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December 17, 2014

Reference-Based Pricing and the Affordable Care Act’s Rules on Out-of-Pocket Limits

On February 27, 2015, the Department of Health and Human Services published the final out-of-pocket limits for 2016. The final limits — $6,850 for individual coverage and $13,700 for family coverage — are the same as the proposed limits noted in this Capital Checkup.

The Departments of Treasury, Labor, and Health and Human Services (HHS), which are responsible for implementing the Affordable Care Act1 (collectively, the "Departments"), have published an answer to a frequently asked question (FAQ) addressing how plan sponsors of non-grandfathered group health plans need to design reference-based pricing programs in order to comply with the Affordable Care Act’s rules on out-of-pocket limits.2 A grandfathered plan is not required to comply with these rules on out-of-pocket limits and would not have the same constraints when implementing a reference-based pricing program, as long as the plan remains grandfathered.

This Capital Checkup describes reference-based pricing and summarizes the latest guidance on how the Affordable Care Act’s rules on out-of-pocket limits apply to reference-based pricing.

Reference-Based Pricing

Under a reference-based pricing program, a plan sets a maximum price it will pay providers for a specific procedure (the "reference price"). This reference price is developed based on industry practice, quality standards and appropriate access to treatment. The plan steers participants to providers that accept the reference price for the procedure by lowering the participant’s out-of-pocket costs. Participants who select other, more expensive providers are required to pay charges that exceed the reference price. The text box below describes a typical reference-based pricing program.

 What Is Reference-Based Pricing?

The best-known reference-based pricing program is one initiated in 2011 by the California Public Employees' Retirement System (CalPERS), which administers health and retirement benefits on behalf of more than 3,000 public school, local agency, and state employers in California. The CalPERS program initially targeted facility charges for total joint replacement of the knee and hip because of the wide variation in prices for those procedures and the lack of measurable differences in patient outcomes. CalPERS’s preferred provider organization identified 41 geographically dispersed California hospitals that both charged less than $30,000 (hospital charges only, not physician/surgeon fees) and met certain quality and frequency measures. Patients selecting one of these designated facilities for hip or knee replacement paid their usual coinsurance up to a $3,000 annual maximum. Patients selecting other hospitals paid the required coinsurance (up to $3,000) plus the difference between the CalPERS payment and the allowed price charged by the facility. CalPERS has since expanded its program to include other procedures.

Source: CalPERS Pension & Health Benefits Committee Agenda Item 7, (June 18, 2013): For additional information, see the Center for Studying Health System Change’s HSC Research Brief No. 30 (December 2013):

Out-of-Pocket Limits

Effective with the plan year beginning on or after January 1, 2014, non-grandfathered group health plans must comply with a new annual limit on cost sharing, also known as an out-of-pocket limit. The maximums for the 2015 plan year and the proposed maximums for the 2016 plan year are noted in the table below.

Non-grandfathered plans that are not in compliance with the new out-of-pocket limit could face penalties under ERISA, the Internal Revenue Code, or the Public Health Service Act (PHSA), as applicable. For example, the Department of Labor could enforce the requirements for ERISA-governed group health plans through audits or plan sponsors could face civil litigation. In addition, IRC Section 4980D imposes an excise tax of $100 per day per person, for violations of the Affordable Care Act’s group health plan mandates.

The Affordable Care Act’s Out-of-Pocket Limit, 2015 and 2016
  2015* 2016 (Proposed)**
Individual Coverage  $6,600  $6,850    
Family Coverage $13,200 $13,700    

* Starting in 2015, the out-of-pocket limits are no longer tied to Health Savings Accounts (HSA) limits, but are calculated based on a percentage increase from the previous year. The percentage increase used this year was 4.2 percent (rounded).

** The HHS proposed rule was published in the November 26, 2014 Federal Register. HHS will set the final numbers in 2015.

Reference-Based Pricing and Out-of-Pocket Limit Rules

Non-grandfathered plans must count amounts paid by patients above the reference price toward the patient’s out-of-pocket limit, unless they satisfy the new guidance discussed below. Consequently, it is important to satisfy the guidance in order to be able to achieve the savings that reference-based pricing programs were intended to provide.

Plan sponsors of non-grandfathered plans that have or are considering a reference-based pricing program must review the program to ensure that it complies with several factors related to quality and access. The Departments will consider all the facts and circumstances when evaluating whether a plan is using a reasonable method to ensure adequate access to quality providers at the reference price, including the following:

  • Type of Service  Plans should have standards to ensure that the network includes high-quality providers at reduced costs, and is not a subterfuge for a limitation on coverage. Reference-based pricing programs should apply only to those services where the patient has enough time between identifying the need for care and getting the care to be able to make an informed choice of which provider to use. Reference-based programs cannot be used as a way to pay for emergency services.
  • Reasonable Access Plans should have procedures to ensure that an adequate number of providers that accept the reference price are available. Plans are encouraged to consider network adequacy approaches developed by states for state-regulated insurance carriers, as well as reasonable geographic distance measures, and whether patient wait times are reasonable.
  • Quality Standards Plans should have procedures to ensure that an adequate number of providers accepting the reference price meet reasonable quality standards.
  • Exception Process  Plans should have an easily accessible exception process. Services should be treated as if they meet the reference-based pricing program standards if access to a provider that accepts the reference price is unavailable or the quality of services with respect to a particular individual could be compromised with the reference price provider (e.g., co-morbidities present complications or patient safety issues).
  • Disclosure Plans should automatically provide information to participants regarding the pricing structure, including a list of services to which the pricing structure applies and the exceptions process. In addition, plans should provide the following information upon request: a list of providers who will accept the reference price for each service, a list of providers who will accept a negotiated price above the reference price for each service, and information on the process and underlying data used to ensure that an adequate number of providers accepting the reference price meet reasonable quality standards.


Plan sponsors of non-grandfathered health plans implementing or contemplating reference-based pricing programs should review the new guidance carefully to ensure that such programs are consistent with the new guidance. It is likely that existing programs will not fully comply with these new rules, particularly some of the participant disclosure and exception process rules, and will need to be revised. Plan sponsors that contract with an insurer or administrative services provider for a reference-based pricing program should ask the service provider to explain how the plan meets each of these criteria. Failure to meet the criteria will result in non-grandfathered plans being unable to exclude charges in excess of the reference-based price from the out-of-pocket limit.

The Departments will continue to monitor reference-based pricing strategies and may provide additional guidance.

• • •

As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their legal counsel for authoritative advice on the interpretation and application of the Affordable Care Act and related guidance, including the new guidance summarized in this Capital Checkup. Sibson Consulting can be retained to work with employers and their attorneys on compliance issues.


1 The Affordable Care Act is the shorthand name for the Patient Protection and Affordable Care Act (PPACA), Public Law No. 111-48, as modified by the subsequently enacted Health Care and Education Reconciliation Act (HCERA), Public Law No. 111-152. (Return to the Capital Checkup.)

2 This latest FAQ on reference-based pricing is available on the Department of Labor (DOL) website. A preliminary answer to a FAQ on this topic is summarized in Sibson Consulting’s June 11, 2014 Capital Checkup, “Latest Guidance on the Affordable Care Act’s Rules for Out-of-Pocket Limits and Preventive Services Requirements,” which is available as a webpage and a printer-friendly PDF. (Return to the Capital Checkup.)


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