# What is reference-based pricing? How it works, and where it breaks.

Source: https://ethosbenefits.com/benefits-101/reference-based-pricing
Type: Benefits 101
Topic: Plan financing
Author: Chelsea Ryckis, Founder and President
Reviewed by: Patrick Ansara, Partner and Director of Client Operations
Publisher: Ethos Benefits
Published: 2025-12-13
Last updated: 2026-11-03
Cite as: "What is reference-based pricing?," Ethos Benefits, https://ethosbenefits.com/benefits-101/reference-based-pricing, updated 2026-11-03.

**Short answer:** Reference-based pricing (RBP) lets a self-funded health plan pay providers a set percentage of a benchmark, usually what Medicare pays for the same service, instead of a network discount off billed charges. It can lower claim costs, but providers who reject the payment may balance bill members, so the plan must resolve those bills.

Employers with self-funded health plans use reference-based pricing to tie what the plan pays for care to a published benchmark instead of a provider's own price list. Done well, it makes claim costs more predictable. Done carelessly, it sends members bills they did not expect. This page explains how it works, the common designs, and what an employer needs in place first.

## What is reference-based pricing?

Reference-based pricing (RBP) means the plan pays providers a set percentage of a reference price, most often what Medicare pays for the same service. Some programs use other references, such as a facility's reported costs plus a margin.

A traditional PPO network works differently. The provider sets a billed charge, and the network contract applies a discount to it. Because the discount starts from a number the provider controls, the plan has little sense of what a fair price is, and the same procedure can cost very different amounts at two hospitals in the same city.

| | Reference-based pricing | Traditional PPO network |
|---|---|---|
| **How payment is set** | A percentage of a benchmark, usually Medicare | A negotiated discount off the provider's billed charges |
| **Who sets the terms** | The employer, in the plan document | The carrier or network, in contracts the employer usually cannot see |
| **Provider access** | Any provider willing to accept the payment, plus any direct contracts | Providers in the network |
| **Balance billing risk** | Real for providers with no agreement; must be managed | Low in network, because contracted providers agree not to balance bill |
| **Where it fits** | Self-funded plans | Fully insured, level-funded and self-funded plans |

RBP is almost always found in [self-funded plans](https://ethosbenefits.com/benefits-101/self-funded-health-insurance), because the employer, not an insurer, writes the payment rules and bears the claims.

## How does a claim get paid?

The plan document states the payment level, and the administrator reprices every claim to it.

1. **The plan sets the reimbursement level.** For example, the plan may pay a percentage of the Medicare rate for each covered service. The right percentage depends on the local market and the type of care.
2. **A member gets care.** The member can usually see any provider, though many plans steer members toward providers that have accepted the plan's terms before.
3. **The provider submits a claim.** The administrator or RBP vendor reprices it using the benchmark formula and sends the provider an explanation of how the payment was calculated.
4. **The provider accepts or disputes.** If the provider accepts, the claim is closed. If not, the provider may appeal the payment or bill the member for the difference.

A simple illustration: if Medicare pays $1,000 for an outpatient procedure and the plan pays 150% of Medicare, the plan pays $1,500, whatever the hospital billed. The numbers are only an example. Plans set their own percentage.

## What is the difference between full-replacement and carve-out RBP?

The two main designs differ in how much of the plan is priced to the benchmark.

| | Full-replacement RBP | Carve-out (partial) RBP |
|---|---|---|
| **What is repriced** | Nearly all medical claims, facility and professional | Only some claims, most often hospital and outpatient facility charges |
| **Network** | None in the traditional sense, sometimes with direct contracts | A PPO or physician network stays in place for the rest |
| **Cost impact** | Broadest, because every claim is priced to the benchmark | Narrower, focused on the largest claims |
| **Member disruption** | Highest; more providers have no agreement with the plan | Lower; most office visits work like before |
| **Balance billing exposure** | Wider | Concentrated on facility claims |

Many employers start with a facility-only or outpatient-only carve-out, because hospital and surgery-center charges drive most of the spend and the physician relationships stay intact.

