When Pacific Steel & Recycling CFO Tim Culliton realized his 750 employees were paying too much for healthcare, he knew the company needed a new plan.

So instead of renewing their current fully funded insurance plan, the Great Falls, Montana-based company, fired their third party administrator and switched to a self-funded plan with a PPO network. They also decided to try reference-based pricing — a highly debated method among benefits advisers for curbing employer healthcare costs.

Working side-by-side with their adviser, Scott Haas of USI Insurance Services, the employer instituted a reference-based pricing strategy in January 2014. So far, the program has led to a reduction in the cost basis of medical claims, Haas says. The pair were able to lower the company’s annual health spend to $3.5 million from $8 million, a savings of about $5 million.

“We saw a significant increase in hospital charges,” Culliton says. “We saw a 400% increase in those costs … that caused us to begin to investigate a different payment process. That ultimately was the beginning of us moving to a reference-based pricing program.”

Reference-based pricing refers to pricing outside what is set by traditional insurance carriers. Provider reimbursement is based on a percentage of what Medicare would typically pay the provider which often ranges from 120% to 170% of Medicare reimbursement, according to Business Benefits Group.

Some employers have been using reference based pricing as a way to curb high healthcare costs. But not everyone is entirely convinced. In an interview with Employee Benefit News, Jake Frenz, CEO of the PBM SmithRx says implementing a reference-based pricing model may be easier said than done.