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Health systems leverage direct employer contracting to save costs, cut out payer middleman

Insiders say often a company will pursue this approach due to being vexed by their relationship with insurers.

Jeff Lagasse, Associate Editor

Boeing is one company that is contracting directly with healthcare providers.Boeing is one company that is contracting directly with healthcare providers.

John Clark, population health program manager at UNC Health Care, said direct employer contracts that cut out intermediaries and can really help a health system contain costs. But the approach comes with some risks.

"You need an employer with a large employee base," said Clark. "You have to have a substantial number of lives in a health plan to implement a contract like this because of the amount of money that has to be invested in this kind of relationship."

It also helps if the employees covered by the contract live in more of a concentrated area, he said. That's because there are certain access standards an organization has to meet to make the direct employer contract a viable option. Few companies would be able to handle their employees being spread out over a wider geography under that kind of arrangement.

"You also need a health system that's willing to invest in this, and it's still very uncertain how the outcomes are going to work," said Clark. "Best practices really aren't established yet in doing that, so everybody's still trying to experiment."

[Also: Boeing grows health plan, adds health networks in Charleston, St. Louis]

Direct employer contracting, though gaining in traction, is still fairly rare, particularly since it requires resources. Dudley Morris, a senior advisor at healthcare consulting firm BDC advisors, said that often a company will pursue this approach due to being vexed by their relationship with insurers.

"The kinds of companies that have been doing that have been national companies like Walmart or Boeing, where they have aggressive human resource departments, and they've grown frustrated with their inability to control healthcare costs with their suppliers," said Morris. "When you look at other industries and the way they buy materials, they negotiate with the rest of their cost structure directly. Healthcare is the only place where they've traditionally gone through intermediaries.

"They're frustrated with going through insurance companies," he said. "They can't necessarily negotiate with the suppliers the way they thought they ought to be."

Of course, a provider pursuing this type of contract makes itself susceptible to competitive bids, which means there's both an opportunity and a risk. A provider can increase its share among the commercial market, which represents the most attractive market segment. But it could potentially lose that business to a competitor offering a lower price.

[Also: Hospitals contract with large employers and offer free surgery]

"Providers have to agree to very big discounts," said Morris. "So this is not for the faint of heart. If you don't have a good electronic reference infrastructure, you're looking at a big expenditure to set up an operation."

One unintended consequence of this contracting approach, he said, is adverse selection. Most of the people who have signed up for products under the Affordable Care Act are sicker and older, typically over 50 years old. "What's happened with this direct employer contracting is just the opposite of that," said Morris. "All the people who have signed up are younger, healthier people -- the millennials. There isn't a lot of opportunity to save money, so you have people going into these contracts like, 'Hey, you get to keep the savings, and that'll be profit.' But there isn't any profit. These are young people who are already using healthcare in an appropriate way. It's very hard for people to make money on these contracts."

Entering into this kind of arrangement, there are a lot of up-front infrastructure costs, said Morris, and an organization must be especially careful financially because the chances of getting shared savings benefits are not huge.

To hedge their bets, some employers have joined forces, aggregating into what has been dubbed "super accountable care organization alliances" to essentially join forces in direct employer contracts. They're harder to control, but the economy of scale gives payers more reach, and Morris said the business model seems to be taking hold, although he isn't convinced that it's a good deal for employers long-term.

[Also: Major employers decry Sutter Health's tactics in dispute over prices]

For those squeamish about direct employer contracting, preferred provider contracts offer another potential opportunity to control costs, using discounts on copays to entice beneficiaries to stay within a network.

That's a big deal, said Morris, because if employees go out of the network, and choose a provider that the employer doesn't contract with, the employer will pay full coverage on the charges.

"You kind of need both sides coming to the table, employer and provider, and reaching an agreement, because it kind of goes against the current model of what healthcare has traditionally delivered," he said. "Our decision was that this is something that, as healthcare providers, we need to learn how to do. It would benefit the community, and it would benefit the providers who are paying our bills, and that's the large employers in our healthcare system who pay huge premiums for their employees."

"We want to make care convenient … and offer services that aren't covered in the traditional fee-for-service model," said Clark. "You don't get paid for keeping people out of the hospital. You get paid for people who come to the hospital. But that's changing, and we have to change with it."

It's the shift to value-based care that's driving these new contracting models. Clark said that health outcomes in the United States are no better than in other countries, despite the fact that the nation spends considerably more in healthcare. What he feels are needed are networks that bring providers together, who still compete in the marketplace but are contractually combined to take care of a population.

"There's consensus that we spend way too much on healthcare," said Clark. "These networks are the first step toward changing the way care is delivered, using data points and electronic medical records to drive it.

"Physician leadership is key. Providers need to step up and say, 'We need to change the way we do business.' Within the next few years, there'll be a definite change."

Clark will be speaking on the topic at the upcoming Healthcare Financial Management Association conference in Las Vegas.

Twitter: @JELagasse

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