How reference-based pricing can recession-proof your benefits

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The coronavirus is causing concern around the world, impacting the health and safety of millions and upending the global economy. As stock prices plunge and a possible recession looms, employers and self-insured organizations may react by cutting excess costs to future-proof their bottom line.

“It does bring to life the effect of an economic downturn and the results that will have in the health benefits space,” says David Henka, CEO of ActiveRADAR, a healthcare analytics and patient education company for employers. “Benefits are locked in for the remainder of 2020, but now is the time of year that consultants, brokers and benefits professionals evaluate what changes and tweaks they need to make to their 2021 benefits.”

Incorporating reference-based pricing is one tool employers should be considering if they need to recast their budgets and reallocate what their projections are going to be going into 2021, Henka says.

As drug prices are a sizable and an ever-growing cost center, many employers are turning to reference pricing to reduce excess pharma spend. Reference pricing identifies the most expensive drugs used by the employee population, highlights more cost-effective alternatives, and then encourages members to switch to the most affordable drug. This approach can lower annual drug costs by 20%, according to studies in the New England Journal of Medicine and the Journal of the American Medical Association.

If an organization’s forecast is down 10% to 20% from what its revenue was expected to be going into 2021, the employer will have to make decisions on how to modify their operations, Henka says. Those decisions could center on the number of full time employees or how to reduce their costs.

“This has a trickle down effect into every single part of an organization including benefits and human resources, and they’re going to need to make some serious decisions,” Henka says.

Henka gave his thoughts on what the best strategy for future proofing healthcare benefits against a coronavirus recession will be in a one-on-one interview.

What kinds of benefits related, cost cutting decisions should employers be anticipating?
It’s going to come down to the CFO going to the chief benefits officer and saying, "You’re going to have to cut your benefits budget by x% and I don’t care how you do it but it needs to be done, effective immediately on Jan. 1, 2021." Many organizations have made the decision over the last five to 10 years to change benefit levels to offer high deductible plans with HSAs and to look at raising copayments, so there may not be a lot of levers left for them to pull because they have already made some of these changes to help lower their premium costs.

How can reference-based pricing affect a measurable reduction in their benefits spend come 2021?
Prescription-based reference pricing is a solution that is not only effective, it does not change the benefit copayment or benefit cost that an individual employee will have. On top of that, it has a dramatic day one impact on the overall cost of the pharmacy spend, which is a significant aspect of the overall healthcare cost.

How does prescription-based reference pricing work?
It is very similar to what is done on the medical side of the equation. On the medical side, typically it’s done for surgical procedures or outpatient procedures like knee and hip replacement. The cost for a hip or knee replacement in the same geographic location could range from $25,000 all the way up to over $100,000 depending on which medical facility the procedure is being performed.

This wide variety in cost is one of the issues that is at the core of our dysfunctional healthcare delivery system. So many large employers have gone to a reference-based pricing model where they have identified hospitals and healthcare systems that are willing to do a knee or hip replacement for $35,000 and they make that the destination that any employee can get the procedure done at their standard copay. If they elect voluntarily to go to a different hospital, their insurance will pay up to $35,000 and the member will be responsible for the difference. It gives the individual freedom of choice but puts a lot more transparency into the equation. This drives costs down for the employer, but also gives the employee access to the transparency of the cost.

This same type of scenario is also applied to prescription drugs when there are multiple drugs that have been on the market for decades that are effective, safe and well studied, and used to treat the same chronic conditions. My company is able to identify the lowest cost drug in a therapeutic category and make that the reference price drug. It’s the same type of arrangement: it’s creating a benchmark for reimbursement by the plan sponsor or employer for a drug that is safe and effective. It’s a really easy way for an employer to lower their pharmacy spend by 20% to 25%.

When should employers start considering a move to this model?
Prescription reference pricing in the United States it’s relatively new. It’s been adopted by multiple large employers to help control their costs.

If employers are going to make a decision for next year they need to make a decision today. Decisions need to be made now through July in order to implement any meaningful policy changes for 2021. The pressure is going to be on consultants and brokers to shorten that timeline for decision making because when times are good and the economy is doing well it’s not a top of mind issue. But when things go south, like they have been and will likely continue, these impacted industries need to make decisions in a tighter timeframe than they are used to, to impact the viability and financial security of their company.

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