## What is a direct contract?

A direct contract is an agreement between the plan, or its RBP vendor, and a specific hospital, surgery center or physician group to accept a stated payment, often expressed as a percentage of Medicare. It turns a provider with no agreement into one that has agreed not to balance bill.

Direct contracts matter for three reasons:

- **Access.** Members can schedule care knowing the provider has accepted the plan's terms.
- **Fewer disputes.** A signed agreement replaces case-by-case negotiation after the bill arrives.
- **Federal protections.** Under the No Surprises Act definitions, a facility with a direct or indirect contract with the plan is a participating facility, and a single case agreement counts for the member it covers. That can bring the out-of-network provider protections for that facility into play.

## Why do balance bills happen?

A balance bill is a bill a provider sends the patient for the difference between its charge and what the plan paid. Under RBP, it happens when a provider has no agreement with the plan and decides not to accept the repriced amount.

Plans handle balance bills in a few layers:

- **Member advocacy.** The member forwards the bill to an advocacy team, which contacts the provider, explains the payment basis and negotiates. Most bills are resolved here.
- **Provider appeals and negotiation.** The plan may agree to a modest increase to close a claim, within limits the plan document allows.
- **Legal defense.** Many RBP vendors offer to defend members who are sued or sent to collections over a balance bill. Read what the program actually covers, and who pays, before relying on it.
- **Clear communication.** Members need to know, before they get care, that a balance bill is possible and exactly what to do if one arrives. Members who pay a bill on their own often cannot get the money back.

The practical goal is not zero balance bills. A plan that never sees one is often paying billed charges in full. The goal is a fast, reliable process that keeps members out of the middle.

## How does the No Surprises Act apply to RBP?

The federal No Surprises Act, which applies to plan years beginning on or after January 1, 2022, protects members from balance bills in three situations, and they do not cover everything an RBP plan does.

| Situation | Protected from balance billing? | What it means for an RBP plan |
|---|---|---|
| **Emergency services**, including at an out-of-network hospital | Yes | The member owes only in-network-level cost sharing. The provider cannot balance bill the member but can dispute the payment with the plan. |
| **Air ambulance** from an out-of-network provider | Yes | Same as emergency: the member is protected, and the dispute is between the provider and the plan. |
| **Non-emergency care from an out-of-network provider at an in-network facility** (hospital, hospital outpatient department, critical access hospital, ambulatory surgical center) | Yes, unless the member validly waives it with notice and consent, which is not allowed for services such as anesthesiology, radiology, pathology and emergency medicine | Applies only where the facility has a contract with the plan. A plan with no network has few or no participating facilities. |
| **Scheduled care at a facility with no contract with the plan** | No | This is where most RBP balance bills come from. The plan's own advocacy and legal process is the member's protection. |
| **Ground ambulance** | No federal protection | The law left ground ambulance out and created an advisory committee to study it. Some states have their own ground ambulance rules, but state insurance laws often do not reach self-funded ERISA plans. |

Two practical effects follow. First, on emergency and air ambulance claims, the provider cannot bill the member, but it can start a 30-business-day open negotiation with the plan and then take the claim to federal independent dispute resolution (IDR). An RBP plan should expect that and budget for it. Second, direct contracts and single case agreements can turn a facility into a participating facility, which extends the federal protection to non-emergency care there.

## Does RBP limit where members get care?

RBP can limit where members get care in practice, even when the plan says members may see any provider. Some hospitals and physician groups will not book a patient whose plan pays on a reference basis, or will ask for payment up front.

Access concerns tend to show up in a few places:

- **Specialists and surgeons** who check coverage before booking.
- **Markets with one dominant health system,** where members have few alternatives.
- **Members in active treatment** at the time of the switch, such as pregnancy, cancer care or a planned surgery.

