10 Steps for Providers Considering Direct-to-Employer Contracts

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Direct contracting between employers and providers is rare but could have some genuine advantages for both parties — and for patients. But providers need to prepare and plan if they are going to get into direct contracting.

Healthcare has changed dramatically in recent years, but one thing remains constant. U.S. employers are frustrated with high costs, poor patient experience and mediocre clinical quality. Additionally, health care providers fret that insurance companies introduce hassles and complexity and bear partial responsibility for the high administrative cost of our health care financing system.

With neither employers nor providers willing to abide by the status quo, the time is right to take a new look at direct contracting and the steps that provider organizations can take to offer their services directly to employers.

Direct contracting between employers and providers is infrequent, largely due to barriers inherent in the system. Only 6% of employers, according to a recent Willis Towers Watson study, report purchasing services directly from providers.

Many providers are prepared to directly contract for only a limited set of services, and most health care delivery systems offer services locally, while most large employers provide health insurance coverage to employees over an expansive geography. Few providers have capability to subcontract and administer payments to outside providers, and thus must build arrangements with third parties for these services. Most provider systems are focused on the fee-for-service revenue model where they gain incremental revenue for each unit of service provided. Some providers also overestimate their existing quality and are surprised that their organizations are not in the top quartile. Many geographies have no providers with the desire and the capability to do direct contracts, so few employers can eliminate health plans altogether.

It's also not easy for employers to execute direct provider contracts. Few employers are experienced at negotiating or monitoring provider contracts, and most lack the internal capacity to develop and monitor relationships with disparate providers in multiple geographies. And in the few instances where they have carved out services out from existing health plan contracts, administrative costs can paradoxically increase due to complexity. Additionally, non-jumbo employers have no leverage with their carriers to change provider payment methodologies or contract terms.

Despite these headwinds, there are successful direct employer contracts with providers that provide value to employers, their employees and families, and providers. Employers including major manufacturers, entertainment companies and union trust funds have created enduring provider relationships which direct volume to preferred providers while improving quality, member experience, and total cost of care. These contracts include centers of excellence for predefined bundles of care (such as orthopedics, cancer or maternity) and population payment for the entire range of care or certain categories of care (including primary care or some specialties).Some direct-to-employer contracts require members to obtain care exclusively from the contracted provider panel, while others offer lower out-of-pocket costs for preferred provider partners. In some instances, members must choose the healthcare delivery system with the direct contract at the time of open enrollment.

These examples show that there is a real path to direct contracting, and the following 10 steps offer provider organizations viable suggestions as to how to proceed.

  1. Candidly assess your ability to care for a population
    The best place to start for healthcare delivery organizations is to understand which, if any, direct contracts they should consider offering to employers. These can range from managing onsite clinics to centers of excellence for one or more condition categories to assuming full responsibility for quality and cost of care for a population. Delivery systems can also offer comprehensive access to care by contracting with other providers where necessary and address gaps in their administrative processes by contracting with niche administrative partners.
  2. Demonstrate your organization’s ability to care for employed populations
    Providers that have demonstrated their capability to care for employed populations have an advantage when seeking to contract directly with employers. Healthcare systems are large employers themselves and can demonstrate their capabilities by showing high quality, cost control and member satisfaction in managing their own employee population. They can also show expertise through success in third-party high-performance networks and in full-risk Medicare Advantage plans. Provider organizations seeking direct contracts should prepare case studies, offer reference clients if possible, and formulate high-level implementation plans.
  3. Offer a single fully integrated contracting entity
    Many delivery systems represent amalgamations of multiple hospitals, physician organizations and other providers, and sometimes try to contract as if those different units remained independent. However, employers look for single-signature authority and coordinated care, so delivery systems should go to market as one entity that can negotiate for and coordinate all the services it offers.
  4. Put in place a high-quality care management program across the system
    Care coordination is best performed in tight alignment with providers. Delivery systems seeking direct contracts must offer more than a repurposed utilization management department that specializes in appealing payment denials. The care management program should focus on high-cost claimants and individuals with chronic conditions where an intervention can improve quality and lower cost. Most care management savings come from decreased hospital inpatient and outpatient utilization, and hospital-based systems should be prepared for this loss of volume.
  5. Put in place a single interoperative electronic medical record across the system
    Over 80% of medical costs are incurred by less than 20% of patients who have severe or chronic illness, which makes coordination of care across a system a competitive advantage.Shared electronic records enable providers to work together, provide “just-in-time” decision support and help reduce the costs of unnecessary tests or visits.
  6. Offer bundled payments and warranties
    Employers are more likely to directly contract with systems that can move away from fee-for-service reimbursement and guarantee a single price for an episode of care. Warranties are especially attractive to employers and can justify a slightly higher allowable price for a bundle of services. Willingness to agree to bundled payments and warranties demonstrates system integration and the health care system’s faith in its own quality. Bundles and warranties will allow more efficient health care delivery systems to gain higher margins from the care they deliver.
  7. Optimize internal compensation arrangements
    There is no perfect way to pay providers. Historically, health systems have compensated physicians based on volume, which tends to increase utilization and cost. This increases revenue but decreases success when the delivery system is “at risk” for cost of care.Some provider organizations offering population contracts incorporate quality in compensation arrangements; others pay salaries or continue to pay for productivity. Healthcare delivery systems that have compensation systems that help them effectively manage the total cost of care will gain a competitive advantage in direct contracting.
  8. Be prepared to address mental health issues in population risk contracts
    Providers seeking to contract for care for populations cannot ignore mental health needs. Untreated mental illness increases costs and leads to worse outcomes, and employers are more aware of unmet need in this space due to the pandemic. Health care providers and systems will likely be more successful if they can demonstrate an integrated approach to managing physical and mental health needs.
  9. Focus on patient experience
    Businesses are laser-focused on satisfaction of their customers and expect the same of their vendors. Provider organizations which already deploy demanding patient experience metrics like Net Promoter Score can better compete for direct contracts.
  10. Offer meaningful reporting to employer clients.
    Employers expect that their vendors will provide regular reporting on management, utilization, cost and outcomes. Health plans prefer not to be disintermediated, so it’s best to offer complementary reporting around efficiencies, outcomes and satisfaction to meet your employer-clients’ needs.

The U.S. healthcare system is complex, with great variations in networks, prices, quality and access. Healthcare delivery systems can position themselves to contract directly with employers to increase volume, improve quality and lower costs. But progress is not always easy to achieve. Providers must make strategic investments and tough decisions to position themselves for success in direct-to-employer contracts.

Jeff Levin-Scherz, MD, MBA, is a managing director and population health leader of the North American Health Management practice at Willis Towers Watson. He is an assistant professor at the Harvard T.H. Chan School of Public Health.

Jane Jensen, FSA, MAAA, is a senior director and a member of the health actuarial leadership team at Willis Towers Watson.