Working Together to Contain Costs: What Hospital Leaders Need to Know for Successful Direct Contracting With Employers

Cleveland Clinic has entered into a number of direct contracting agreements with employers through its Program for Advanced Medical Care. In 2012, for instance, the system became one of six nationwide to partner with Bentonville, Ark.-based Wal-Mart Corp.

As part of that bundled payment contract, more than 1 million employees and their dependents covered by Wal-Mart's health plan can travel to the Clinic for cardiac surgery, with deductibles and travel costs covered by the company.

The Clinic has also formed a partnership with the Mooresville, N.C.-based home improvement company Lowes, among other employers. Michael McMillan — the Clinic's executive director of market and network services who led the development of the systems direct-to-employer agreements — says there's "great opportunity" in working with employers through direct contracting.

"We believe that employers and providers working together directly creates an opportunity for innovation and to create new ways not just to address the needs employees have when they are sick but also how to keep employees healthy," he says.

Direct contracting arrangements are expected to grow in the future as more hospitals and employers recognize that opportunity. A Fitch Ratings report released in May predicted employers seeking to contain healthcare costs and providers looking to focus on population health management will increasingly turn to direct contracting. Other large employers and providers aside from the Clinic and its partners have done so: In June, for example, Boeing selected two Seattle-based accountable care organizations (one affiliated with UW Medicine and the other with Providence Health & Services and Swedish Health Services) for a new Preferred Partnership option for employees.

"[Employers] want better management and output results from their plans than they've been getting for the last 20 years," says Mark Kendall, president of CSIG Healthcare, an innovation center for CSIG Holding Co., and former president of employee lifecycle solutions provider Laurus Strategies. "Healthcare and college tuition, they go up every year, and no one ever questions it. Employers have finally said, 'We're done.'"

What the direct contracting landscape looks like for providers: Risks and rewards
Direct contracting arrangements also look appealing to providers that have invested in integrated delivery networks and developed strategies to manage the health of a given patient population, says Jim Lebuhn, a senior director with Fitch.

Fitch has predicted providers with superior clinical outcomes and cost savings will benefit from direct contracting arrangements. However, the short- and long-term financial implications aren't entirely clear, and it will probably take some time for providers to develop best practices and pricing methodologies to handle the risk associated with direct contracting.

When providers take responsibility for reducing the cost of care and improving outcomes for a specific employee population, they can open themselves up to actuarial risk if they don't achieve the expected savings, Mr. Lebuhn says. "Even with a large health system and a large employer…it's still a relatively small population base," he says. "Regardless of what [providers] do, there are  certain claims that are outliers."

Fitch expects most providers to take on limited risk under first-generation contracts and then gradually increase that risk over time as they gain confidence in their ability to manage the employee population's health and costs. "As that contract moves on and they keep those patients within their health system, they can take on more risk knowing that they can manage those healthcare conditions," Mr. Lebuhn says.

The outlook also differs depending on the type of hospital or health system. According to Fitch, community health systems serving local employer-based populations will probably favor narrow networks and shared savings contracts, compared with the bundled payment arrangements favored by providers with national market recognition, such as the Clinic.

Jennifer Kim, an associate director with Fitch, says well-known providers are capable of entering into direct contracting arrangements where people travel across the country to get a certain service. "They're able to develop a product that people will travel for," she says.

Smaller community hospitals, however, might not be well-positioned to implement that direct contracting model. "From a community hospital perspective, it's less likely you'll be able to put a recognizable product into the market," Ms. Kim says. "What makes a lot more sense for them is to leverage the geographic presence that they have. For the smaller [providers] that are not established systems in the market, we're seeing a lot of providers partnering up with each other to develop networks."

Best practices and approaches for direct contracting
Ruth Coleman, RN, founder and CEO of Health Design Plus, which works with major employers to build and manage direct contract relationships, including Wal-Mart and Lowe's travel surgery programs. "I think providers underestimate how complicated this is if it's done well," she says. "It's not going to be a small investment."

She says providers must keep in mind that a direct contracting arrangement should be a partnership, rather than an adversarial relationship. "If an employer approaches you in an adversarial manner, it's not likely to last, and you could invest a lot in an unsustainable relationship," she says.

 However, it's also important for providers to recognize that they're entering into a buyer-seller relationship, in the role of the seller. Ms. Coleman advises providers to get to know what their buyers' goals are and work to support them. Hospitals and health systems should talk to major employers in their markets, specifically the directors, vice presidents, senior vice presidents of benefits or human resources. "They're the ones dealing with employee issues and usually will be the ones you work with," she says.

Mr. McMillan of Cleveland Clinic agrees that providers engaging in direct contracting need to understand the marketplace and employers' needs. "Tailor solutions that are built around the kinds of things employers are interested in," he says.

Providers also need to know what they're getting into in general, Ms. Coleman says. Unless provider organizations already directly administer a fully integrated health plan and have experience with employers' desire for collaboration, she says they need to work to understand the complexity of administering a direct contracting program. "Even if you have a health plan that you administer, generally employers who do this want to be at the table," she says. "It's an added party to most standard network relationships. This may create a need for significant adaptation."

Other pieces of advice from Ms. Coleman include leaving arrogance at the door, being transparent and honest, preparing for things to go wrong, and being willing to learn and commit resources to making the arrangement work. Providers must also consider that hospitals can be generally slower in administrative functions than the timeframes businesses may operate under, and all parties (integrated and non-integrated hospitals, physicians and others) must buy into the program. One or two "rogue" parties can lead to failure, Ms. Coleman says.

Overall, she says providers must remember that ultimately, it's about the patient. "Most employers who take this path care about employee care and satisfaction — a lot," she says.

Mr. McMillan says it's crucial to ensure patients' needs are met, especially those who travel to the hospital or health system for care. This includes providing opportunities for patients and their family members to undergo joint education and making it easy to navigate the facility. "To make it easy and seamless for a person to travel to another location is pretty important," he says.

Far from being concerned that the Clinic's arrangements with Wal-Mart, Lowes and others will lose their prestige as direct contracting becomes more common, Mr. McMillan says he welcomes the rising popularity of the practice. "As it becomes more popular or more widespread, I think it's ultimately a positive because it will enhance the opportunity for all organizations to improve," he says. "You're not just measured against the organizations in your local marketplace, but you're measured against best in class wherever they might be in the country. That sets the right standard for achievement."

More Articles on Direct Contracting:
Boeing to Contract With Providence-Swedish, UW ACOs for Employees  
Fitch: Hospital-Employer Direct Contracting Arrangements to Gain Popularity
Employer-Hospital Direct Contracting: Not Always a Sure Thing 


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