What does a 60 percent network discount actually mean?

Every carrier proposal brags about network discounts. 50 percent. 55 percent. 60 percent off. It sounds great until you ask the obvious question: 60 percent off of what?

The answer is billed charges, the hospital's list price, sometimes called the chargemaster. Almost nobody pays billed charges. Hospitals set them high on purpose, because a bigger starting number makes a bigger discount look impressive. A carrier can show you a 60 percent discount on a $40,000 charge and still be paying $16,000 for something Medicare pays $5,000 for.

That's why two carriers can both claim 55 percent and be paying wildly different prices for the same MRI at the same hospital. What matters is actual dollars paid, measured against a fixed yardstick. Medicare publishes what it pays for nearly every procedure, which makes it the closest thing healthcare has to a sticker price. RAND's national research found employer plans paid hospitals about 2.5 times what Medicare would have paid in 2022.

Network strength also changes from one zip code to the next. Contracts are negotiated system by system, and in DFW one carrier may have the best deal with one health system while a competitor wins at another. When I put a group out to market, I look at where your employees actually live and where they actually go for care, not just the headline discount.

Questions to ask

What are we paying as a percent of Medicare, by hospital system?
Which systems drive most of our claims dollars, and how strong is this carrier's contract with each one?
If we change networks, what is our employee disruption, and how was it measured?

What is reference-based pricing, and is it risky for employees?

Reference-based pricing pays providers a set percent of Medicare with no contract in place. It can save real money, but because the provider never agreed to the price, it can balance bill your employee for the difference. A direct contract at a percent of Medicare avoids that, and any RBP program should come with member advocacy and legal support.

How do underwriters actually price our renewal?

Your renewal is a number the carrier decides, not one it simply calculates. The underwriter projects your claims, adds trend, blends in a manual rate based on credibility, applies pooling charges for large claims, then adds retention for admin, taxes, commissions, risk, and profit. Every one of those inputs has a range, which is why two carriers can look at the same data and come back 15 percent apart.

When should we start working on our health plan renewal?

Five months or more before the effective date. Requests for quotes typically go out three to four months before renewal for fully insured groups and four to five months out for self-funded and captive groups, because stop loss quotes and lasers depend on current large claim detail. Most renewals fail because they start 60 days out.