So long, middleman: Direct contracting of health care services

Do you think you’ve tried every strategy under the sun to keep your health plan costs under control without sacrificing quality of care, but are still struggling? Consider direct contracting. It’s not new, and it’s not only about saving money.

Simple in theory, but not always in practice, direct contracting has drawn attention both from employers and health providers. As its name suggests, it involves employers establishing service arrangements with health care providers and systems without an insurance carrier or third-party administrator (TPA) acting as an intermediary. In other words, it’s a form of “cutting out the middleman.”

“Through direct involvement with the provider and regular monitoring and reporting on its performance, employers gain a level of transparency into costs and quality that is uncommon in typical TPA arrangements,” according to a report issued earlier this year by Jones Day, an international law firm.

Various services

Although much more common among larger employers with substantial market leverage and in-house administrative resources, direct contracting can, under the right circumstances, work out for relatively small employers, as well. One of the important variables is the scope of medical services to be covered under the direct contracting agreement. The narrower the scope, the less complicated.

For example, employers can contract exclusive relationships with medical and surgical specialists for services such as joint replacement surgery, cardiac catheterization, occupational therapy and immediate primary care, to name a few. And the American Academy of Family Physicians (AAFP) has suggested to its members that they consider offering a host of other categories of care on a direct contracting basis, including:

  • Wellness and preventive services,
  • Occupational health screenings,
  • Separate worksite clinics,
  • Workers’ compensation cases and return-to-work and stay-at-work programs, and
  • Comprehensive primary care services for episodic illness and chronic care under a direct primary care contract or through the physician’s own clinic.

Direct contracting doesn’t mean you’ll have to get into the claims management and adjudication business. Typically, a TPA is still in the picture, but it plays a more limited role than it would under a traditional arrangement.

No “free lunch”

The promise of direct contracting isn’t limited to saving money by eliminating intermediaries. After all, TPAs and brokers perform essential functions that need to get done one way or another — including plan design and regulatory compliance services. In other words, there’s “no free lunch.” The eliminate-the-middleman part of the cost-saving component depends on your ability to perform those services in-house (or outsource them) more economically. 

The potentially much larger opportunity for cost saving revolves around creative medical service delivery and pricing models. Medical providers themselves also have significant administrative costs doing business in the traditional way — dealing with insurers and independent TPAs. If providers can eliminate or drastically reduce those costs, some of those savings can be shared with employers. It holds the promise of being a “win-win.”

On a related note, providers themselves don’t hold all the cards in the health care market. They face pressure from large networks to negotiate lower fees to be included in those panels. It can benefit some of them to market themselves directly to employers to strike deals that leave both parties better off. That’s why “more family physicians are offering services to help businesses control unnecessary expenditures and reduce the administrative burdens associated with health insurance,” as the AAFP informed its members in the document that included the list of potential services referenced above.

Financial incentives

Not to be lost in any discussion about direct contracting are financial incentives for superior medical outcomes. Customized agreements between health care purchasers and providers can accommodate creative incentive-based reimbursement structures that benefit both parties. (Granted, some of them can also be incorporated into traditional plan designs implemented by TPAs and health insurance carriers.) 

One example is a flat fee to cover a medical or surgical service that typically involves multiple providers and follow-up care. If the care that’s provided is efficient and medically successful, the providers are reimbursed adequately. In the alternative scenario, they’re financially penalized, but you as the employer don’t pay more, as you would in a strict fee-for-service payment model.

A variation on that theme is the “capitation” model, also used by traditional HMOs. Under this arrangement, the medical group is paid a flat fee per covered employee, regardless of actual services rendered. That shifts financial risk to the provider, along with the incentive to keep covered employees healthy so that they don’t ultimately require the costliest care.

Still another approach available through direct contracting is a fee-for-service-based “shared savings” system. With this arrangement, the provider gets to keep a portion of any “savings” calculated as the difference between the actual fees charged and a preset benchmark dollar amount that represents a market average.

Opportunities and pitfalls

As noted above, establishing a direct contracting arrangement isn’t a walk in the park. Depending on the scope of the arrangement, you could inadvertently take on the role of a health insurance company. This could trigger a myriad of regulatory requirements that could prove overwhelming. There could be ERISA compliance ramifications as well.

But, if you’re concerned enough about the high cost of your health plan as it’s currently constituted, you may want to take the time to assess the potential opportunities as well as the pitfalls of direct contracting and proceed accordingly.

© 2018

Published in Healthcare

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