Direct contracting touted as rising cost antidote

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As more health systems consolidate, some industry observers fear that prices will continue to escalate and competition will wane. However, there’s a clear path for brokers and advisers who heed this warning on behalf of their employer clients, according to Steve Kelly, co-founder and CEO of ELAP Services. In a nutshell: direct contracting between self-funded plans and providers, which he says will result in more equitable pricing.

Kelly, who believes this approach will help shape Amazon’s intention to disrupt the healthcare market with two other blue chip companies, recently articulated his vision to EBA. An edited version of their conversation follows.

To what extent do you expect more healthcare consolidation?

It’s very likely we’ll see a continuation of these acquisitions. It seems that hospitals are fighting for market space, and probably the best way for the large systems to expand is just not through organic growth. I think you also will see the continuing trend toward acquiring physician practices. They’re trying to funnel referrals and lines of business into the major system.

How do for-profit vs. not-for-profit hospital pairings differ?

It’s a difference without a distinction. Some of the most irrational and egregious pricing can often come from nonprofit hospitals. There are for-profit hospitals that also have outrageous billing and profit schematics, but it doesn’t seem to be a huge. It’s more a matter of market position.

How can direct contracting result in fair and reasonable payment outcomes for all parties – and what role can benefit brokers and advisers play in achieving this objective?

We had 47 brokers in our office recently talking about this quite a bit, so it’s very timely. It’s kind of a threshold moment for the brokerage community. We need to become more relevant and instrumental in how healthcare is delivered to middle-market employers.

When employers sit down with a health system, typically good things happen. They know each other from the community, but they’ve never really had a business discussion. That’s always been handled through intermediaries. Often, the relationship between insurers and health systems is very adversarial, and it’s done at a table where the employer has almost no visibility or stake.

If the employer can get a competitive pricing schedule from the hospital and structure their plan document to steer members through lower out-of-pockets, that’s a win for the hospital. They may only be getting 20% or 30% of the dollars from that group, but with proper plan language and incentives, they might be able to move that to 50% or 60%.

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It’s interesting that large employers, people like Jeff Bezos, are now coming to the same conclusion that there may be a better way to do this. I suspect that one of the major things you’re going to hear from Amazon, Berkshire Hathaway and JPMorgan Chase is that they’re going to go directly to the provider company. They’re not going to rely on United or Aetna to do that for them. I suspect that will be one of the planks that this strategy will be built upon. We believe the employer community, given the proper guidance, would welcome those initiatives at every level, and that the brokerage community is well positioned to provide that kind of guidance.

How does reference-based pricing come into play in direct discussions between employers and providers in addressing the elephant in the room, which is balance billing?

When we work with a self-insured employer, it’s often to develop a reimbursement schematic whereby we move away from the PPO process, which is largely nontransparent and highly variable, to one that’s a lot more predictable. It can cause some contentiousness with the provider community because we’re not sitting down and agreeing to rates in advance. We’re prospectively putting these limits in the plan document and paying claims based on that language.

How would you assess the prospects for growth in self-insurance, as well as how a skeptical perception of this funding mechanism among brokers and advisers might evolve?

We’re seeing more employers self-insuring, and the size at which they choose to self-insure is going down to 50 employees. The self-insured platform, particularly if we’re talking about direct contracting, is absolutely essential. It’s a very mobile, agile platform. You need to adhere to the federal ERISA statute in the Affordable Care Act, but you sidestep a lot of what could be considered cumbersome state regulations. There are pricing and cost efficiencies, and it enables you to reach out to a local provider and strike your own deal. I think the brokerage community is largely getting on board, and those guys that remain stuck in the fully-insured mindset will kind of go the way of the dinosaur.

To what extent is it more palatable for providers to work directly with employers for much better control of their own destiny?

I’m not here to vilify health systems. They have a very difficult time as well trying to transition into this new world. There’s some simplification in dealing with a large insurer for 200,000 employee lives as opposed to having multiple individual relationships. There is some scalability that’s attractive to them. Nonetheless, I think there are also significant advantages for health systems that are a little more proactive and want to market their brand.

Employers have to leverage their buying power a little more effectively, direct some spending toward certain high quality providers, and in return, look for lower reimbursements and be able to take some of those savings and give their employees a break in terms of the out-of-pocket.

How do you answer critics who say this approach is risky, rebellious, or even careless?

I would say that it’s none of the above. More to the point, employers that take a harder line on what they pay for healthcare are actually performing their fiduciary duty in the manner that the Department of Labor would have them do. Being in a position where we continually end up with few options except to push more out-of-pockets and deductibles onto our employees is not a sustainable path. Having reimbursement metrics on our plans that are designed to identify the actual cost of a service and allow a fair market above that cost is a very responsible position.

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