The usual responses are direct contracts with the hospitals and groups members use most, a concierge line that finds accepting providers before care is booked, and transition-of-care rules for members already in treatment. An employer should review where its members actually get care before choosing a design.

## What does an employer need before launch?

RBP is a plan design decision, and the employer as plan sponsor owns it. Before launch, an employer needs these pieces in place.

| Need | Why it matters |
|---|---|
| **Member support** | A staffed advocacy line, written instructions, an ID card that explains the payment basis, and pre-launch education. Members must know to forward any balance bill, not pay it. |
| **Plan document and contract language** | The plan document and summary plan description must describe the payment method, any appeals and the member's cost sharing clearly. Vendor contracts should spell out balance bill handling, legal defense terms and response times. |
| **Stop-loss alignment** | The stop-loss policy must recognize the plan's RBP payment level and any negotiated settlements as eligible expenses. If the plan settles a claim above the reference price, or after the policy's run-out window, a mismatch can leave the plan paying costs the carrier will not reimburse. |
| **Provider strategy** | Direct contracts with the facilities and groups members use most, and a plan for providers who refuse the plan's terms. |
| **Data and monitoring** | Track repriced amounts, balance bills opened and closed, settlement amounts and member complaints, and adjust the payment level if access suffers. |

Stop-loss deserves extra attention. Confirm with the carrier, in writing, how it will treat RBP payments, balance bill settlements and IDR outcomes before the policy is bound. The [stop-loss insurance](https://ethosbenefits.com/benefits-101/stop-loss-insurance) page explains contract types, lasering and terminal liability, all of which interact with how and when RBP claims are paid.

## Questions to ask first.

Before moving to RBP, an employer should be able to answer these questions:

- Where do our members get care today, and will those providers accept the plan's terms?
- Do we start with a facility-only carve-out or replace the network?
- Which vendor handles repricing, balance bills and legal defense, and what exactly does each contract promise?
- Does our stop-loss policy cover claims paid at the RBP level and settled after negotiation?
- How will we explain the change to employees and support them if a bill arrives?
- Who will review the data each quarter and decide when to change course?

Ethos Benefits helps employers evaluate reference-based pricing and direct contracts through its [cost containment](https://ethosbenefits.com/services/cost-containment) work.

## One plan's experience.

Hendry Marine Industries, a shipyard with about 300 employees, moved to a self-funded plan built around reference-based pricing in 2017, before Ethos became its advisor. Over five years, the plan paid an effective rate of 123% of Medicare. Providers sent 352 balance bills totaling about $2.1 million in initial charges, and all of them were settled for less than $15,000 in total. The [Hendry Marine case study](https://ethosbenefits.com/results/hendry-marine) has the full figures. One plan's results do not predict another's, which depend on the market, the design and how balance bills are handled.

## On the podcast

- [Employer Health Coalitions and Smarter Purchasing: With Karen van Caulil](https://ethosbenefits.com/podcast/employer-health-coalitions-karen-van-caulil), The Business of Benefits, Episode 86
- [Self-Funded Health Insurance, PBMs and Reference-Based Pricing: The People's Picks: our most-watched moments](https://ethosbenefits.com/podcast/self-funded-health-insurance-most-watched-moments), The Business of Benefits, Episode 84
- [Benefits Consultant Fees Are Only Part of the Price: Chris Deacon on paying more and getting less](https://ethosbenefits.com/podcast/benefits-consultant-fees-chris-deacon), The Business of Benefits, Episode 68
- [Health Plan Fiduciary Duty Starts With the Employer: Alden Bianchi on ERISA exposure](https://ethosbenefits.com/podcast/health-plan-fiduciary-duty-alden-bianchi), The Business of Benefits, Episode 65
- [Reference-Based Pricing, Part 2: What Employees Experience: Danielle Young of ClaimDoc](https://ethosbenefits.com/podcast/reference-based-pricing-employees-danielle-young), The Business of Benefits, Episode 56
- [Reference-Based Pricing for Employers, Part 1: Danielle Young of ClaimDoc](https://ethosbenefits.com/podcast/reference-based-pricing-danielle-young), The Business of Benefits, Episode 55
- [What a Third Party Administrator Does for Your Health Plan: Eugene Starks, a TPA industry veteran](https://ethosbenefits.com/podcast/third-party-administrator-eugene-starks), The Business of Benefits, Episode 53
- [Leaving Traditional Health Insurance, Live on Stage: Bryan Orr of Kalos Services](https://ethosbenefits.com/podcast/leaving-traditional-health-insurance-bryan-orr), The Business of Benefits, Episode 52
- [How One Employer Took Control of Its Healthcare Costs: Bryan Orr of Kalos Services](https://ethosbenefits.com/podcast/employer-healthcare-costs-bryan-orr), The Business of Benefits, Episode 47

