Health Systems Direct

DIRECT CONTRACTING: ACCOUNTABLE PARTNERSHIPS WITH EMPLOYERS

George G. Karahalis, FACHE,
President & Chairman, HealthSystems Direct LLC

Employers are aggressively considering ways to reduce their operating expenses with an eye to their international and local competitiveness. Despite several years of success in controlling the rate of cost increases during the early 1990’s, health care costs are again rising at alarming rates led by pharmaceutical costs, consumer push for freedom of choice and the effects of new technology. Physician utilization patterns and their charges are frequently mentioned by employers as another key source of cost increases. Of greater importance, health outcomes have not kept pace with the rhetoric of the managed care industry or the tangible evidence produced by providers and employers, and NCQA and JCAHO.

Yes, healthcare costs continue as a major source of employer expense and a target for employer action. However, the current (1999 – 2000) tight labor market has inhibited employer interest in reducing patient choice, steering employees or other elements common in effective managed care plans. Employer aggressiveness would return rapidly should the labor market soften. The question now: what priorities for action should exist for providers and employers?

Some evidence of the need for a more considered approach
A 1998 Towers Perrin nationwide employer survey confirmed, as suspected by physicians and hospitals, that employers are now more focused on health plan and health system administrative expenses. But, medical expenses are also a concern and, depending on the employer and location, the costs of health services may outweigh administrative concerns. To truly control total health care expenses and satisfy employer and employee expectations, these aspects must be considered and acted on simultaneously.

Patient outcomes and service satisfaction dominate other data gathering. A survey conducted by the Atlanta employer coalition (formed in 1999 by the merger of the statewide managed care association and the “old” coalition) showed that clinical outcomes are of increasing concern. Steps have been taken to create an aggressive agenda to apply market power to both cost and outcomes. Their state-level legislative agenda should also be of concern to providers who think that “managed care is dead.”

Direct contracting as a tool for concerted action – satisfying a mutual need
A significant number of employers and providers believe that direct contracting offers a way to reduce administrative expense and may also open the door to a more efficient process of controlling overall health care costs. For both, direct interaction may be an opportunity to more closely manage their mutual patient populations using the tools made possible by remaining ERISA rules. Direct interaction may also help to avoid possible governmental action to limit ERISA’s value as a tool.

Certainly the focus of employer coalition effort is to undertake group purchasing of healthcare services, with an eye toward potentially reducing cost through shared plan administration and, more important, to exert greater market power when negotiating for provider prices and to improve patient/family service quality and outcomes.

Collectively, most employers and providers believe that health care should have a community-wide focus which helps to assure that large insurers or national managed care organizations cannot “take money out of local communities when it is needed there for appropriate medical care.” Both seek a level of patient service that avoids complaints of access denial or other forms of rationing.

However, they may not understand the complexity posed by taking on these responsibilities. There are a variety of issues that must be considered before undertaking what may become an expensive option to delegating these roles to a licensed administrative company, such as a Third Party Administrator (TPA) or a Preferred Provider Organization (PPO).

For example, success at direct contracting must consider:
   • Setting achievable expectations for each contracting party

   • Managing to these expectations

   • Measuring performance in terms meaningful to each party

   • Agreeing on what to measure

   • Obtaining commitment by senior decision-makers to stay at the table for two or more years while the above is created and until they reach a sustainable structure that can quantify results and show evidence of making changes “stick.”

Beyond these high-level considerations are a host of “infrastructure issues,” such as:
   • What information system will be used to warehouse common employer/provider databases? Is it compatible and user-friendly to providers and employers alike for required management and measurement reasons?

   • Who will have access to this information? Are there reliable security methods and will these methods deal with patient privacy issues associated with access to patient-specific claims and utilization data?

   • How will the group deal with medical liability issues related to utilization management decisions. Will employers be delegating “ostensible agency” to their network of providers when they are jointly administering an “accountable health care ‘partnership?’ ” Are provider-sponsored-networks (PSNs) cognizant of the magnitude of these risks, especially as it relates to limiting or denying an item of benefit coverage?

   • How often must a project development or coordinating group meet to sustain forward momentum — how much time will this take from other management or clinical duties for employers and providers?

   • What does it “really cost” for reasonable health plan administrative reporting and claims payment to assure that only the correct benefits are authorized and paid, and that performance accountability can be systematically managed. What is the additional cost of new information system “tools” to keep track of (measure) each accountable party’s responsibilities?

