Direct hospital contracting in Maine dramatically cuts costs

Direct contracting by employer groups of hospital services may be a way to dramatically reduce costs.

Jackson Laboratory, a genomic research company in Maine, decided to seek bids from local hospitals on their most commonly employed ICD and CPT codes, Healthcare Finance News reported.

The decision was driven by Jackson joining the Maine Health Management Coalition six years ago. When the company did so, its managers discovered that its healthcare costs were 25 percent higher than other employers in the organization, even though its employee morbidity incidence was more than 10 percent below the coalition average in areas such as cancer, heart disease and respiratory disease.

"We thought that it wasn't us that was the problem, but the healthcare facilities," said Wayne Gregersen, Jackson Labs' manager of benefits and compensation. The hospital costs being paid by Jackson were 50 percent higher than the coalition's average.

St. Joseph Healthcare ending up winning the bidding war for Jackson's employer group by submitting a proposal that was 14 percent lower than the average costs submitted by the other hospitals. Jackson decided to go with that hospital for many procedures even though it was 40 miles away from where most of the company's employees resided. It also partnered with St. Mary's Hospital in Lewiston, 150 miles away, to cover all joint replacement surgeries, according to Healthcare Finance News. Employees were also offered cuts in premiums in exchange for joining a wellness program and meeting certain goals.

The results: Healthcare costs have remained flat since 2007. Hospitalizations have dropped by more than 43 percent and claims above $50,000 have been halved.

Traditional contracting practices, with the insurer as the middleman, have been blamed for some stark pricing disparities among hospitals, and reference pricing has had uneven results, suggesting that direct contracting may eventually take hold on a larger scale. And while the financial results for Jackson have been impressive, direct contracting between employer groups and hospitals remain rare. One prominent agreement between Wal-Mart and the Cleveland Clinic accounts for just a fraction of the Cleveland Clinic's total revenue. However, some healthcare experts see direct contracting as part of the ongoing evolution of healthcare delivery.

To learn more:
- read the Healthcare Finance News article