Managing Healthcare Costs with Out-of-the-Box Ideas

Karen Naccarato
VP, Customer Support & Business Development for Tennessee, Sherrill Morgan
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Many employers struggle with trying to provide affordable healthcare to their employees. Traditionally, employers’ solution is to select a medical vendor who touts the deepest provider discounts. Discounts do save money, when used to buy groceries, appliances, or other consumable goods; however, maybe not so much with healthcare. Why is this? The “true” cost of services can be hidden under a layer of fees and add-ons and may also vary between regions and facility types. Therefore, a discount from an unknown cost may not always control costs, especially if the unknown cost is continually changing. That may also explain why employers, year after year, are having to deliver premium increases to their members, or absorb the cost. When that occurs, employers may need to think outside the box to meet those needs.

Reference Based or Transparent Pricing is the concept of identifying and processing a bill for medical services based on a known price point such as Medicare. This information is then used by insurers to determine a “cost +” pricing for all services. The savings realized on specialized care facilities or providers can be substantial, because those areas may have the greatest markup.

How does Reference Based Pricing work? A predetermined “cost +” is outlined prior to claims being processed by the insurance company or TPA (Third Party Administrator).  Where Traditional Discount Plans rely on “networks” to steer members to covered facilities, with RBP (Reference Based Pricing), there is no network.  Employers pay the same “cost +” amount regardless of where the member receives services.  For example, with the Traditional Discount Plan if a member needs an MRI, the member must go to the network facility for services otherwise out-of-network benefits apply. However, with RBP the member may go to any MRI facility and regardless of the amount billed, the payment is the same. The amount the employer would pay using the Traditional Discount Plan in most cases is more than the amount paid using the RBP method.

The reason is based on the markup of services vs the amount of the discount. There is not a lot of room for markup on primary care services; therefore, savings using the RBP model may not be as substantial, but with specialized medicine and urgent care facilities there is no ceiling on the markup applied to claims.  For that reason, if employers have a 30% discount using the Traditional Discount Plan, but the facility is billing 400% of Medicare, they probably are not seeing a reduction in their medical spend. 30% of 400% above Medicare means the employer still paid at least 200% more than with the RBP model, which for services related to a premature baby, heart disease and/or cancer could be substantial. Therefore, using the Traditional Discount Plan model the only option available to employers to reduce their healthcare spending is to shift the cost share more to the member by increasing deductibles and premiums.

Using the RBP model is a tried and true method to reduce healthcare costs without employers having to reduce benefits to the member.  In fact, members’ benefits may improve by eliminating the deductible in favor of a flat copay.  This makes the RBP much easier for the provider and the member to know what is expected at the time of service.  Members like the plan because they can go to any provider or facility, and providers like the plan because it eliminates the need for them to be in the collection business.

According to CMS, in 2021 retail drug spend in the US was around $378 billion, which increased by 7.8% from 2020. [1]  The cause is due to the increase in the use of prescriptions.  In fact, costs for medical and pharmacy spend have increased each year since 1960, which is when CMS started collecting data.  That means employers should be looking for “outside-the-box” ways to provide benefits including pharmacy. Many Traditional Discount Plans will advertise the “rebates” and throw out words such as “transparent” and “100 % pass through” as a way to let employers know these plans are serious about saving money on pharmacy costs.  What isn’t always disclosed is the shell game with “rebates”. [2]  Drug companies partner with PBM (Pharmacy Benefit Managers) or Insurance Companies to have their drug place on the formulary in a preferred status.  This encourages members to use their drug instead of other drugs which may be cheaper and more effective. On the back end, the company pays a rebate back to the PBM, which provides those back to the employer.  The primary issue with that methodology is that high-cost drugs listed on the formulary in a preferred placement does not mean those drugs are more effective, which is what many employers, members and even physicians think.  In fact, in many cases those preferred drugs are NOT more effective.  People might be surprised to know that the FDA’s only requirement for a drug’s effectiveness is whether it is better than a placebo. [3]  For this reason, placing a high-cost, possibly ineffective drug on the formulary, just for the rebates does not save on prescription spend and does not help the patient with his or her medical condition.

Comparative Effectiveness Data looks at drugs to determine their effectiveness in treating conditions, and it’s those drugs that have preferred status on the formulary. Excluding high-cost and ineffective drugs may reduce rebates, but the overall savings to the plan can be much greater.

Employers may not realize the tools they have in their toolbox to control healthcare costs and preserve benefits for their members. That is why getting away from the traditional methods of controlling costs where the members’ burden increases either by premium or plan design changes, will not work.  Using that method could drive people who are well to go elsewhere for their healthcare needs and creates an atmosphere of discontent for those remaining on the plan. Using Reference Based Pricing to reduce the medical spending, and Comparative Effectiveness Data to determine which drugs should be placed on the formulary, are only two of the many tools available to employers trying to control healthcare costs.  The end result is a win-win for the employers and their members.




*The views and opinions expressed in the Public Risk Management Association (PRIMA) blogs are those of each respective author. The views and opinions do not necessarily reflect the official policy or position of PRIMA.*

By: Karen Naccarato
VP, Customer Support & Business Development for Tennessee, Sherrill Morgan

Summary of Qualifications

Karen has 27 years experience in the area of employee benefits with the school systems in Memphis, Tennessee. In 2013-2014, she saw the merger of Shelby County Schools and Memphis City Schools, which formed one of the largest school districts in the US. She was the benefits manager for approximately 13,000 employees and 12,000 retirees. The following year, six municipal school systems were formed after pulling out from the Memphis/Shelby County schools system. Karen became part of a "shared service" department which managed benefits for the six school systems. A health rust was created that same year to provide benefits for four municipal school districts and three cities. Today, the trust processes approximately $40 million in claims for 7500 employees and their dependents.


  • Plan administrator of $40 million health trust in Memphis, TN
  • Point-of-contact for employer-sponsored medical clinics and pharmacy
  • Participates in the creation, administration and implementation of the business development strategies
  • Participates in the identification, evaluation, solicitation and follow-up with targets through multiple sales, communications and marketing methods such as cold calling, conference attendance, social media, public relations, presentations, etc
  • Participates in the initiation and development of relationships with key prospects to identify and meet prospects’ business needs
  • Supports the implementation of full sales cycle, including needs analysis, pitch, closing and renewal
  • Participates in renewal preparation and periodic meetings for Sherrill Morgan clients
  • Provide specific healthcare expertise and relevant experience into the product and services portfolio and strategic planning process as needed
  • Responds to RFPs, review plan documents, NDA’s and other contractual agreements, including the preparation of project budgets

Business Experience

  • Employee Benefits Supervisor for Bartlett City Schools (2014-2022)
  • Benefits Manager for Memphis Shelby County Schools (2013-2014)
  • Director of Employee Benefits for Shelby County Schools (1995-2013)

Karen has served on a number of boards including TASBO Board of Directors (2011-2012), TASBO president-elect (2013), CIGNA Board of Diversity (2008-2010).

Professional Affiliations

TASBO (Tennessee Area School Business Official) member (2011-2013)


  • Bachelor of Science in Business Administration, University of Phoenix
  • Master of Science in Business Administration, Keller Institute of Management

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