By Sabrina Corlette and Karen Davenport

State employee health plans (SEHPs) have wrapped up their open enrollment periods for plan year 2025. Many state workers got some bad news about hefty premium hikes in the process. Like other employer health plans across the commercial insurance market, SEHPs are facing significant increases in health care costs. These increases force states to choose between drawing more heavily on tax revenue to cover these costs and shifting more costs to state workers and their families.

SEHPs can pursue a variety of avenues to constrain cost growth, and one strategy—often referred to as “provider-based reference pricing”—has been gaining traction. A recent study estimates that the use of this type of reference pricing would have saved up to $7.1 billion across all SEHPs in 2022. This year, Washington State’s Office of the Insurance Commissioner recommended provider-based reference pricing for that state’s SEHP, following similar—and successful—recent initiatives in Oregon and Montana.

In our surveys of SEHPs’ cost containment efforts, we found that nine state plans use some form of provider-based reference pricing to establish reimbursement rates for health care providers. In this article, we focus on the lessons learned from the SEHPs in Oklahoma and South Carolina, both of which have long used government-set fee schedules to pay participating providers.

Defining Terms: What Is Provider-Based Reference Pricing?

When it comes to health insurance, there are different forms of “reference pricing.” One form is a benefit design strategy to steer policyholders to lower-price in-network services. The state employee health plan of California (CalPERS) is well-known for pioneering this strategy. The plan surveys prices for specific elective services within geographic regions and determines a cap or “reference price” as the maximum it will pay for that service. Plan enrollees who choose to receive services from a provider that charges a higher price than the reference price must pay the difference. This form of benefit design-based reference pricing is not the focus of this post.

Rather, we zoom in here on provider-based reference pricing: The plan pays participating providers a non-negotiable, established rate that is equal to or a percentage of a reference rate, such as the price Medicare pays for the same service. This approach is quite different from plans’ common method for establishing provider reimbursement levels, which is to negotiate a discount off the provider’s list prices. There is broad consensus in the economic literature that those list prices are dictated more by a provider’s market power than by the cost or quality of those services.

A plan can implement provider-based reference pricing by determining an upper limit or cap on the rates the health plan will pay for specified health care services. This is the approach of Oregon’s SEHP, which caps in-network hospital rates at 200 percent of the Medicare rate. It can also be implemented via a government-set fee schedule for provider services, as is the approach of SEHPs of Oklahoma and South Carolina.

Reviewing The Evidence: Cost Savings From Provider-Based Reference Pricing

Of the nine SEHPs in our survey that have provider-based reference pricing, only two have benefited from public-facing analyses of their cost impact. A recent peer-reviewed study of the Oregon SEHP’s reference pricing program for hospital services found that it saved the plan $107.5 million in the first 27 months of the program. Similarly, an independent study on Montana’s reference pricing program concluded that this initiative saved the SEHP nearly $48 million from state fiscal year (SFY) 2017 through SFY 2019, following its 2016 implementation. However, in 2022, the state moved to adjust the program to allow Blue Cross Blue Shield of Montana, the newly contracted plan administrator, to exceed the reference pricing cap in certain circumstances (although what those circumstances might be has not been publicized). It is not clear whether that move will affect future spending growth. This year, Washington State’s insurance department has projected that if the state’s SEHP implemented a reference price of 160 percent of the Medicare rate for provider services, it would reduce medical spending between 3 percent and 19 percent.

Spotlight On South Carolina and Oklahoma And Considerations For Other States

South Carolina and Oklahoma reported in our 2022 survey of SEHPs that they set the prices for the providers with whom they contract. Both states report that their prices fall between Medicare’s fee schedule and the prevailing commercial rate. Although there have been no external evaluations of the use of provider-based reference pricing in these states, both SEHPs report that the strategy has generated significant savings for the plan, its members, and state taxpayers.

