Why Reference-Based Pricing Exists: The Three Unknowns of Healthcare Pricing
Howard Yeh is a co-founder of Healthcare.com with two decades of experience building companies in healthcare, insurance, and digital distribution. More about Howard →
Healthcare Pricing & Reference-Based Models --- Part 1
I started thinking more about reference-based pricing ("RBP") earlier this year after it came up repeatedly at the William Blair Benefit Tech Conference (February 2026, NYC).
I was encouraged to hear RBP discussed so frequently because it has been part of our plan design long before it became the latest trend. My experience with reference-based pricing (good video explainer on RBP) comes from its use inside individual health plans at Pivot Health.
I've had the opportunity to see this model up close. When my Healthcare.com cofounder Jeff Smedsrud launched Pivot Health in 2016 (before Healthcare.com's acquisition of it), he adopted a reference-based pricing approach as part of Pivot's product design. For an independent entrant without access to a national provider network, it offered a transparent reimbursement framework that could operate across markets.
I'll share more about our experience building Pivot Health in the next article, including perspectives from Jeff.
This series zooms out to look at the broader question: why reference-based pricing emerged in the first place and why it is getting renewed attention across the industry.
It's also worth noting my vantage point here. My work has been much closer to the individual health insurance market than the employer market. Because the individual market represents a smaller segment of consumers, I try to avoid making sweeping statements about the entire U.S. healthcare system.
One reason I'm writing about reference-based pricing now is that broader adoption in employer-sponsored plans is likely to influence how certain individual market products evolve. Pivot Health was an early example of using reference-based pricing in an individual-focused insurance product, and I expect we may see more private insurers explore similar approaches over time.
Greater adoption in the much larger employer market could accelerate overall adoption far faster than the individual market would on its own.
Like any model, RBP comes with trade-offs. Providers and members sometimes need education because the structure works differently from traditional network-based insurance. But it also introduces something healthcare pricing often lacks: a clear reference point for reimbursement.
The Three Unknowns
Healthcare pricing in the United States behaves differently from most markets.
For many services, the final price depends on three unknowns.
1. Who provides the service.
2. Who submits the bill.
3. Who ultimately pays for it.
Change any one of those variables and the price can shift dramatically. In many cases, the final cost isn't known until weeks or even months after the service is delivered.
In most markets, that level of pricing uncertainty would make rational decision-making nearly impossible.
Yet that is how much of the U.S. healthcare system still operates.
Over time, different parts of the healthcare system have experimented with ways to introduce clearer price anchors. One approach that has gained traction in certain segments of the market is reference-based pricing, where reimbursement is tied to a known benchmark --- most commonly Medicare reimbursement schedules.
RBP emerged as a practical response to a deeper structural issue and is receiving increased attention across the industry.
One of the driving factors is the attempt to reduce the uncertainty created by these three interacting variables.
The Three Unknowns of Healthcare Pricing
The first unknown is the provider.
Two hospitals in the same city may charge very different amounts for the same procedure, a phenomenon documented in studies on hospital price variation. Differences in market leverage, payer mix, ownership structure, and negotiated contracts can all influence the final price.
The second unknown is who submits the bill.
Modern healthcare delivery often involves multiple entities participating in the same episode of care --- hospitals, physician groups, specialists, outpatient facilities, and laboratories. Each entity may bill separately, often under different reimbursement arrangements.
The third unknown is the payer.
Medicare, Medicaid, commercial insurers, employer-sponsored plans, and self-pay patients all reimburse providers at very different levels for the same service.
Put those three variables together and the resulting pricing landscape becomes difficult to interpret.
The same procedure can produce dramatically different reimbursement outcomes depending on the combination of provider, billing entity, and payer.
A Market Without Clear Price Anchors
Most markets eventually develop reference points.
Consumers generally know what a gallon of gasoline should cost within a reasonable range. Investors understand typical valuation ranges for certain classes of assets. Even complex markets develop benchmarks that help participants interpret prices.
Healthcare evolved differently.
For decades, prices have largely been shaped through negotiated contracts between insurers and providers. These contracts frequently include confidentiality provisions that prevent negotiated reimbursement levels from being publicly disclosed.
As a result, prices exist, but they are rarely visible.
Even sophisticated buyers may struggle to understand what a particular service actually costs until well after the claim has been processed.
When markets operate without visible reference points --- something policymakers have also attempted to address through federal hospital price transparency rules --- pricing can become difficult to interpret.
And when pricing becomes difficult to interpret, incentives start shaping outcomes in ways that are not always obvious from the outside.
The Search for a Reference Point
Over time, various participants in the healthcare system began looking for ways to introduce clearer benchmarks into pricing.
Employers wanted better visibility into healthcare costs.
Patients increasingly carried higher deductibles and became more
sensitive to price.
New insurance products needed predictable reimbursement structures
without negotiating thousands of provider contracts.
In different corners of the industry, one solution began appearing more frequently: tie reimbursement to a known external benchmark.
Most commonly, that benchmark became Medicare.
Instead of relying entirely on confidential network negotiations, some plans began linking reimbursement to a defined multiple of Medicare rates. The approach introduced something healthcare pricing often lacked --- a visible reference point.
This model became known as reference-based pricing.
Why This Matters
Reference-based pricing did not emerge as a theoretical concept.
In many cases, it appeared as a practical response to a structural problem: how to operate in a system where prices are difficult to observe and even harder to predict.
By tying reimbursement to a publicly known benchmark, the model attempts to introduce a clearer pricing anchor into an otherwise opaque system.
It does not eliminate the complexity of healthcare payment. Providers still operate within negotiated contracts, billing structures remain complicated, and reimbursement levels continue to vary across markets.
And RBP is not necessarily a universal solution. A sudden, wide-scale shift to Medicare-based reimbursement levels could significantly disrupt the economics of many healthcare providers.
But the model highlights an important principle.
When pricing systems lack clear anchors, markets eventually look for ways to create them.
Looking Ahead
In the next article, I'll walk through how reference-based pricing works in practice, using Pivot Health as an example, and why some insurance products adopted it as an alternative to traditional provider networks.
From there, we can explore how the broader healthcare pricing system evolved --- and why negotiated network contracts became so difficult to interpret in the first place.
Because once pricing becomes visible, incentives tend to follow.