A hospital sends a $6,200 bill for a knee MRI. Your reference-based pricing (RBP) vendor reprices it to $1,900. The vendor reports a 69 percent savings. That number looks great in the quarterly report. It also points to a problem: the vendor's fee was calculated on the gap between $6,200 and $1,900, and the hospital set the $6,200.
RBP vendors deliver real value. They reprice claims to a benchmark such as a multiple of Medicare. They negotiate with providers. They give members a phone number to call when a bill arrives. The conflict sits in the compensation model, not the service itself.
The Fee Math
A savings-based fee has three inputs: the billed charge, the repriced amount, and the contingency percentage. The billed charge is the hospital's chargemaster rate. The repriced amount is the amount the vendor applies or negotiates. The contingency percentage is the vendor's share of the difference.
Suppose the contingency is 20 percent. The bill is $6,200. The repriced amount is $1,900. The spread is $4,300. The vendor earns $860 on that one claim. Now suppose the same hospital had billed $8,000 for the same MRI and the vendor still repriced it to $1,900. The spread becomes $6,100. The vendor earns $1,220. The hospital's inflated list price just raised the vendor's revenue by $360. The employer's actual cost did not change.
The contingency does reward the vendor for negotiating the repriced amount down, and that incentive is aligned with the employer. The flaw is the other input. The billed charge comes from the hospital's chargemaster, which the vendor does not control, and every dollar the hospital adds raises the vendor's fee even when the repriced amount does not move.
Savings Reports Use the Wrong Denominator
Percentage-of-savings vendors control the denominator in their own case results. A savings percentage against billed charges resembles the discount a hospital reports against its own list price. Hospitals report those discounts as concessions, even though insurers do not pay full charges. A 69 percent "savings" means little if the starting bill was three times what any payer would accept.
The metric that matters is total paid per adjusted claim, trended over time, against a benchmark the employer approved. Ask for the repriced amount, the benchmark, and the billed amount per procedure code. Ask whether the claim was paid at benchmark, negotiated, or still in appeals. A single savings percentage compares today's price to a price insurers do not pay.
Two Fiduciary Red Flags
First, the vendor has no financial reason to help the employer shrink the billed charge itself. Direct provider contracts and narrow high-value networks shrink the spread on each claim, and preventive care reduces the number of high-dollar claims that reach the vendor. If the vendor supports those moves, it does so against its own compensation model. Every dollar of structural savings the employer creates reduces the fee the vendor collects.
Second, the vendor's revenue rises when providers bill more aggressively. The vendor benefits from the same inflated list charges that make hospital pricing broken. The fee structure rewards the behavior it claims to fight.
Fee Disclosure Is Now a Statutory Requirement
Fee disclosure stopped being optional on December 27, 2021. The Consolidated Appropriations Act, 2021 amended ERISA section 408(b)(2) to require brokers, consultants, and other covered service providers to group health plans to disclose their direct and indirect compensation to a plan fiduciary before the contract is signed. The exemption that lets a plan pay for those services depends on the compensation being no more than reasonable.
A vendor whose fee is a share of savings off billed charges has a compensation structure tied to the chargemaster, and the fiduciary who approves the contract must judge whether that structure is reasonable. The written compensation disclosure belongs next to the fee-base answer in the renewal file. If the two documents tell different stories, the contract is not ready to sign.
Questions to Ask Before Renewal
- What is the fee base? Get it in writing. If the answer is a share of savings, ask for a flat per-employee-per-month (PEPM) quote.
- How do you report savings? Demand benchmark-based reporting that shows total paid per adjusted claim, not a percentage off billed charges.
- What happens to your fee if our claims run below benchmark? If the vendor has no answer, that silence is an answer.
- Do you profit when the chargemaster rises? A direct question that produces a long pause.
Why a Flat PEPM Fee Changes the Conversation
A flat per-employee-per-month fee removes the tie. The vendor earns the same amount whether the chargemaster is rational or inflated. The employer's total cost becomes easier to audit, because the fee no longer moves with the savings calculation. It also shifts the vendor's incentive: the vendor now has a reason to help the employer reduce billed charges, because the vendor's renewal depends on actual cost performance, not on the size of the chargemaster spread.
Plan sponsors have a fiduciary obligation to understand vendor compensation. The fee base tells you what the contract rewards. Bring this question to your broker before the next renewal. If the vendor's fee is based on savings off billed charges, you have found a vendor that profits from the very problem you hired it to solve.
This article is for general information only and is not legal, tax, or medical advice. Employers should consult their own advisors.