Industry Voices—Health systems and the rise of direct contracting

Stethoscope on top of five, ten, and twenty dollar bills.
As employers continue to experience unsustainable healthcare cost growth, a significant number are starting to embrace direct contracting. (Getty Images/PLG)

As employers continue to experience unsustainable healthcare cost growth, a significant number are starting to embrace direct contracting with health systems to reduce healthcare spending and improve provider accountability for the quality of care they purchase.

According to a recent survey by the Business Group on Health, nearly a quarter (24%) of all employer healthcare purchasers are considering contracting directly with integrated delivery systems.

Direct contracting’s rising popularity is fueled by results that demonstrate the model can achieve effective, affordable and higher-value care. In fact, we expect it to become dominant in employer-provided healthcare benefits within the next 10 years, which means it’s time for health systems to acknowledge this growing opportunity by developing strategies to successfully compete for direct contracts.

What is direct contracting?

Direct contracting establishes a one-to-one relationship between a health system and a self-insured employer. These employers assume the financial risk and responsibility of paying their employees’ medical claims. Typically, they contract with third parties for enrollment, claims processing and provider network construction.

Direct contracting consolidates employee healthcare within an integrated health system for reduced duplication and better coordination, giving the health system and employer greater influence over cost and quality of care.

It pays off for health systems and employers in large part because of “keepage,” which is the system’s ability to keep all or most of a population’s healthcare contained within its delivery network instead of losing visits to competing providers. If the health system can be assured of dedicated patient volume—and that it will be managing those patients’ entire healthcare journey exclusively using its own providers—it can offer deep discounts off fee-for-service rates. Large individual claim risk is commonly mediated by stop-loss insurance, but the employer pays the health system directly for medical claims.

Demonstrated results

Direct contracting helps eliminate high-cost, duplicative services like testing and imaging that might occur when patients see providers across different health systems. In addition, health system leaders know managing patient care from start to finish, with everything tracked in one electronic medical record, allows providers greater oversight into care coordination and provides the opportunity to get to know patients better, improve outcomes and enhance the patient experience. In exchange, the health system commits to meeting certain performance metrics on quality and outcomes, in addition to lower costs.

Pioneering large employers have illustrated how these models can and do work. In 2018, General Motors predicted 10% savings from its five-year direct contract with Henry Ford Health System. Technology giant Intel has reported its direct plans cost the company 17% less per member per month than traditional plans—translating to $1.8 million in savings per month.

The savings come from lower rates, but also better care. In some cases, like New York-based Northwell Health’s new direct contract offering, Northwell Direct, rates are as much as 20% lower than non-direct best-in-market rates. Our own data show patients in direct contracts experience 16% fewer admissions, 11% fewer readmissions and 14% fewer ER visits than individuals in open-access plans.

Where to begin

Many health systems are well-positioned to offer direct contracting to employers because they’ve already created “domestic” health plans for their employees. Incentives in domestic plans are similar to those that drive successful direct contracts. Consider that hospitals are often among the largest employers in their local geography, so they experience the same health benefit cost pressures as other employers. Typically, they design domestic plans to provide strong financial incentives for employees to seek care within their provider network, ensuring the health system maintains patient volume and delivers better care and outcomes. These plans have helped many health systems not only keep their own healthcare benefit costs in check but also lay the groundwork for performance on direct contracts.

In fact, direct plans are often marketed as an extension of a health system’s successful domestic plan, which provides valuable optics for employers looking to signal the benefits to employees of staying within one health system for the majority of their care. Who wouldn’t want the same plan their own doctor uses?

Adapt to the demand for direct

Health systems new to direct contracting may find it helpful to partner with an experienced TPA to design and bring their program to life. They can administer the program for a health system, but they also know how to market the program, analyze and assess an employer’s coverage needs and fill adequacy gaps. A good TPA partner will have all the resources needed to make the program successful, including a technology platform with plug-and-play architecture, robust reporting, consumer-friendly engagement strategies and tools, and medical management services that complement the health system’s existing programs to contain costs and manage utilization.

The world is changing. Based on the growth trends we observe, most employer groups will demand more affordable options, and they will prefer to buy direct.

Many employers already are willing to commit to a health system that offers robust benefits in return for better, more efficient care, higher quality and outcomes, and a better price point. If your health system doesn’t offer a direct product with substantial savings over a traditional plan, it’s time to get started—before your competitors do.

Jim Cusumano is president and chief financial officer at Brighton Health Plan Solutions, a healthcare enablement company on a mission to improve how healthcare is accessed and delivered.