Exciting announcement: Flume Health Raises $30M Series A To Redefine Health Plan Administration Learn more

What Montana and North Carolina can teach us about reference-based pricing


In 2016, Montana became the first state to implement reference-based pricing for all 30,000 of its employees' health benefits. In 2018 North Carolina tried to be the second, but its efforts appear to be coming up short. 

In this post, we’ll take a look at:

  1. Tactics used by each state to get RBP off the ground
  2. What worked and what didn't for their leadership
  3. Key take-aways for employers considering reference-based pricing

Montana is done letting insurers and hospitals run the show

As some readers may know from experience, launching an RBP plan isn't easy. Montana was no exception. The state’s Health Care and Benefits Division Administrator, Marilyn Bartlett, spearheaded the transition, and faced resistance from hospitals, the incumbent insurance carrier, and even members of her own office. Some employees quit over how many changes she was demanding. One tactic that Cigna employed to stop her efforts was a classic one: they refused to provide transparency into pricing agreements made with hospitals under the incumbent plan. Rather than capitulate, Bartlett ended the relationship. ProPublica reports “that Christmas, the Cigna representative sent each employee in Bartlett’s office a small gift, a snow globe. Bartlett didn’t get one.”

She and her team went to work engaging hospitals and facilities one-by-one, forging relationships and direct contracts based on mutually agreeable terms. Despite the myth that hospitals would refuse to engage with her, she powered through until all but one hospital had agreed to accept the state's RBP terms. Time was running out until the new plan went live, so she created a plan to transport employees who lived near the hold-out to other facilities for non-emergency treatment. 

When that still did not produce the desired effect, Bartlett got a local union to join the fight, lobbying the hospital to accept their members on Bartlett's terms. Within a month the hospital signed on to the new plan. 

Modern Healthcare reports that under the new plan, Montana has saved $13.6 million dollars in three years. This is mainly from fees and over-priced medical coverage previously rubber stamped by Cigna. In addition to containing hospital costs and getting rid of fee payments to Cigna, Bartlett also found a pharmacy benefits manager that would provide the plan with transparency on drug prices - without taking a spread or pocketing rebates.

And the hospitals? They're doing just fine. ProPublica's 2018 coverage on the coup states that they have had "reasonable financial performance."


So what went wrong in North Carolina?

After seeing Montana's success, North Carolina State Treasurer Dale Folwell decided that RBP was worth a try for his state as well. Private employers aren't the only ones whose budgets are being squeezed by runaway healthcare costs; Folwell said that without a change in how it pays for healthcare, North Carolina's plan would run out of money by 2023.

Where Folwell went wrong, and Bartlett got it right, was in capitulating to all the noise that launching a new plan generates. Folwell negotiated with hospitals in the state for over a year, but every time they pushed back on a reasonable rate, he would raise his bid. The hospitals claimed that accepting RBP prices from NC's 130,000 state employees would ruin their profit margins and cause them to go bankrupt. Unfortunately Folwell did not get the training, or just the straight up gumption, that Bartlett has. Unlike Bartlett, whose “take it or leave it” approach forced Montana hospitals to the table, North Carolina’s compromise essentially removes any incentive for hospitals to agree to RBP: in August 2018, he announced the completely nonsense approach that facilities would be allowed to stay in the plan under the old agreement. Now it’s unclear whether the hospitals that had already agreed to the new plan will still be okay with it moving forward.


Three lessons for a successful transition to reference-based pricing


(1) Prepare for noise

Making the switch to reference-based pricing isn't easy. There's no reason to pretend that it is. Just like Montana's Bartlett, employers should be ready for both internal and external pushback. Having realistic expectations and a game plan can increase the likelihood of a successful transition.

Employers should especially be prepared for noise from plan members. It's important to communicate early and continually about how the change will help them in the medium- and long-term. Like Bartlett engaging with the unions and major employers to push her agenda forward.


(2) Don't buy hospitals' bull sh*t

Providers, especially hospitals, will say that reference-based pricing is financially untenable for them, and try to play on people's fears by threatening lost services.

North Carolina-based advisor David Contorno sees through that claim, though:

"It's complete and total B.S. The reason hospitals claim they can't afford RBP rates is because they're so inefficient. They carry huge administrative costs, most of which is the billing department! When hospitals have extra cash, they need to reinvest it in large expansion projects in order to keep their non-profit status. So they need to fill the beds, even though there was no real need for extra supply in the first place."

The reality is that there are plenty of excesses that hospitals can reduce in order to adjust to fair and reasonable reimbursement rates.


(3) Make sure your team is on the same page

At Flume Health, we like to talk about the "three-legged stool": C-suite, HR, and benefits advisor. If one of these legs is not fully on board and committed to making a change work, the entire stool falls over.

While Marilyn Bartlett may have received pushback from some of her employees, she had the support of the state officials who had hired her. In fact, they had chosen her because of her radical plan. Furthermore, when Cigna wouldn't allow Bartlett to see the old plan’s hospital prices, she launched a search for a plan administrator that shared her vision for transparency. For a company switching to RBP, it's important that all the relevant parties understand the issues at hand and are bought in to the hard work of changing the way the company views healthcare.


Conclusion: worth the work

Transitioning to RBP is not for everyone. But it can be an incredibly effective method not only for cost containment, but for bringing back control of the health care supply chain. For organizations that can get buy-in from the right parties, know their facts, and make a plan to push through the initial noise, the benefits can be huge. Like, Montana huge.


In explaining the events of Montana and North Carolina's RBP attempts, this post relies heavily on reporting by ProPublica and Modern Healthcare (here and here).