Employers, Unions Look to Direct Contracting

Posted by

Brian Klepper and Fred Goldstein

Published 8/17/16 in Employee Benefit News

Industry denials notwithstanding, reducing healthcare costs is fundamentally against nearly every healthcare organization’s perceived economic interests. That’s why it’s been such a struggle for purchasers to find healthcare organizations that deliver truly better health outcomes at lower cost. U.S. healthcare is built on a culture of excess: egregious unit pricing and over-treatment. Many organizations promise value but few deliver.

As Florida’s Gov. Rick Scott, former CEO of Hospital Corporation of America, pointed out at a venture capital conference a few years ago, “What business wants to make half this year what they did last year? That’s why the healthcare industry won’t fix the healthcare industry.”

[Image credit: Bloomberg]
[Image credit: Bloomberg]

Although direct contracting has gotten media attention lately, the term doesn’t adequately convey the depth of purchasers’ senses of frustration with and betrayal by the healthcare industry. Benefits managers’ and CFOs’ rage simmers below the courtesy that modern business practice demands, but that anger foments searches for better solutions in every healthcare niche. Employers and unions are quietly beginning to go around their brokers and health plans, which have often become the complicit contracting agents for the industry’s excesses. Seen from this perspective, direct contracting’s potential is virtually limitless.

Many health systems actively seek direct contracts with employer and union purchasers, making convincing cases about cutting out the middleman’s share, but caveat emptor. Prudent purchasers should ask two questions: Can the health system show data on successful health outcome improvements and reduced costs for an employee group or other at-risk groups? Will the system guarantee performance by putting their fees at risk against targets that can be validated? A “no” answer to either should be a deal breaker.

The Boeing Company’s contract with MemorialCare Health System for its 37,000 southern California employees and dependents is a step in the right direction. Boeing built performance target language into the contract, ensuring MemorialCare has no incentive to over treat. MemorialCare CEO Barry Arbuckle laid out his organization’s progressive position in clear, pragmatic terms.

The Boeing contract, he says, will allow MemorialCare to “earn certain incentives or, if we don’t meet certain criteria, incur a loss on that particular aspect. There is no incentive to keep people in the hospital and go to multiple specialists. For us, this is where healthcare needs to go.”

Many health system executives are far more reluctant. Even in the best case scenarios, purchasers shouldn’t imagine health systems will be willing to cut unit pricing or over-treatment patterns to the bone. To preserve the prosperity they’ve become accustomed to, most will offer glacially incremental cost reductions (or more likely some reduction in cost versus expected trend, such as numbers that can be manipulated). While many health systems promise to deliver better value, presumably translating to lower per patient revenue and margins, we’ve heard more than one CFO say, “Why take less until we have to?”

The Boeing-MemorialCare contract is notable because it’s between a large, well-known employer and a leading healthcare institution. The deal shows thoughtful purchasers with leverage and progressive health systems are no longer standing on ceremony and are entirely comfortable betting on circumventing health plans with old arrangements that often provide little to no value.

Even with the leverage their local dominance lends them, large institutions may not necessarily dominate healthcare marketplaces in the future. Around the country, small, specialized, scalable organizations have learned to manage care and cost in high-value healthcare clinical and financial niches, such as cardiovascular conditions, musculoskeletal disorders, cancer, drugs, surgeries, primary care, hospitalizations, imaging, large case management and centers of excellence.

Some are willing to take financial risk against performance targets that reflect significantly better health outcomes at costs that can range between 25-50%lower than conventional care within a particular niche. Savings across targeted niches can be greater than 20%. This is the tip of an iceberg that could ultimately restructure much of current healthcare purchasing arrangements.

These will be the real disrupters that direct contracts will empower, but only if employer and union benefit managers see beyond the conventional and are willing to swap out vendors who persist in delivering excess rather than quantifiable value.

 

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