Alert / Employee Benefits
A case lesson in the virtues and vexations of reference-based health plans

A Colorado jury recently ruled that an employee covered by her employer’s self-insured health plan should have to pay only $766.74 of a $229,112.13 hospital bill balance left unpaid by her health plan. The jury verdict may be the first significant shot fired in the growing battle between healthcare providers, employees and self-insured employer-sponsored health plans that agree to pay a reference-based price for a healthcare service. The amount paid is often far less than the provider's billed charges, leaving any unpaid balance for the provider and the employee to sort out, in this case through the courts.


Most self-insured employer group health plans access provider networks, usually arranged by the plan’s claims administrator. Under these agreements, in-network providers agree to charge the plan less – often, substantially less – than their retail rate for certain healthcare services. In exchange, the plans agree to pay the adjusted charge less any cost sharing (deductibles, copayments and coinsurance) payable by the employee. Most importantly, the provider agrees to accept payment of the reduced charge as payment in full.

A small minority of self-insured employers, however, shun the network approach and simply agree to pay a provider what the plan believes is a reasonable charge for the service. The plan may agree, for example, to simply pay a bit more than the Medicare reimbursement rate for the service (e.g., 110 to 150 percent of the Medicare reimbursement rate; 140 percent is fairly common). Or the plan may agree to pay the provider’s cost of the service plus a percentage (e.g., 10 percent) of that cost. The plan determines the provider’s cost from cost reports filed by providers with federal Medicare and Medicaid officials.

If the provider isn’t willing to accept the “reference-based” amount (the “reference” being the plan’s identified percentage of the Medicare reimbursement rate, or the provider’s cost plus a percentage) as payment in full, it bills the employee for the portion of the bill left unpaid.

Lockton comment: The third-party administrator or vendor may (and usually does) agree to help the employee negotiate a settlement with the provider, and represent the employee in a legal action (as was the case in this litigation), but ultimately the employee remains responsible for what the provider says it is still owed. For example, a hospital bills an employee $100,000 for a surgical procedure, the plan agrees to pay 125 percent of what the hospital would be paid by Medicare for the procedure (let’s say that’s $40,000), less the employee’s deductible and other cost sharing.

The employee remains responsible for the $60,000 difference plus any coinsurance or deductible applied. The third-party administrator or vendor agrees to help the employee negotiate with the provider in the hopes of eliminating or reducing the balance owed, but ultimately the responsibility is the employee’s. In some cases, the plan may elect to pay the difference if negotiations are unsuccessful, but not without significant stress placed on the employee during the process of the hospital attempting to collect the debt against the employee.

See Lockton’s recent white paper on reference-based pricing arrangements.

The hospital, the employee and the jury

In the Colorado case, the employer maintained such a health plan for its employees. The employer used a vendor to help determine the typical cost to a healthcare provider of certain procedures, a cost gleaned from the cost information providers supply to federal officials. The vendor also agreed to help negotiate settlements between employees and healthcare providers over balance billing (the difference between payments by the plan and billed charges), and to defend employees if sued by a provider. But ultimate responsibility for the balance due remained with the employee.

In this case, the employee needed complicated spinal fusion surgery. As is common practice when receiving medical services, she signed a form agreeing she was responsible for any amount billed by the hospital and left unpaid by her health plan. However, there was evidence that the hospital told her it believed that the balance would be just $1,336.

The hospital billed the employee $303,709.49 for the surgery and related care. The plan’s vendor took the position the bill was excessive and suggested the plan pay less than $75,000 (using its reference-based pricing model), which the plan did. The hospital disagreed that its bill was unreasonable given the complicated nature of the procedure and additional care the employee received. Ultimately, the hospital sued the employee for the almost $230,000 left unpaid.

After a six-day trial involving expert witnesses and other testimony, the jury largely sided with the employee. The hospital has said it will appeal the verdict.

The lessons

The case is most interesting for what it tells us about the risks, rewards and hassles of reference-based health plans.

An employer is not required to maintain a health plan, although failure to do so might trigger penalties under the Affordable Care Act’s employer mandate.

If the employer does offer a plan, it is not required to provide any specific benefits aside from preventive care and, if the plan is fully insured rather than self-funded, benefit mandates imposed by the relevant state.

Lockton comment: Self-funded ERISA plans are immune from state-imposed benefit mandates that apply to insured plans. Even self-funded governmental or church plans (i.e., non-ERISA plans) are immune from some state-imposed benefit mandates, depending on the state and the text of the mandate.

Where a self-insured plan provides certain benefits beyond preventive care, it isn’t required to pay a particular price for a given service. The employer is under no obligation to shield an employee from balance billing by a healthcare provider.

Lockton comment: Federal law does require a health plan to limit an enrollee’s out-of-pocket expenses for certain care received under the plan, and federal authorities have expressed concerns about reference-based plans under which too few providers accept the plan’s payment as payment in full. But so far, those authorities have not issued guidance regarding how the out-of-pocket expense limitation applies to reference-based plans. Regulators have personally opined that the out-of-pocket expense limitation should apply to a plan with no network providers at all (as opposed to a plan with both network and out-of-network providers), but that opinion has not been provided in any written guidance to date.

Many employees tend to see health insurance as the most critical of employee benefits, and they’re accustomed to managed care-type plans that use a network of providers. When employees agree to see those in-network providers, they understand they will be responsible for only the deductible, copayments and coinsurance. The notion of balance billing by healthcare providers is not something most employees have encountered or are well-prepared to deal with.

While the Colorado case resulted in a victory for the employee for the moment (we could say the employer was already a winner, of sorts, in that it limited its exposure to the reference-based amount it paid), the employee was forced to endure the angst inherent in being a defendant in a lawsuit seeking nearly a quarter of a million dollars, and the employee will continue to experience that stress, as she may still lose the case on appeal.

Lockton comment: Firms administering reference-based plans say a small percentage of balance-bill claims reach litigation. Lockton’s analysis suggests about two to five percent of plan enrollees are balance billed by providers, and only about one percent face litigation - at least for now. However, it's likely that as reference-based plans become more prevalent, providers will begin to fight harder for what they believe they are owed. Further, even if the provider is willing to reduce its price, it may still make an attempt to recover the balance of the reduced cost from the employee, going so far as to hire collection agencies.

While reference-based health plans have their place in the employee benefits world amidst the ongoing struggle by employers to rein in health insurance costs, they require a fair bit of explanation to employees about how the plan works. As a practical matter, the employer (through its vendor) must also exhibit a willingness to help the employee negotiate a settlement and defend the employee against collection actions in the event of a lawsuit. In addition, savvy employees may find the risk posed by their health plan to be less than palatable when electing to accept or continue employment.

Not Legal Advice: Nothing in this Alert should be construed as legal advice. Lockton may not be considered your legal counsel and communications with Lockton's Compliance Services group are not privileged under the attorney-client privilege.

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