departments compared to freestanding ambulatory surgery centers for these procedures.

However you define it, this benefit design has potential compliance problems with the ACA, particularly where large market group and self-insured employer plans are concerned. The ACA sets out-of-pocket maximums for individuals and families in nongrandfathered group health plans: $6,350 a year for individuals and $12,700 for two or more enrollees in 2014, increasing to $6,600 and $13,200, respectively, next year.

Calculating costs

EBSA is contemplating how plans that offer reference-priced services calculate out-of-pocket costs for members who go to providers that charge more than the negotiated ceiling price. Plans and employers say those costs should not count toward the ACA out-of-pocket limit, because members may choose a less costly option. Consumer groups and unions — and the Federal Trade Commission (FTC), for that matter — cry foul, saying that health plans can use that as a tool to limit networks and heap more costs onto consumers.

For now, EBSA is sticking with the standing rule; plans do not have to count out-of-pocket spending for reference-priced services toward the annual limit. Here’s an example of how the calculation works now, according to EBSA: If the plan covers 75% of the usual, customary, and reasonable amount (UCR) charged for services provided out of network and the participant pays the remaining 25% of UCR plus any additional cost the out-of-network provider charges, the plan may count all or part of the 25% of UCR the participant paid toward the out-of-pocket maximum and exclude any amount above UCR the participant paid.

The driving force for reference pricing is the wide variation in fees in some markets. Robinson notes that the fee for a colonoscopy in northern California can range from $800 to $8,000. Ann Boynton, deputy executive officer for benefit programs policy and planning at CalPERS, states, ‘At CalPERS, we found that hospital prices for a single joint, elective knee or hip replacement ranged from $15,000 to $100,000 with no discernible difference in patient outcome.’ Boynton wrote one of the pieces of correspondence sent to the Labor Department.

Hospital prices for something like knee or hip replacement can range from $15,000 to $100,000, says Ann Boynton of CalPERS. That’s ‘with no discernible difference in patient outcome.’

In a Web site posting, ‘FAQs about Affordable Care Act Implementation (Part XIX)’, the Labor Department states that agencies that regulate ACA implementation worry that health plans could use reference-based pricing as subterfuge for imposing ‘otherwise prohibited limitations on coverage, without ensuring access to quality care and an adequate network of providers.’

The same sentiments emerge in a blog post on the FTC Web site. Authors from the FTC’s Bureau of Economics put forth a hypothetical scenario with only one hospital in a market where it has used its monopoly position to negotiate a high price for its services. ‘Suppose a health insurer introduces a reference pricing plan in this market and sets a reference price for, say, knee replacements that is well below the hospital monopolist’s price,’ the post states. ‘Given that there are no other choices available for knee replacements, reference pricing cannot make patients choose lower-priced providers.’

That scenario is unrealistic, Robinson says. ‘The whole point is to put in reference pricing where there’s a range of prices,’ he says. ‘If there’s only one provider in a rural area, there’s only one price. The insurers could do something else; they could put in a high deductible, say $5,000 for the procedure, but they wouldn’t do reference pricing in that context.’

This harks back to the misunderstanding so many have about reference pricing, he says. ‘There’s so much confusion about reference pricing because it sounds like employers and plans are setting prices,’ Robinson says. ‘They’re not; they can’t set prices.’

For employers and insurers, leaving the calculations for out-of-pocket costs as they are will give them more flexibility in designing plans. ‘Implementing well-designed programs that ensure access to quality hospitals with reasonable prices enables us to provide our members with quality services and control costs,’ Boynton says.

Three goals

Boynton notes these strategies align with the so-called Triple Aim — the three goals the Institute for Healthcare Improvement has set for innovative plan designs: improving patient satisfaction and quality of care; improving population-based health; and reducing per-capita health care costs.

Says Boynton: ‘We are concerned that if purchasers like CalPERS and others are unable to continue effective, appropriate strategies such as this, costs will continue to rise unchecked and providers will be less interested in negotiating fair and reasonable prices.’

Hopefully, the government will hypothesize more realistic scenarios before it makes a determination on the out-of-pocket cost rule.