Going Direct to Cut Costs

Why do healthcare systems agree to cut costs for employers that funnel patients their way?

Because the providers know that an employer is going to drive their plan members—either through communications or through plan design—directly into their facility. That makes them willing to give a discount on services because of that increased utilization. A provider’s incentive is they usually get paid faster [because they aren’t going through an insurer] and they can offer a discount because the employer may be driving 60% more utilization into their facilities. Every CFO of a health system would sign up for that today because it turns that traditional insurance model on its head.

What kind of healthcare organizations participate in direct contracting?

We’re approached by all kinds of health systems and provider partners. Most health systems have a position, whether it’s director of business development or director of direct contracting. You have systems that are actively looking to drive increased utilization into their facilities. That was not the case five or 10 years ago. Those positions didn’t exist. Back then, they were focused on managing their network and managing their discounts with large insurers. When we speak with a health system or a group of providers, they’re saying they believe they have value and want to find a way to drive utilization in their market.

Why are employers interested in direct contracting?

Employers are looking to lower their costs, and healthcare is the No. 1 expense for most employers. When costs go up it’s the first place that most CFOs look: to employee benefits. So, we’ve seen a tremendous amount of interest from, typically, large employers. I think our data shows that 75% of benefits executives or people making healthcare decisions are engaged in some form of direct contracting. Five years ago, nobody was willing to make these types of changes, but with healthcare costs continuing to rise a high number of folks are thinking about it.

In direct contracting, the employer agrees to send as many employees as possible to a select provider. How do you or the employer make that happen?

Employers first have to understand where their members go for care and how they utilize the system. There’s a lot of tools right now that help from a transparency perspective. We’ve seen a lot of groups who can show if someone needs, say, a colonoscopy, the employer can show the person that it will cost $150 at one facility and $1,000 at another. So, it’s about giving the members data points and letting them know they need to be smarter about their point-of-care decisions.

Employers can help drive them to better-performing, lower-cost facilities by targeting a plan design so that members are incentivized to go to the facilities you want them to use. In a traditional, open-access model, people can go wherever and see whomever they want in the network. But with plan design, you can offer members zero-dollar copays for facilities you want them to go to. But if they use an emergency room or non-preferred provider, they have a higher copay.

So, employees aren’t required to go to the contracted providers, employers just have to get them there to get the lower rates?

You’re always going to have employees who are going to go where they want to go. But if you can steer just 25% to 50% of your population to those providers, you are going to see a reduction in costs. And what it looks like in year one will be different in year three. It takes time to educate people on the product and build relationships with these new doctors and facilities.

What services are often provided to employees through direct contracting?

Total joint replacement is really common and was one of the first types of direct contracting agreements. Like Mount Sinai here in New York, it has a great joint replacement program that focuses on lower costs and reducing readmissions. You see a lot of contracting for cancer care, too. But contracts can be very industry-specific.

I do a lot of work with firefighters, contracting with burn and trauma units. Mental healthcare and substance misuse are also important for firefighters and first responders, so they may contract for those services. When employers have a problem, they can come to a vendor like us to solve it. And direct contracting is typically the first or second avenue to explore because it’s targeted, it’s customized, and it directly impacts the member on a near-term basis.

What savings can employers anticipate through direct contracting for healthcare services?

When you can cut out the middleman—the middleman being the insurer—and contract directly with a facility for care, you’re able to reduce your costs significantly. I typically suggest that it’s a 20% to 25% cost reduction for services.

How is healthcare quality improved through direct contracting?

Employees are seen by the same doctors and seen more often. Their care is contained at one facility, so their electronic medical records are available, the care is more targeted, and you’re able to treat a total episode of care. Healthcare today is naturally fragmented, which I believe results in higher costs and worse quality of care.

Are there other benefits for employees to direct contracting?

We are seeing providers and healthcare systems who will accept new members [that weren’t taking new patients]. Some have a concierge service who can help set appointments and reduce wait times to see a doctor. Some offer parking valet services and offer reimbursements for parking. It’s the cost and the care that’s really important. But it’s interesting to see the other perks that providers are offering.

Are there cases when direct contracting isn’t a good option for an employer?

Direct contracting only makes sense if there are two or three health systems in a town. You need some competition in a market for it to work. And it’s best for large employers, ones that have 1,000-plus lives. They have the buying power to do this. Unfortunately, 500 people may not move the needle for a provider because it’s not only a smaller group of employees, but when you are trying to target something, like cancer, there are going to be even fewer people with that to refer to the provider.

But we have seen instances where it can work in different ways. We have a doctor in Idaho who provides a capitated risk arrangement for employers [with capitation, a provider gets a set, upfront per-patient payment over a period of time—often a monthly fee—and provides all services needed for the member]. It’s a small trial, but it’s a proof-of-concept that we’re hoping to be able to take to other markets. And there is an advantage to smaller arrangements because they’re quick to implement and provide a near-term solution.

We’ve also seen options work in Alaska, which has among the highest healthcare expenses of any of the 50 states. That’s because doctors and nurses typically don’t want to live there. They use a lot of rotating and travel providers.

So, in pretty much any market there you can find a provider or a system that is looking to increase their volume. But it’s not just about the money, it’s also providing a unique solution to people and bettering the community.

Are there drawbacks to direct contracting?

It does require the employer to get the employees to go to the providers with which they’ve contracted. But, at the end of the day, if you’re coming off of a traditional open-access plan, the only benefit you can have here is cost savings and better care. And if you maintain the status quo, your costs will just stay the same.

What are some specific things employers should think about if they are considering direct contracting?

They need to know the sources of their members’ dissatisfaction. Where do my members struggle with their care today? Why do they not like their employee benefit plan? Are they having issues with certain hospitals? Then they have to identify where their costs are high, like overutilization or unnecessary emergency room care. With this direct contracting model, members are usually building better relationships with their providers and hospital systems, and we tend to see fewer users of emergent and urgent care. With direct contracting they don’t need to use those types of care because they can get in to see their doctor Monday morning instead of going to a walk-in clinic over the weekend. Another important component is finding an experienced third-party administrator—somebody who knows the product, knows the network, knows the market. Not everyone is equipped to do direct contracting. There’s a lot of research on the front end for us to determine if direct contracting is a fit for an employer.

How can employers dip their toe in the water if they want to experiment with direct contracting?

You can start small and do a piece and see if you have success before expanding to a broader contract. There’s no specific pattern or process you have to follow with direct contracting. It may just be looking at your plan design and letting employees know that if they see a primary care doctor or specialist in a certain health system, their copay will be zero. And if they do, then that’s great. And I think employers sometime underestimate how many people will use those providers to save money. If you have a family of five and each person goes for an annual wellness visit and they’re saving $500 a year in copays, that’s big money in today’s world from a healthcare savings perspective. So, you’re not forcing your employees to go into a direct contracting model, but you can give them the option. I think that’s the best starting point—having two traditional plan designs, and one that is a direct contract with lower copays. And then, if you see it pay out and save money, you could start offering only that plan for new employees.