Reference-Based Pricing for Employers: How It Works

Key takeaways

• Reference-based pricing pays providers a fixed amount tied to Medicare rates instead of discounting a hospital's self-set chargemaster price, like PPO networks.
• The model can lower plan spend but introduces balance-billing and provider-access risks, which a coordinated TPA, repricer, and member-advocacy structure exists to contain.
• RBP changes how claims are priced, not where or from whom care is delivered, so employers often weigh it against strategies that influence provider choice.

Imagine two patients receiving the exact same care at the exact same facility. One patient has Medicare. The other receives insurance from their employer. Despite the clinical situations being exactly the same, the employer-sponsored insurance plan could pay two to three times what Medicare pays? Reference-based pricing is one of several healthcare strategies designed to prevent this problem.

At first glance, that might sound like an easy fix, but the reality is a bit messier. While reference-based pricing can help to close this pricing disparity, it can also leave employees with surprise balance bills and providers who refuse to accept the plan. Whether reference-based pricing turns out to be a smart move or a costly mistake depends on a wide number of factors.

What reference-based pricing is

Reference-based pricing (RBP) is a claims payment methodology that sets the plan's own price for each service, usually a fixed percentage of the Medicare rate, and pays that amount directly. It replaces the PPO model, where the plan instead pays a negotiated discount off the hospital's chargemaster, the list price the hospital sets itself.

The interest in RBP comes down to the match behind the cost. Aon projects that employer health care costs will rise 9.5% in 2026, the third straight year of increases near double digits. At the same time, RAND found that, in 2022, private health plans paid hospitals 254% of what Medicare would have paid for the same services. So, employers are paying roughly two and a half times the public rate for identical care, and each year that gap gets even wider. The usual responses, like raising deductibles, trimming benefits, and shifting cost onto employees, are no longer effective.

When a PPO discount is measured against a price that high, it is fair to ask whether the network is delivering savings or obscuring the underlying rate. Reference-based pricing attempts to answer that question by setting the rate directly and sidestepping the drivers of the healthcare cost crisis. However, it doesn’t always work out that way.

How reference-based pricing works

The RBP model works by replacing the network contract with a payment rule. Under a traditional network, a provider agrees to accept a plan's discounted rates in exchange for being listed as in-network. RBP does away with that arrangement. Instead of accepting whatever discount a network has negotiated off a hospital's chargemaster (its internal list of sticker prices, set by the hospital itself), the plan sets its own ceiling for each service at a fixed percentage of what Medicare pays for that same procedure. 

Every facility claim is repriced against that ceiling and paid at it directly, whether or not the provider agreed to the amount in advance. Because no network contract binds the provider to accept it, the provider can either take the payment as payment in full or bill the member for the balance.

Reference-based pricing is not a plan that can be bought off the shelf. It is a coordinated execution model that depends on three operational roles working together, and a benefits team cannot evaluate any vendor without first understanding how those roles divide the work.

The three-party execution model: TPA, repricer, and member advocacy

• Third-party administrator: Processes claims, applies the plan's reference rate, and issues payment.
• Repricer: The pricing engine the TPA runs each claim through, either as a separate vendor or built in. It sets the price the employer will pay and defends it with data if a provider pushes back.
• Member advocacy vendor: Usually provided by the RBP solution, a member advocacy vendor stands between the member and the provider, fielding any balance bill, negotiating with the billing office, and shielding the employee from collections.

How a claim moves from submission to resolution under RBP

Say a hospital submits a $40,000 charge for an outpatient procedure. Rather than applying a network discount, the repricer sets the plan's allowed amount as a fixed percentage of the Medicare rate for that service: Medicare would pay about $10,000, so at a 150% benchmark the allowed amount is $15,000. The plan pays the provider that $15,000 and treats it as payment in full. Most providers accept it and close the claim. If a provider rejects the amount, it can bill the member for the $25,000 difference, and the advocacy vendor steps in to negotiate, usually settling with a single letter or a renegotiated rate.

