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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.
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.