Why data is only one key to success in direct contracting

Value-based care is an amorphous concept that covers a lot of the so-called alternative payment methodologies driving healthcare transformation. The basic premise for value-based care is to transform healthcare from a quantity based system to a quality based system.

The common way to advance the transformation is to shift the manner in which healthcare services are reimbursed or paid. Namely, the shift goes from paying on a per service basis to paying based either on a predetermined amount per patient or episode of care.

When payment becomes premised upon managing the amount of care provided to a particular patient or on a particular issue, understanding all of the potential costs, complications and other factors about that item becomes paramount. If the provider is taking the risk of a preset payment, then the applicable scope of services should align with or be better than the payment. If success cannot be achieved in managing cost, then that provider will lose money.

The ability of providers to accurately assess cost is not one to be taken lightly. A provider may have little to no insight into the actual cost of performing a service. An in-depth review of one provider, found the provider routinely increasing its list price for a particular procedure by a few percentage points each year. However, the provider never bothered to examine its supply costs, staffing costs or other costs in delivering the particular service. When the provider finally conducted that exercise, it found the list price was nearly five times greater than the actual cost of providing the service.

Given the very real challenges in succeeding with value based care, the growing number of reports concerning direct contracts between providers and companies for employees generates a lot of questions along with hope. The direct contract creates a scenario where a hospital or health systems contracts with a company, such as Walmart or General Motors, to provide the full or some other defined scope of healthcare services needed by that company’s employees. In essence, the provider takes on the role of both providers of healthcare services and insurance company.

As such, the provider, through negotiation, is attempting to conduct actuarial calculations to determine the appropriate fee to charge. The actuarial rating and risk determination is a function traditionally handled by an insurance company. Arguably, the determination, assessment and management of risk is the entire core of an insurance company’s business as it tries to set premiums in an amount to cover potential costs while enabling return on investment until the premium funds are paid.

Shifting that function to the provider directly theoretically removes the administrative intervention created by an insurance company. Because direct contracting represents a full shift of old functions, the question is whether provider organizations or facilities are appropriately staffed to be making these determinations.

In most instances, the answer to that question is likely no. Consultants may be available to assist, but consultants come at a cost that could be viewed in a similar manner as the insurance company in the first place. Accordingly, providers should be trying to staff up in actuarial and related departments to almost replicate an insurance company. At least those actions should occur if the provider wants to be serious about succeeding with a direct to employer contract.

Still, the road will not be easy because even providers that attempted to run traditional insurance operations often find such operations to be significantly less than profitable.

Another challenge with a direct contract is finding an employer with a sufficiently large employee pool such that risk can be spread around. A small pool with a high degree of cost risk will either be prohibitively expensive to the company or run the risk of financially decimating the provider. It may not be enough to find a company that has a lot of employees if those employees receive coverage through a spouse or other source. The employees must obtain the coverage through the company contracting with the company. From the company’s perspective, it may also be more beneficial, though not necessary, if a large portion (or at least large chunks) are located in a specific geographic area. If the workforce is spread across a large region, it would be difficult to force those employees to see a provider that is not geographically convenient.

If these fundamental operational challenges can be overcome or deemed sufficiently satisfied, then negotiating the terms of any direct contract will be very important. For instance, as suggested above, data will be essential to undertaking any actuarial analysis and maintaining an ongoing assessment of performance.

To ensure data are available, what terms would be needed in a contract? Should a party be penalized if it fails in its obligation to provide data? It would likely be quite beneficial for the parties to work their way through such issues and permutations to enable inclusion in the governing contract.

Another important consideration could be the ability to terminate the arrangement. For example, in Massachusetts, a contract between a provider and an insurance company cannot be terminated without cause, which means the contract can only be terminated by mutual agreement, if one party breaches the agreement, or certain other actions that would provide cause to terminate. Neither party is allowed to terminate merely because it no longer likes the arrangement.

It is not clear whether a direct provider to company contract would be covered by the same statutes or regulations governing insurance. If the matter is left to negotiation of the parties, it would be easy to predict that the provider would want to include termination without cause as protection against it doing a less than ideal job on setting rates whereas the company would more likely want to keep the provider locked into the arrangement and without the ability to back out at any time.

A third area set for heavy negotiation would be the rates. As discussed, rates would likely need to be based on some form of actuarial analysis. Who would conduct that analysis or would each side produce its own and then have to reach some mutually agreeable middle ground.

Regardless of the actual process, some amount of negotiation should be expected because the old axiom is true that everything can be a negotiation. However, the specific rate may not be the only factor impacting payment. If the contract covers multiple years, how would the payment rate be adjusted, on what frequency and by whom? Those factors could arguably be even more important than the initial rate because increases should be needed since the cost of supplies and services never remains static.

With all of the challenges, it is not surprising that direct contracts between providers and companies are not popping up around every corner. Success is very much uncertain. However, it is clear that direct contracts are yet one more means of proceeding into value based care. If providers can become more proficient in assessing and succeeding with risk, then direct contracts could very well become a major part of the healthcare landscape.