Self Insurance + Reference Based Pricing = Healthcare Savings

Companies employing at least a hundred employees often consider self-insurance as a way to control medical costs but self-insurance alone is not enough. Of the many practices needed to improve quality of care and keep costs down, the most effective is replacing the discount pricing offered by the PPO with reference-based pricing (RBP).  Self-insured companies that replace PPO discount pricing with reference-based pricing see 20% to 30% lower costs than those who don’t.

PPO “Discounts” – The Dirty Secret

A PPO (Preferred Provider Organization) is a deeply flawed managed-care system through which hospitals agree to accept discounted fees from the PPO’s covered members in order to get access to those members. Hospitals inflate their true costs by 400% or more, which the PPO then “discounts” by 50% to present the illusion of large savings. Hospitals are also allowed to charge a “facility” fee in addition to the service and pharmacy charges, driving costs even higher.  States like California, Texas, Florida and New Jersey tend to have the worst pricing mark ups but In-hospital pricing everywhere is driven by the massive, bloated insurance companies which pretend to come to rescue by reducing the outrageously excessive markup to a “still too excessive” markup.

How Reference-Based Pricing (RBP) Works

RBP limits healthcare costs on all emergency care and on elective procedures by using a competitive pricing “reference”, usually whatever the Medicare reimbursement is for the given procedure. Nationwide databases identify the Medicare reimbursements hospitals accept and other databases show many hospitals and doctors accepting 40% over Medicare. Paying for a procedure at 140% of Medicare instead of settling for a 50% “reduction” of an outrageously inflated bill, results in large savings for the self-insured company.

Drug cost comparison for one employee with Multiple Sclerosis:

Fully insured with PPO discount:                 $19,303 per month

Self-insured with RBP:                                 $ 5,247 per month

Example comparison of costs and reimbursement for a hip replacement:

If it’s This Easy, Why Aren’t More Companies Doing It Already?

Healthcare is complex and confusing and many CEOs would prefer to focus on their business and let the healthcare broker and HR deal with it. Most HR would rather not think about piloting such a dramatic change through the organization and most brokers who are not already doing most of their portfolio in self-insured programs are lacking the requisite expertise with the complexities of reference-based priced self-funding to promote the concept to the CEO/CFO/HR and help them through the transition process.

Won’t Huge Medical Claims Damage Self-Insured Companies?

Making changes to the status-quo also bring up concerns about potential risks.  Surveys show the number one concern of CFO’s is catastrophic claims that can financially ruin the company. A proper risk distribution analysis will show that the maximum exposure the CFO should carry equals the premium savings gained on 20 employees.  If the premium savings on every 25 employees is $2,000 then the CFO’s limit of company exposure should be $50,000 max, with a stop-loss policy covering 100% of any amounts over $50,000. If the premium savings on every 25 employees is $4,000 then the limit of exposure should be $100,000. The big claims that exceed $50,000 or $100,000 limit are always completely insured so the company protects its large cost savings.

Any Downsides to Reference-Based Pricing?

As with all healthcare cost containment strategies, there are some downsides to RBP for those who go self-insured. If you are in a “non-competitive” market served by only a couple of providers, then reference-based pricing will be harder to achieve than in competitive markets.

Another issue to know in advance is “balance-billing.” In a minority of cases, a hospital that has already been accepting reference-based pricing will arbitrarily bill the patient for the balance of fees owed. In those cases, the hospital will not prevail if there has been adequate employee education first, and the employee sticks to the Third Party Administrator’s (TPA’s) protocol approved by the CEO, CFO, and HR. The TPA coordinating your self-insured program handles all balance-billing issues.  A good TPA will not just educate your employees, but protect them from the occasional balance-billing harassment some will experience.


Fully Insured PPO User                                    Fully Informed, Self-Insured with RBP

Leaves it up to broker and HR                                  CEO, CFO are fully aware and in control with HR

No useful claim data                                                   Easy access to useful claim intelligence

“Doesn’t want to think about it”                              Doesn’t want to pay for it

Annual premium increases                                        Downward trend in cost of care

Likes being in the majority                              Likes being in the lead                 


Are U Committed to Making Things Better?

There are plenty of resources to help you succeed and create a new, better benefits for your employees and provide dramatic savings for your company but this isn’t magic and cannot be done without your commitment.

Your success requires commitment to the 3 “U’s”:

  1. Unwilling

You must be absolutely unwilling to participate in a broken “PPO-discount” model.  CEOs must replace the emotion of fear with the stronger emotion of with disgust and indignation.

  1. Understand

It takes time to understand clearly the “referenced-based pricing” vs. “PPO Discount” models. A CEO gains from his consultant (who isn’t commissioned by the carriers) an army of facts, viable alternatives, and resources.

  1. United

You must have the CEO, CFO and HR united in their vision, commitment and leadership to break out of the same, inefficient way of doing insurance and reduce their cost of quality benefits.

What Should You Do?

To understand your options and an estimate of what these healthcare savings might look like for your organization, you may contact DCI Solutions for a no-cost, no-risk assessment at (888) 395-0809 or by emailing


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