These savings do not appear to have affected enrollee access to care, as administrators in both states describe networks with broad provider participation. Thanks to both plans’ large memberships, they are able to use their market power to convince hospitals and physicians to participate. Additionally, officials observed that because they cover schoolteachers and other public servants, providers in their state have been generally sympathetic about the need for lower rates. Indeed, in Oklahoma, officials reported that 99.3 percent of hospitals and 80.0 percent of physicians participate in the SEHPs’ network. South Carolina’s plan has 100 percent hospital participation and more than 99 percent of physicians (although they do not directly contract with behavioral health providers). South Carolina officials noted that providers like working with the SEHP because it is a “prompt payer” and provides generous coverage.

South Carolina and Oklahoma officials have also found that reference pricing is relatively easy to administer. As one administrator put it, “When a new hospital opens, we reach out and provide our fee schedules. Because we don’t have a negotiation process, there really isn’t anything to negotiate.” Another observed that the use of a fee schedule makes it very easy to for the plan to calibrate its spending over time and to help keep cost growth in check.

Plan enrollees also benefit from these SEHPs’ success in constraining provider price growth, as these states have less need to shift costs to workers through higher premiums and deductibles. State employees in North Carolina, Montana, and Oregon have been vocal proponents of reference pricing proposals.

Potential Challenges

Despite the benefits, SEHPs seeking to adopt reference pricing can face several challenges. First, a number of states have diluted their market power by separating different groups of state workers into different plans. For example, many states have separate plans for government workers and school employees. Others have separate plans for state and municipal workers. These states may need to consolidate these plans into one, or work in tandem on purchasing strategies, to effectively counter the inevitable resistance from hospitals and other providers.

Second, even in states where the SEHP is consolidated and the largest employer in the state, SEHPs may face challenges getting hospitals to agree to the reference price. Montana’s effort encountered stiff resistance from hospitals and required a public relations pressure campaign to convince holdout hospitals to sign network contracts. The proposal from North Carolina’s SEHP to establish reference pricing foundered when hospital lobbyists convinced legislators to reject it. However, recent news that the SEHP is facing a loss of more than $106 million has prompted some advocates to revive calls for a reference pricing program.

Third, the third-party administrators (TPAs) that many states use to design and administer their provider networks and process claims may oppose or obstruct a move to reference pricing, particularly since it effectively reduces the TPA’s role in network design. The Montana SEHP, for example, had to sever its relationship with its long-standing TPA to move forward with its reference pricing program. SEHP officials responding to our survey report experiencing foot-dragging and resistance from TPAs over other cost-control strategies they have tried to implement; they may encounter similar reactions to a reference pricing initiative, requiring a shift to more agile and willing partners for this effort.

Finally, a trade-off that SEHP administrators may need to consider is whether, or to what extent, a reference pricing program and its reliance on a fee-for-service reimbursement chassis inhibits the use of alternative or innovative payment models. Such models can promote population health management, quality improvement, and whole-person care. Reference pricing should not preclude such efforts, but plan administrators will have to consider how the two types of payment methods can coexist.

Looking Ahead

The cost of employer-based insurance is rising at an unsustainable pace, and SEHPs are not immune from cost pressures. The primary driver of these cost increases is high and rising provider reimbursement rates. The inability to keep these rates down is forcing difficult choices for employers, leading to higher deductibles and cost sharing and an epidemic of underinsurance. Indeed, 23 percent of people with year-round health insurance are considered underinsured; 66 percent of these individuals are covered through an employer-based plan.

For SEHPs, provider-based reference pricing can be a viable strategy to constrain cost growth, maintain the value of coverage for workers, and generate savings for taxpayers. The success of reference pricing in states as diverse as Montana, Oklahoma, Oregon, and South Carolina suggests that it can be replicated in a wide range of states. Furthermore, a state-led reference pricing program holds the potential to be leveraged by private-sector employer purchasers, who are equally desperate for a way to keep costs in check and maintain affordable coverage for workers and their families.

Author’s Note: The authors’ time drafting this post was supported by a grant from Arnold Ventures.

Sabrina Corlette and Karen Davenport “State Spotlight: The Use Of Provider-Based Reference Pricing In Oklahoma And South Carolina,” January 28, 2025, https://www.healthaffairs.org/content/forefront/state-spotlight-use-provider-based-reference-pricing-oklahoma-and-south-carolina. Copyright © 2025 Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.