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Direct contracts with medical providers help self-insured employers control costs

Direct contracts with medical providers help self-insured employers control costs

A growing number of self-insured employers are bypassing health plan administrators and contracting directly with providers in efforts to limit the increases in their health care costs.

Direct contracting isn't new, but more employers are considering it among other cost-cutting measures, and many providers are better prepared to run the numbers.

According to Aon Hewitt's “2014 Health Care Survey,” conducted between December 2013 and January of this year, 11% of employers are engaging in some form of direct health care provider and service contracting during this plan year, and 28% expect to do so in the next three to five years.

“Having that direct contract opens the door to discussions about cost and performance in ways that employers who are just doing business with health plans ... never see,” said Donna Marshall, executive director of the Colorado Business Group on Health in Lakewood, Colorado.

Salt Lake City-based researcher and consultant Leavitt Partners L.L.C. predicted in a May research brief that “employer-provider relationships are likely to proliferate” in the next several years as health care costs “continue to escalate.”

William DeMarco, president and CEO of DeMarco & Associates Inc., a Rockford, Illinois-based health care consultant, said the health care reform law is stoking hospital-physician consolidation, which also is driving up costs, leading to employers' “renewed interest” in direct contracting.

Many employers also are unhappy with the cost and outcomes data they receive from their health plan administrators, he said.

“They'd like to know, well, how did this person end up in the hospital?” Mr. DeMarco said. Few health insurers and third-party administrators provide data linking a physician's diagnosis to a hospital's cost and the outcome of the patient's care, he said.

Greg Mansur, a partner in the health and welfare consulting practice at PricewaterhouseCoopers L.L.P. in Los Angeles, said the Patient Protection and Affordable Care Act's looming excise tax on high-cost health plans, scheduled to go into effect in 2018, and an aging workforce also are increasing the pressure on employers to use cost-control opportunities such as direct contracting.

“Doctors and hospitals almost expect a direct contracting overture,” said A. Michael La Penna, founder and principal of health care industry consultant The La Penna Group Inc. in Grand Rapids, Michigan.

Whether employers pay a monthly fee per member or a bundled rate, significant savings can be achieved, experts say. Some employers are negotiating narrow networks and changing plans to persuade employees to use the network for some or all of their care. And in suburban Denver, the City of Arvada, Colorado, already is seeing encouraging results through its recent primary care contract with Paladina Health L.L.C.

Most employers are looking to save 5% to 10% of their health care spend, Mr. Mansur said. Some providers promise even greater savings, he said, cautioning employers to carefully scrutinize those deals.

Intel Corp., the world's largest computer-chip maker, struck a deal in 2011 with Presbyterian Healthcare Services in Albuquerque, New Mexico, to serve 3,500 employees and their dependents at its manufacturing facility in Rio Rancho, New Mexico.

Under the value-based agreement, rolled out in 2013, Intel pays the organization, which has 100 clinics and eight hospitals in the state, a monthly fee per member, and the two organizations share in any risks or savings above or below a specified target. Intel projected savings of $8 million to $10 million through 2017 as a result of the direct contracting arrangement, structured as an accountable care organization.

AtlantiCare, an Atlantic City, New Jersey, health care organization, is negotiating direct contracts with local employers through its ACO. It rolled out the network to its own 8,500 employees and dependents in 2011. Monthly costs per member that had been projected to increase by 7% in 2012 actually decreased by 4%, and costs remained flat in 2013, said Steven Blumberg, senior vice president of AtlantiCare Health Solutions, the ACO.

Some employers are seeking direct contracts for high-cost care, such as heart surgery or hip replacements, consultants say.

When Greenville, South Carolina-based Michelin North America Inc. examined its health care spending, musculoskeletal-related expenses ranked No. 1, said Chris Mattern, the tire maker's former manager of worksite health and wellness programs and now the company's facility manager. To manage that expense, the company signed with Tallahassee, Florida-based Integrated Mechanical Care, whose clinicians follow strict musculoskeletal care guidelines.

Michelin declined to discuss its results, but Integrated Medical Care President Chad Gray said employers can reduce total musculoskeletal spending by 40% to 60%, depending on plan design, employee communications and other variables.

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