## Frequently asked questions

### What are the pros and cons of reference-based pricing?

The main pro is lower and more predictable claim costs, because the plan pays a set percentage of a published benchmark such as Medicare instead of a discount off billed charges. The cons are balance bills from providers who reject the payment, reduced access where providers refuse to schedule, and more work for the employer, which has to fund member advocacy and resolve disputes.

### Is reference-based pricing legal?

Yes. A self-funded plan can set its own payment terms in the plan document, and reference-based pricing is one way to do that. The plan still has to follow its document, the federal claims and appeals rules and the No Surprises Act where it applies, and providers with no agreement can still bill members for the balance.

### What happens if a provider rejects reference-based pricing?

The provider may send the member a balance bill for the difference between its charge and what the plan paid. Many of these bills are settled through member advocacy and negotiation, but some are not, so the plan needs a defined process and budget for them before launch.

### Does the No Surprises Act stop balance billing under an RBP plan?

Only in part. It bars balance billing for emergency services, air ambulance, and certain non-emergency care from out-of-network providers at in-network facilities, but a plan with no network has few in-network facilities, so most scheduled care at hospitals and surgery centers is not protected by it.

### Does reference-based pricing work with self-funded plans?

Yes. RBP is used almost entirely by self-funded plans, because the employer sets its own payment terms in the plan document. It has to be paired with stop-loss insurance that recognizes the plan's payment level, or large claims may not be fully reimbursed.

### How do you explain reference-based pricing to employees?

Start before launch and keep it practical. Employees need to know that the plan pays providers a set amount, what to do if a provider asks about their coverage or refuses to schedule, and to call the member advocacy line, not pay, if they receive a balance bill. A phased rollout, a support line and simple ID card language reduce confusion.

## Sources

1. [Requirements Related to Surprise Billing; Part I (interim final rules), 86 FR 36872](https://www.govinfo.gov/content/pkg/FR-2021-07-13/html/2021-14379.htm), Departments of the Treasury, Labor and Health and Human Services, Federal Register
2. [45 CFR § 149.420, Preventing certain cases of balance billing for non-emergency services](https://www.law.cornell.edu/cfr/text/45/149.420), Legal Information Institute, Cornell Law School
3. [45 CFR § 149.30, Definitions (participating health care facility, single case agreement)](https://www.law.cornell.edu/cfr/text/45/149.30), Legal Information Institute, Cornell Law School
4. [45 CFR § 149.510, Independent dispute resolution process](https://www.law.cornell.edu/cfr/text/45/149.510), Legal Information Institute, Cornell Law School
5. [Your rights and protections against surprise medical bills](https://www.cms.gov/medical-bill-rights), Centers for Medicare & Medicaid Services
6. [Advisory Committee on Ground Ambulance and Patient Billing (GAPB)](https://www.cms.gov/regulations-guidance/advisory-committees/advisory-committee-ground-ambulance-and-patient-billing-gapb), Centers for Medicare & Medicaid Services