The strategy is to anchor low: the plan opens at the Medicare-based amount and negotiates up only if it must, so even a settled rate stays close to Medicare rather than the chargemaster. Either way, the member's cost share is based on the $15,000 allowed amount, not the $40,000 chargemaster price.

The risks of reference-based pricing

Reference-based pricing carries operational and member-experience risks that network-based plans do not, and benefits teams owe their employees a clear-eyed view of those risks before implementation. The two risks employers should keep in mind are balance billing and provider access.

Balance billing exposure and member protection workflows

A balance bill happens when a provider rejects the reference price and invoices the member for the difference. ELAP, a reference-based pricing administrator, reports a balance-bill rate of about 4.6%, or roughly five of every 100 claims, with most resolved through advocacy and about four of those five settled with a single letter to the provider.

However, the risk is not only a bill. A provider can also decline to schedule non-emergency care at the reference rate, and in markets dominated by one or two hospital systems, a member may have few alternatives. A balance bill or a provider who turns the member away creates genuine uncertainty for an employee and their family in the middle of a health event, proving why employers should take their member protection workflows seriously.

Several controls contain that exposure: a member advocacy team that intercepts bills before they reach collections, legal defense funded by the plan, clear member communication at the point of care, and a repricer that can document why the payment is reasonable. It is easy to shop on price alone, but the strength of these workflows is what separates a smooth program from a disruptive one.

No Surprises Act and ERISA compliance

The No Surprises Act limits balance billing in two common cases: emergency care, and out-of-network care delivered at an in-network facility. In both, the member owes only their normal in-network cost share, while the provider and plan settle the remaining amount between themselves through a federal dispute-resolution process rather than billing the patient. The problem, though, is that many RBP plans operate without a traditional network, which changes how those protections apply and makes plan-document language critical.

Under ERISA, the Employee Retirement Income Security Act of 1974, a self-funded plan must define its reference-based methodology clearly in its plan documents, administer claims and appeals through standard procedures, and meet its fiduciary duty to manage the plan prudently. For this reason, employers should ensure to align the program with both frameworks alongside their TPA and benefits counsel before launch, not as a fix after a dispute escalates.

RBP vs. PPO networks vs. direct contracting

Before committing to a payment strategy, benefits teams need to weigh cost structure, risk exposure, and administrative lift across the three models that dominate self-funded plans. Each one moves a different lever, and the trade-offs are not interchangeable.

• PPO network: Delivers predictable member access and contracted rates, but those rates start from chargemaster prices set well above Medicare.
• Reference-based pricing: Inverts that math, paying a far lower Medicare-anchored benchmark and capturing the difference, at the risk of member friction.
• Direct contracting: Negotiates fixed rates or bundled prices with specific health systems, which reduces friction but takes scale and time to build.

What none of the three touch is where the member goes for care. Care is priced after it is delivered, but the bigger driver of cost is the provider who delivers it, since a lower-performing one generates more complications and unnecessary care. That’s why Garner's position is that lasting savings also require redirecting where employees seek care, not only how claims are priced after the fact.

Comparing cost structure, risk profile, and administrative complexity

‍How to evaluate reference-based pricing vendors

For benefits teams preparing a recommendation, the decision is less about whether reference-based pricing works in theory and more about whether your organization can absorb the model and execute it well. That calls for a structured read on both the vendors and your own readiness.

It is also worth asking a harder question before committing. The plan design changes RBP requires, higher out-of-pocket exposure and the member friction of balance-bill disputes, are a real trade-off worth weighing against other levers that can deliver comparable or greater savings without the same member friction.

RBP vendor scorecard: what to assess in a TPA, repricer, and advocacy partner

Score each partner on the role it owns.

• Scoring the TPA: assess claims accuracy, integration with the repricer, and reporting transparency.
• Scoring the repricer: assess how the benchmark is set, how defensible the pricing data is, and how it handles appeals.
• Scoring the advocacy vendor: assess balance-bill resolution rates, member response times, and whether legal defense is included.

