Employers looking to reduce healthcare costs continue to explore a variety of potential alternatives. One alternative is direct contracting with medical providers.
What is it?
At its most basic level, direct contracting is where an employer’s self-funded health plan directly contracts with one or more medical providers for the provision of medical services. Direct contracting may take different appearances depending on the goals of the plan, size of the employer, and provider market in a given geographic area. Contracts may be with an entire health system that incorporates providers from primary care to specialties and area hospitals. In that way, it could be similar to a network contract that an insurer might have where the employer agrees to make the health system its go-to provider for a geographic area.
On the other hand, the contract might be more limited in nature and could only cover a specific set of services at pre-defined prices. In those cases, it might be more provider-driven where the provider offers the plan a chance to pay a fixed price for certain services the provider offers and avoid working through a third-party administrator (“TPA”) to negotiate pricing.
Under either approach, the thinking is that this process gives employers direct access to healthcare providers (whether health systems or individual providers) without having to utilize the network of an insurer or TPA. The employer and provider(s) can negotiate terms to try to minimize costs and incentivize better care coordination and higher quality care. The provider(s) may take on the risk of, for example, hospital readmissions or other negative outcomes by accepting a flat fee for a particular service, like a knee replacement. This makes the provider more responsible for the care outcomes, but also forces them to assume some level of risk.
Because these direct contracts often fix the plan’s costs at a particular level, the employer may want to incentivize plan participants to use the contracted providers. They may do this, for example, by having the contracted services covered by the plan without regard to the deductible. In the right cases, this can result in a win-win for the plan and the participant: the plan gets predictability, often at a lower price, and the participant receives care at a reduced cost.
Practical Considerations
As with any change in plan design, there are multiple issues to consider. An employer looking to contract with a health system will likely need a critical mass of employees in a particular area for direct contracting to work. The number of employees needed in a particular area will depend on the size of the market and breadth of the provider services. An employer with several small offices spread across several states probably does not have the market power in any one geographic area to negotiate a competitive large-scale deal with providers.
On the other hand, smaller employers may still benefit from direct contracting that is more limited in nature, say for medical imaging services only with individual providers. In some cases, those contracts may be offered directly by the provider to any plan that is willing to contract.
Employers also need to consider who will process the claims. Even though there is a direct contract between the provider and the employer, the provider will still submit claims and those claims will still need to be reviewed and paid. The provider may have an administration arm that can do that. Alternatively, the employer may want to contract with a standalone TPA to administer the claims.
Claims incurred with the provider will also need to be reconciled with those incurred through the main network to ensure accurate tracking of deductibles and out of pocket maximums across the plan. However, this may be less of an issue if the plan offers to pay the full price (before the deductible) of any directly contracted service.
The employer will also still need an actuary to help with setting the contribution rates for its plan and potentially for helping to negotiate the prices offered by the provider or health system.
If the employer has a stop loss contract, the employer should ensure that claims submitted through the direct arrangement are covered by the stop loss. In many cases, carriers may carve out any direct agreements between the employers and providers, which requires the plan to then accept the risk of full payment to the provider.
Compliance Considerations
From the provider side, if the provider is taking on significant risk, state law may treat that provider as an insurance company. This could come with additional obligations, such as certain state filings and the need to maintain reserves. Even if the provider is not treated as an insurer under state law, it may still be treated as a TPA, if it is engaging in certain claims processing-related services. Being a TPA may also require state filing. The law is not clear in this area (and varies by state), so these rules may or may not apply. However, an employer interested in exploring direct contracting may want to work with the provider to notify applicable state insurance departments before proceeding.
Also from the provider side, if the provider has discretion with regard to processing claims, it may be treated as a fiduciary of the employer’s plan under ERISA. This generally means the provider would have to avoid potential self-dealing. Its interactions with participants and the plan would also be governed by ERISA’s duties of care, loyalty, and prudence. This may make it practically difficult for the provider, or its affiliate, to also serve as a TPA with respect to a plan. This also presents an issue for the employer. The employer likely also serves as plan administrator and therefore would be a co-fiduciary to the provider. Under ERISA’s co-fiduciary liability rules, the employer, as plan administrator, could be liable for fiduciary breaches of the provider. For this reason, an employer likely will want to contract with a separate TPA to administer these claims.
An employer that doesn’t have a large enough workforce on its own might consider banding together with other employers to engage in a single direct contract that applies to multiple participating employers. However, doing so would create a multiple employer welfare arrangement (“MEWA”). If the MEWA is self-funded (as it would likely have to be), it will be illegal in some states. MEWAs are also subject to state insurance regulation as well as other compliance obligations. As a result, banding together in this way may not be a viable option for some employers.
Providers also need to avoid potential antitrust issues. Banding together to contract with plans could be seen as price fixing for a particular geographic area.
Employers considering direct contracting must also be conscious of the health savings account (“HSA”) contribution rules if offering a direct contracting arrangement alongside a High Deductible Health Plan. For example, if the plan will cover the full cost of services (i.e., no deductible) with a directly contracted provider, that will likely make individual ineligible to contribute to an HSA.
Conclusion
While direct contracting may make sense in the right set of circumstances, employers and providers should be mindful of the potential practical and legal considerations involved. However, as more employers attempt to move in this direction, they may discover additional cost saving strategies that will find their ways into the broader marketplace. Employers considering direct contracting should work with their HUB advisor to make sure they have appropriate protections in place from a stop loss perspective and have considered the practical and compliance considerations with direct contracting.
If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.