Reference-based pricing is a health insurance strategy where an employer sets a fixed payment amount for each medical service, typically based on a percentage of what Medicare pays, instead of relying on pre-negotiated rates with a network of providers. It’s used almost exclusively by self-insured employers, and while only about 5% of employers currently use it, the model is growing as companies look for ways to control healthcare costs.
How It Differs From Traditional Insurance
In a standard employer health plan, an insurance company or administrator negotiates discounted rates with a network of hospitals, doctors, and labs. You stay “in-network,” and your plan pays the agreed-upon rate. The tradeoff is that those negotiated rates, while lower than a hospital’s full sticker price, are still significantly marked up. Nationally, commercial insurance pays roughly 196% of Medicare rates on average. For outpatient services specifically, that figure climbs to 263% of Medicare. These markups vary wildly by location: commercial rates in Alaska average 294% of Medicare, while Alabama averages 143%.
Reference-based pricing skips the network negotiation entirely. The employer, working with a third-party administrator, simply decides what it will pay for a given service. That amount is pegged to Medicare’s reimbursement schedule, usually somewhere between 120% and 300% of Medicare rates. Because Medicare rates are public and standardized, the employer has a transparent, predictable benchmark rather than opaque rates that differ from one hospital contract to the next.
How the Price Gets Calculated
The “reference” in reference-based pricing is Medicare’s payment data. Third-party administrators use software that pulls cost information from a federal database called HCRIS (Healthcare Provider Cost Reporting Information System). That data gets adjusted based on the type of facility, the geographic area, and how complex the procedure is. A margin factor is then added on top so that providers still receive more than Medicare alone would pay.
So if Medicare reimburses $10,000 for a hip replacement and the employer’s plan is set at 150% of Medicare, the plan pays $15,000 for that procedure, regardless of what the hospital would have charged a traditional insurer. Compare that to the average commercial rate for inpatient services (209% of Medicare), and the potential savings become clear.
Where Employers Use It
Not every employer applies reference-based pricing to all medical spending. Historically, most have limited it to out-of-network emergency claims and laboratory services. Some larger employers target it at specific high-cost procedures like knee and hip replacements, where price variation between facilities can be enormous. Increasingly, though, some employers are replacing their traditional provider network model with reference-based pricing across all or most of their medical spending.
The hybrid approach is common: an employer might keep a traditional network for primary care and routine visits but apply reference-based pricing to hospital and facility charges, where the biggest cost differences exist.
Potential Savings for Employers
Proponents of reference-based pricing claim it can reduce healthcare spending by 20% to 30% for self-insured employers. The math makes intuitive sense. If commercial insurers are paying hospitals an average of 196% of Medicare and your plan pays 150%, you’ve cut a significant portion of every claim. The savings compound over hundreds or thousands of employees and their dependents.
The catch is that those savings estimates come from vendors who sell reference-based pricing services, so they represent best-case scenarios. Actual results depend on the Medicare multiplier an employer chooses, the local market, and how much time and money goes into resolving billing disputes.
The Balance Billing Risk
This is the most important thing to understand if your employer is considering or already uses a reference-based pricing plan. When the plan pays a set amount and the hospital expected more, the hospital can bill you for the difference. This is called balance billing, and it’s the central tension of the entire model.
Here’s how it works in practice: you go to a hospital for surgery. The hospital charges $40,000. Your plan pays $15,000 based on its Medicare reference rate. The hospital, which has no contract with your plan agreeing to accept that amount, sends you a bill for the remaining $25,000. You’re now caught between your employer’s cost-control strategy and a hospital that wants to be paid its full charges.
Most reference-based pricing plans include a patient advocacy or claims negotiation service specifically to handle these disputes. The third-party administrator will typically negotiate with the provider on your behalf, and many balance bills do get reduced or eliminated. But the process can take weeks or months, and during that time you may receive collection notices or feel pressure to pay.
How the No Surprises Act Helps
The federal No Surprises Act, effective since January 2022, provides some protection. It prohibits out-of-network providers from charging you more than your in-network cost-sharing amount for emergency care, air ambulance services, and non-emergency services delivered by out-of-network providers at in-network facilities. Providers must also get your explicit informed consent before billing you at out-of-network rates for non-emergency care.
When a provider and a payer disagree on what’s owed, the No Surprises Act created an Independent Dispute Resolution process. Both sides submit a proposed payment amount, and an arbitrator picks one. This matters for reference-based pricing because it gives providers a formal channel to challenge low reimbursements without putting the patient in the middle. However, arbitrators in these disputes have been awarding payments averaging about 314% of Medicare, which is significantly higher than what most reference-based pricing plans offer. That dynamic could push costs back up over time.
What to Watch For as an Employee
If your employer switches to a reference-based pricing plan, a few things change about your experience. You can generally see any provider you want, since there’s no formal network. That sounds like a benefit, and it can be, especially in rural areas with few in-network options. But the freedom comes with uncertainty about what your final bill will look like.
Before a planned procedure, ask your plan’s administrator what they’ll pay for that specific service at that specific facility. Some reference-based pricing plans offer tools that let you look up expected reimbursement amounts in advance. If the hospital’s charges are likely to far exceed the plan’s payment, you have the option to shop around for a facility willing to accept the reference-based rate.
Pay attention to how robust your plan’s patient advocacy service is. The quality of that service, meaning how aggressively and effectively it negotiates balance bills on your behalf, makes the biggest practical difference between a reference-based pricing plan that works smoothly and one that creates financial headaches. Some administrators guarantee they’ll cover balance bills above a certain threshold, while others simply offer to negotiate without any guarantee of the outcome.
For emergency care, your protections under the No Surprises Act are strongest. You cannot be balance-billed beyond your normal cost-sharing amount for emergency services, regardless of whether the provider would have accepted your plan’s reference-based payment. For planned, non-emergency care, your exposure is greater, and that’s where upfront research and your plan’s advocacy services matter most.