A strong program needs all three to perform, since a low benchmark means little if members are left to fight bills alone.

RBP readiness criteria: financial, operational, and cultural factors

Financially, a plan should have the reserves and stop-loss structure to absorb disputed claims while advocacy runs its course. Operationally, HR and benefits staff need the bandwidth to support members through occasional billing friction. Culturally, leadership has to be willing to trade some member convenience for lower plan cost, and to communicate that trade honestly. Employers that depend on benefits to compete for talent, or that have not solved the member engagement problem, should weigh that friction carefully before moving.

An alternative to reference-based pricing

While reference-based pricing and Garner both address the same problem, employers overpaying for care, they do so with very different approaches. Reference-based pricing works on the price of a claim after the care is delivered. Garner intervenes much earlier, before the care happens, by steering members toward higher-performing providers, which has the biggest impact on downstream cost and quality outcomes.

That difference drives the risk each one carries. Because reference-based pricing pays a set rate with no network contract behind it, its savings come with the balance-billing and provider-access risks it introduces. Garner, on the other hand, operates inside the plan’s existing network and incentivizes better choices rather than cutting what providers are paid. Its savings come from improving the quality of each care decision instead of repricing the bill after the fact.

That makes Garner the lower-disruption and more sustainable option for lowering healthcare costs. However, the two are not mutually exclusive. An employer can pair Garner with RBP and have Garner build a custom provider network around their specific plan, adding quality steerage to the cost savings RBP delivers on its own.

Weighing the trade-offs of reference-based pricing

Reference-based pricing exists because providers often overcharge patients with employer-funded medical insurance. As such, it can meaningfully lower employers’ plan cost. A strong TPA, repricer, and advocacy structure can contain the balance-billing and access risks that come with it. That benefit is undercut only by the fact that it acts on price after the fact, not where care happens, limiting its potential and introducing new risks.

If you're considering strategies to lower health care costs and improve outcomes, book a demo with us to see how Garner can support your employees.

FAQs

Why does reference-based pricing use Medicare as the benchmark?

Medicare is the only price in U.S. health care that is public, standardized, and built from cost data. The government publishes fee schedules for nearly every procedure, so for any service there is one objective rate a plan can anchor to, unlike a hospital's chargemaster, which each hospital or healthcare systems sets on its own. That also makes the benchmark defensible: a repricer can justify paying a set percentage of the Medicare allowable against a published figure if a provider disputes it.

How much can employers actually save with reference-based pricing?

Savings depend on the gap between what a plan pays today and the reference benchmark, so there is no single reliable figure. RBP pays a benchmark pegged to Medicare instead of the much higher rates commercial plans negotiate, and the plan keeps the difference on every claim a provider accepts.

Actual results vary widely by region, by how many providers accept the reference price, and by the share of claims that trigger balance-bill disputes. Independent data on average savings is limited, so vendor savings estimates should be treated as directional, not guaranteed.

What happens when a provider refuses the reference-based price?

When a provider rejects the reference price, it can bill the member for the difference, a practice called balance billing. The member always owes their normal cost share, and that balance is technically theirs until it is resolved, since the provider is not bound to accept the rate. In a well-run RBP program, the advocacy vendor negotiates the balance down or away, and many plans add balance-bill protection that covers anything beyond the usual copay, coinsurance, and deductible.

Is reference-based pricing compliant with the No Surprises Act and ERISA?

Reference-based pricing can be operated in compliance with both, but the plan design carries specific obligations. The No Surprises Act limits balance billing for emergency care and for out-of-network services at in-network facilities, though many RBP plans run without a traditional network, which changes how those protections apply.

Under ERISA, a self-funded plan must define its reference-based methodology clearly in plan documents and follow standard claims and appeals procedures. Most employers work with their TPA and counsel to align the program with both frameworks before launch.