As healthcare cost rises in the United States and new regulations supporting employee healthcare plans stiffen, Employers are seeking out ways to lower costs of healthcare plans for their employees while still maintaining a high quality of care. One strategy that is gradually gaining ground is direct contracting between employers and centers of excellence.
Direct contracting was pioneered by large Employers such as WalMart, Boeing, and Lowe’s in an attempt to cut down cost as they purchased healthcare services through selected healthcare providers. Since it was first introduced, many more large employers, especially the self-insured companies, as well as mid-sized and small employers have adopted this strategy to their benefit.
Direct contracting in the US largely involves a partnership with local healthcare providers usually in a different state as a form of domestic health tourism, however, in some cases, employers make these direct collaborations with international providers. All employers want is to get providers that deliver quality care and better health outcomes at lower cost. These providers, on the other hand, are willing to discount their charges in exchange for the higher inflow of patients.
In 2011, Johns Hopkins Medicine signed a contract with Pepsi Co – a subsidiary of Frito-Lay – to provide complex joint replacement and cardiovascular procedures to its 250,000 employees in its Baltimore centers. The food and beverage company is self-insured and as part of the disintermediation plan with Johns Hopkins, it waives deductibles and coinsurance for its employees who seek to have their surgery done at Johns Hopkins.
These contracts have immense benefits for the employers and employees. On the one hand, giving employers enough financial sustainability by cutting administrative costs and on the other hand, increasing quality of care for patients and giving them a greater choice for their health care.
How Do Direct Contracts Work?
The process of direct contracting begins with screening health providers and setting up strict benchmarks by which they will be assessed. Criteria used in the screening process include positive clinical outcomes, patient satisfaction, a total cost which consists of hospital expenses, treatment fees and doctors cost, expertise and training of staff, and low incidence rates of hospital-acquired infections.
Many employers seek guidance from consultants and purchasing coalitions to help in the selection process. In one instance, Lowe’s, Walmart, and McKesson partnered with Health Design Plus (HDP) and the Pacific Business Group on Health (PBGH) to launch the Employers Centers of Excellence Network (ECEN) to help employers identify quality healthcare providers and negotiate bundled care payments.
ECEN initially started the contracts for patients intending to receive a total joint replacement and spinal surgery but has recently included bariatric surgery in the plan. ECEN identifies providers that meet the benchmark and standards of quality and provide the employees of the participating companies with full coverage for all medical and travel expenses with no out-of-pocket costs left to the patient.
The selection process by ECEN is an iterative one, and fewer than 5% of the healthcare providers assessed in the preliminary evaluation process meet all the requisite quality standards. After this stage, ECEN sends an invitation-only request to the successful healthcare systems for information regarding quality, clinical outcomes, and patient experience.
This is followed by an assessment conference call between PBGH, HDP, and the administrators and physicians in the healthcare system under evaluation. These candidates often provide details of their clinical protocols, criteria for surgical selection, and performance metrics on institutional and clinical staff levels such as procedure outcomes and complication rates, recovery duration, and infection rates.
Subsequently, the evaluation process continues with assessing overall patient experience in the hospital under consideration – from patient arrival at the airport up till when they are discharged. After this is carefully evaluated, negotiation and bargaining begin with the successful healthcare facilities. Usually, the bundle rates agreed upon covers all services rendered during one period of care, and may also include emergencies such as unrelated complications and unexpected laboratory investigations.
Major Advantages of Direct Contracting
Essentially, direct contracting is beneficial to all parties involved – the employers, the employee, and the care provider, otherwise, such investments will be meaningless.
There are two significant advantages of direct contracting to employers. On the one hand, they enjoy price transparency. Prices for healthcare procedures and treatment vary in different states. For example, in 2015, a total knee replacement cost $11,317 in Montgomery, Alabama while in Ney York, the same procedure cost $69,654.
There are also intra-state variations in prices of healthcare services. For example in Colorado, as reported in Denver Business Journal, the median cost of knee replacement surgery in Good Samaritan Medical Center in Lafayette is $19,760.36, with the same procedure carrying a median cost of $58,337.67 at North Colorado Medical Center in Greeley.
Therefore, with direct contracting, employers can seek providers who offer treatment at lower rates without compromising quality. By ensuring all employees receive specific treatments at such centers, employees tend to cut down on healthcare costs massively, saving a lot of money.
On the other hand, employers enjoy the benefit of episode-based bundled payment, which ensures that employers pay a fixed price for a set of services centered on a specific diagnosis during a set period.
For instance, Starbucks made a contract with Virgin Mason Medical Center for treatment of back pain for its employees. The agreement required more use of physical therapists, which cost less than treatment by doctors, conducting fewer laboratory tests, avoiding unnecessary medical treatment, and 100 percent customer satisfaction.
The benefit of such focused-care treatment is that providers tend to provide the best quality of treatment, ensuring the best clinical outcomes because any extra cost incurred above the fixed price agreed upon will be paid by the provider.
Consequently, Starbucks observed that with this standardized system of healthcare, its workers returned to work earlier, missing just two days off work instead of five if they sought treatment elsewhere. Starbucks ensured the healthcare providers maintained superior quality standards as it requires of itself in business operations.
In the same vein, Geisinger Health System, upon reaching a direct contractual agreement with some large employers, experienced a 21% reduction in rates of complications, 44% reduction in readmissions, and a 25% drop in rates of surgical infections.
Direct contracting has begun to sweep through healthcare systems in the United States and a few other countries, creating a domestic health tourism model. However, it remains vital for such contracts to be driven by high quality of care In addition to cost savings. This will, no doubt, create a new paradigm in health travel and achieve maximum benefits to all parties involved.