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Employers who negotiate with hospitals get ahead

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Few employers negotiate with hospitals and other health care providers to obtain discounts on cost of medical services, but those that do usually cut their costs and improve the quality of the care their employees receive.

The difficulty of the process and the scale needed to make the effort worthwhile deters most employers, but several large, and even some middle-market companies, have embraced direct contracting with providers.

Employers that do contract directly with providers, such as hospitals, accountable care organizations or a center of excellence, seek lower fees and better outcomes for employees. Such deals also can be informal, where an employer and provider work together to fix a problem, exchanging patient volume for reduced fee schedules.

“It's become a hot topic, while not that many are executing on it today” because of its difficulty, said Erin Tartar, Denver-based national leader of the health management practice at Towers Watson & Co.

According to an Aon Hewitt survey released in July, 6% of companies said they contract directly with hospitals and other health care providers, 1% said they planned to do so this year and 30% said they may do so in the next three to five years. Still, 53% were not interested.

That's down from the 11% of employers that deployed some form of direct contracting with medical providers in 2013, when 28% anticipated doing so in the next three to five years, according to Aon Hewitt.

“You almost need the perfect storm” to do it, said Brian Marcotte, president and CEO of the Washington-based National Business Group on Health. Companies need to have enough employees concentrated in a particular market to build such provider relationships and have the internal resources to “ensure that they are driving efficiency and the consumer experience and outcomes in the right way,” he said.

Employers with fewer than 1,500 to 2,000 employees may not have enough clout in the local market, said Chris Miles, Lincolnshire-Illinois-based senior vice president of U.S. health and benefits at Aon Hewitt.

It is “time-consuming and complex” work, which employers traditionally outsourced to their health insurer as part of network management development, she said.

Giant companies, such as Intel Corp. and Boeing Inc., have succeeded in contracting directly with health systems, which has stirred interest elsewhere, experts say.

In late July, Boeing, which its website says employs more than 160,000 people, reached agreements with Roper St. Francis Health Alliance in North Charleston, South Carolina, and Mercy Hospital in St. Louis, the hospitals said in a statement. Boeing already has direct contracts with several health systems in the Puget Sound area.

Both new contracts offer Boeing employees lower paycheck contributions and reduced costs for primary care visits and generic prescriptions, according to the statements.

Boeing could not be reached for comment.

But the goal in the past several years has been to enable direct contracting in the middle market, said Michael Booth, president of Westmont, Illinois-based Axion RMS Ltd.

Serigraph Inc. has made it work with only 540 employees at its West Bend, Wisconsin, headquarters.

The graphics firm contracts with a dozen providers, such as orthopedic hospitals and MRI centers, and chooses them based on quality, low infection rates and price, said John Torinus, Serigraph's chairman and former CEO who also is the author of “The Company that Solved Health Care.”

For example, West Milwaukee, Wisconsin-based Smart Choice MRI charges $600 for an MRI, but discounts the price to $525 for Serigraph, Mr. Torinus said. Using financial incentives, Serigraph steers its employees who need MRIs to Smart Choice instead of a larger health system that charges nearly $3,000 for an MRI, he said.

Serigraph and its employees reap the savings. Mr. Torinus said he reaches out to providers, but many also approach him for deals, which he said is in reaction to private-sector employers taking their business to high-value providers.

Sources say it could also be a reaction to health insurer consolidation, changes in reimbursement for medical services under the health care reform law and the focus on value-based health care.

The change in relationship between employers and providers is one shift in direct contracting that several experts are seeing.

Many hospital systems are establishing their own plan networks and reaching out to area employers offering lower service fees in exchange for higher patient volume, Axion RMS' Mr. Booth said.

Midsize employers can also pool together to get the attention of the local hospital system, he said. For example, five 500-employee companies can join to “look as a 2,500-employee entity,” making the hospital more willing to negotiate, he said.

The direct contract landscape also includes outside firms that negotiate deals on behalf of employers.

One such company, Employer Direct Healthcare, negotiates bundled rates on more than 300 different surgeries for self-insured companies with 2,000 or more employees, said Clint Hampton, the Austin, Texas-based company's CEO.

Employers pay a monthly fee per employee for Employer Direct's SurgeryPlus supplementary surgical benefit, and Employer Direct will negotiate rates in its own nationwide network of surgeons using Medicare rates as a benchmark.

The employees' out-of-pocket costs and deductibles are waived, and the employer sees the rate prior to the procedure, so it's “completely transparent and completely predictable,” he said.

Mr. Hampton claims that his firm can save employers 30% to 50% per procedure.

“If more employers had the critical mass to go direct, I think they would,” Mr. Marcotte of NBGH said. They would try to see if they could “improve the experience and the delivery and the outcomes in the market by working directly with the provider community.”