   • How much new administrative or duplicative expense will providers be willing and need to accept to reduce the intrusiveness of health plan administrators? Are employers willing to compensate providers for these management duties and do employers trust providers to “guard the chicken house?” How will employers access information to assure themselves that value is being delivered, that desired outcomes are achieved?

   • Are there ethical conflicts for health care providers who both manage patient care and assist in the administration of the employers’ health plans, and can these relationships be managed in a way to avoid the perception of conflict of interest?

   • Will employer expense and patient outcomes be measurably improved, long term, if an “accountable partnership” is formed within a local community — will all parties, in fact, obtain value from the effort? Is all this complexity worth the effort and expense?

   • Is it essential that participating employers agree to a common benefit plan and agree to a longer contract (than the usual one year common to health plans), so that costs related to marketing, patient education and enrollment, network provider lists, etc., can be minimized?

These elements begin to illustrate the potential complexity of a direct relationship. This list also begins to identify specific considerations for a community of employers and providers who wish to explore these ideas. There are examples of successes and failures.

In our experience, successes commonly occur when:
   • There are more than 5000 lives in a covered population, to assure mutual expectations can be managed and that predictability can be achieved for each party to the agreement. The simpler solution would be to deal with a single employer of the requisite size; but, most often, providers wish to serve the entire local community and to make arrangements to include multiple employers.

   • Individual employers understand that their particular group (within the 5000) might have better or worse cost experience, depending on the risk characteristics of the group. They are willing to share cost experience (positive or negative) with other employers in their local community (i.e., the essence of “community rating”).

   • Employers, physicians and hospitals agree in advance to specific financial arrangements that align specific areas of accountability and share financial rewards and losses. These arrangements must avoid incentives that risk the employer’s ERISA plan, such as capitations directly from the employer to the provider – a condition that places the employer “in the business of insurance.”

   • Claims administrative and medical management systems are operated by experienced health plan staff who are not overly swayed by either employers or providers. Plan staff members must be able to tolerate tensions generated by conflicts inherent in a direct contracting situation.

   • A common committee or governing structure exists to meet regularly, attack issues openly, assign tasks, make expeditious decisions and focus staff members on delivering health services to the broadest community in the most efficient and quality manner.

   • There are a few large employers who are leaders among employers, who share the same vision and commitment, and who will take the time to provide personal involvement in the early stages of development. There must also be a physician who can influence his or her peers to participate actively and to avoid falling into the “greed” trap, as well as hospital managers who are willing to play active but supportive roles.

Failures occur when:
   • Employers and providers pursue “hidden agendas” which make it difficult to identify the real issues affecting those that are serious in undertaking an effort to learn how to jointly manage health care costs.

   • Competing providers or managed care organizations reduce the available pool of interested and committed providers and/or willing employers by “pulling them into their orbit” — the so-called “divide and conquer” method. A group below a certain critical size will have difficulty delivering acceptable, tangible value for all parties.

   • Inadequate attention is paid to “up front” definition of expectations and measures of performance of importance to each party. The combined entity must fully explore measures of each, developing common terminology as well as developing management reporting tools.

   • Senior leadership from all parties is not regularly involved and who “do not do their homework” between meetings of the governing structure.

   • Hospital leadership does not understand their role and is not willing to “give up control to gain control.”

   • PSNs underestimate the potential for losses and fail to make business-like decisions regarding protection from such losses by reinsurance, and by establishing realistic medical management processes, such as hospitalists and continued stay reviews which may have the effect of reducing inpatient revenue.

   • Patient surveys are inadequately applied and techniques of “Member Service” functions are not employed. Outcomes from these functions must be used to address consumer issues. A failure of these activities will encourage increasing governmental intervention in ERISA plans.

   • Service networks are too small, too restrictive, or inadequately allow for subspecialty needs.

While these considerations may seem daunting, listing them offers a method to structure an approach. Direct contracting should offer tangible benefits to all — patients, employers, providers and communities. Given that much of America’s business occurs in businesses that do not have ERISA qualified health plans, the potential may exist for an initial employer group to form the base for a small employer coalition product. Then, a true benefit for the larger community might be created. Regardless of the community health care strategy, the parties to direct contracts must consider each of the elements outlined above.