Open access networks that have no doctor restrictions are beginning to buzz in the news media right now. With traditional major medical plans and PPO networks continuing to fight rising costs, health plans and employers that offer health insurance benefits are trying to find new ways for their members to save on out-of-pocket costs and reduce the initial sting of having to meet a high deductible. By looking at short term medical insurance as an alternative and turning the pricing model for medical services on its head, critics and fans alike are voicing their opinions about this new way to cover healthcare costs.

First, a brief overview. A Preferred Provider Organization (PPO), which is the most common model for medical billing in the U.S., is a subscription-based model. Membership in a specific PPO network gives insurance companies the ability to obtain discounted services for medical treatment on a pre-negotiated basis. Any patient who belongs to a PPO network their provider accepts receives “in-network” pricing and pays the amount the network has already negotiated with the provider.

Remarkably, PPO networks are fairly new. They were launched at one Denver hospital in 1980 and grew over time in the Western United States as the concept became popular by way of state legislatures. Today PPO networks are the norm, and under the Affordable Care Act (ACA), have been scrutinized as insurance carriers have limited networks of individual plans to curb costs.

How Medical Bills Without a Network Are Paid

Pivot Health uses reference-based pricing on most of its short term health insurance plans to pay medical providers for their services. This is a different model than a PPO network payment system, and it is gaining in popularity. But how is pricing and payment for services typically structured? Let’s take a look.

Doctors and hospitals decide on their pricing based on “usual and customary” charges, which is determined by insurance companies. Usual and customary charges (sometimes called “reasonable, usual and customary”) refers to what the average price other doctors and hospitals in the local area are charging for a specific medical treatment. The insurance company uses this information to determine how much they are willing to pay for a given medical service. If a doctor charges more than the usual and customary scale for his or her local area, the insurance company will typically only pay up to the usual and customary level and the patient is typically responsible for the rest of the bill.

PPO Networks

If you have a health plan with a PPO network, you need to visit a doctor or facility within the network or face out-of-network charges. When a medical service is within a PPO network or “in-network”, the claim for treatment is re-priced to a pre-negotiated level agreed upon between the insurance company and the provider based on the usual and customary scale. Side note: Networks can change annually, so it’s always smart to check with a provider to confirm they are still in a specific network you utilize when you enroll from year to year.

Open Access Network

When a plan advertises an “all-access” open network with no PPO restrictions (like Pivot Health), that means you can see any doctor or hospital facility in your area. What is different is how the provider is paid by the insurance company for medical services. The type of payment system used is known in the industry as “reference-based pricing”.

What is Reference-Based Pricing?

When an insurance company receives a claim for a plan that has a referenced-based pricing model, they reprice each line item of services based on Medicare’s allowable reimbursement scale. They do not pay Medicare’s prices, but a percentage above Medicare’s pricing scale. On the PPO side, the claims representative would just look-up the PPO price negotiated by the insurance company. So an MRI, after it has been repriced, might cost $500 for a one patient and $400 for another individual based on how well the services were negotiated by the insurance carrier. This consumer inequality is why the healthcare system is slowly shifting to the reference-based pricing model.

Simply put, instead of the insurance company asking, “what kind of deal can you give us for medical services?” we simply say, “this is what we are willing to pay based on an established and proven Medicare reimbursement scale, and it’s a percentage higher”

Life Example of Reference-Based Pricing

Let’s look at a real-life example to help you better understand reference-based pricing:

Your friend is selling their car and you need a new car. The asking price is $10,000. You decide to do some comparative shopping and find the same car with similar miles at a dealership for $9,000. But you would prefer to work with your friend.

You go back to your friend and tell them you found the same vehicle for $9,000 but you want to work with them versus a dealership. You are willing to pay $9,250 for the car. The friend accepts your offer.

In this example, the car buyer told the seller what they were willing to pay for the car. This is how reference-based pricing works. With reference-based pricing, medical services are based on a higher percentage rate of the Medicare reimbursement average to determine what the provider is paid, not what a large organization that has pre-negotiated for consumers to pay.

Why is Reference-Based Pricing Good For Providers?

Reference-based pricing shifts away from a top-down, negotiating-network-pricing approach to a bottom-up focus. The provider gets a fair payment for medical services that are on a set schedule and does not vary based on how well negotiations went when coordinating benefits with the insurance company.

At Pivot Health, we reimburse providers up to 125 percent of the allowable Medicare scale for doctor office visits and up to 150 percent of Medicare allowable for facilities. That means medical providers receive more than the Medicare reimbursement scale requires.

How Reference-Based Pricing Saves You Money

The reference-based pricing model has cost-savings that are passed on to the consumer. When you have a plan with a PPO network, there are network “subscriber fees” that gives you the privilege to participate in the network. The extra costs of these fees are passed to the consumer in their monthly insurance premium. When no PPO network used, no additional fees are added to the price of your insurance, keeping your monthly costs lower than if you had a PPO plan.

Balance Billing Explained

Some providers are loyal to their PPO networks and either don’t understand or don’t want to accept reference-based pricing. For example, an outpatient surgery center might charge $2,500 for surgery. The Medicare reimbursement scale pays $1,000 for the surgery, and the reference-based pricing fixed limit is 50 percent more than the Medicare price, which comes out to $1,500.

Once the surgery center is only paid $1,500, they could seek to get the remaining $1,000 balance from the patient. This is known as balance billing. However, most claims administrators are willing to negotiate the bill down or eliminate it completely. Pivot Health has arranged “no balance billing” with its claims administrator partner. If a Pivot Health member receives a balance bill, they just need to send it to the claims administrator and they will negotiate the bill down to zero on behalf of the member.

Popularity of Reference-Based Pricing Increasing

Lockton, a mid-size employer in Missouri moved its 1,350 employees from their PPO network to reference-based pricing in 2014 when monthly premiums for employees were increasing by double digits year after year. In the state of Montana, all state workers were recently switched to reference-based pricing. In 2020, all North Carolina state employees will be moved from their PPO plan to reference-based pricing.

Open, all access networks and reference-based pricing are becoming the new way to do healthcare in the U.S. By giving patients the choice to see any doctor or hospital, they are able to see a local doctor on main street or visit the top medical clinic in the nation. And using an established pricing model such as Medicare protects health insurance costs, keeping them more level from year to year.

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