Self-funding 101: Networks and other payment models
When you say “health insurance,” most people’s minds go straight to traditional PPO networks. In reality, these networks are just one of a range of payment models available to self-funded employers. In this post, we’ll explore some of the main options to consider when designing a self-funded health plan.
Big carrier PPO networks have become the norm in health insurance: insurance carriers negotiate payment rates with providers behind the scenes, and then anyone on the carriers’ plans can see the providers with “in-network” benefits. The main draw of traditional networks is simply this: it’s easy, for both the plan sponsor and the member.
But just because it’s easy doesn’t mean it’s always the best choice. Because traditional network pricing is based on closed-door negotiations, employers often don’t realize they’re paying inflated prices. Because big carriers don’t have much incentive to catch billing errors (or outright fraud), these networks often hide significant waste. And because plan sponsors often don’t have access to much claims data, it can be difficult to understand exactly what’s driving costs.
Under this model, your health plan contracts directly with providers, who agree to see your members at predetermined rates. These contracts can be held by the Third Party Administrator, the benefits advisor, or even the plan sponsor themselves.
Unlike traditional networks, direct contracting allows both the plan sponsor and the member to know the cost of care ahead of time. And because the price has been agreed on in advance, there should be no risk of members receiving a balance bill. Providers are able to streamline their billing cycle by contracting directly with self-funded plans, so you may be able to get more competitive rates than a big insurance carrier would.
The challenge is that someone has to put in the work to build these direct contracting relationships, and there’s no guarantee that a provider will say yes. That’s why direct contracting is often used in conjunction with other payment models, such as reference-based pricing.
Reference-based pricing (RBP) essentially treats every provider as out-of-network, and pays them a predetermined rate at a percentage above what Medicare would pay for the same services. (Note: unlike direct contracting, RBP rates are predetermined by the health plan, but not agreed upon in advance by the provider.)
By basing reimbursement on Medicare rates (the best available estimation of a provider’s costs), RBP establishes a clear connection between what the plan pays a provider and what it actually costs the provider to give care. So it does away with arbitrarily inflated prices.
However, there’s no guarantee that a provider will be satisfied with the RBP rate they’re paid. This can lead to access issues with the provider, and in worst case scenarios balance bills for the member (it’s important to note, however, that RBP plans don’t necessarily have higher balance billing rates than normal PPO plans; balance billing is an issue across all sorts of health plans). RBP originally got a bad reputation because of “scorched-earth” RBP policies that treated providers poorly, but newer TPAs like Flume Health are taking an approach that’s fair to both the plan sponsor and the provider.
For employers who want the comfort and ease of a network without the restrictiveness of a normal PPO plan, it may be worth looking into specialty networks. These networks can be limited to a certain region, a certain type of provider, etc. Unlike big carrier networks, smaller specialty networks can often be used in conjunction with direct contracting or RBP.
Of course, when members see a provider through the specialty network, the plan is bound by that network’s payment rates, with the flexibility to negotiate that you have with RBP or direct contracting. If you’re using a regional network, it’s also important to make sure that employees who are geographically distributed or traveling won’t have access issues.
There’s no one-size-fits-all health plan. A good plan does two things: 1) it gives members affordable access to health care and 2) it does this without breaking the bank for the plan sponsor. Benefits advisors have a whole range of options when it comes to putting together a health plan that does these two things. That’s why it’s important to understand the payment models available outside the traditional PPO network, and how they might be able to meet your client’s specific needs.