Episode Details

Lots of talk about direct contracting going on these days. Many of you will be familiar with the term, but in short, direct contracting means when a self-insured employer directly contracts with a provider organization with no payer in the middle of that arrangement. And when I say "employer," I mean the employer and all their peeps—their TPAs, repricers, other vendors, and consultants.

Most of this talk, though, seems to come from the point of view of the employer. It's super easy to quantify what's in it for employers. US healthcare costs get blamed for all kinds of things: companies who have lost big global contracts because all of those fringe benefits cost way too much around here.

If we're looking around for a why on that point, let me refer you to last week's episode (EP366) with Dr. Kevin Schulman entitled "An In-Depth Dissection of Our Dysfunctional Healthcare Benefits Market." Or the show with Dr. Wayne Jenkins (EP358) about how premium and deductible financial toxicity negatively impacts plan members. Never forget that financial toxicity is clinical toxicity.

So, like a knight riding in on a white horse, direct contracting with a provider organization has some interesting potential. Most obviously, when an employer contracts directly with a provider organization, they cut out the middleman. They put the direct in direct contracting. Considering the multi-billions of dollars that some of these middle people are raking in every quarter in profits and/or "margins," cutting out the middle people could have a financial upside as big as those billions in profit.

If those billions get passed on to patients in the form of lower co-pays/coinsurance or premiums, there could be some big benefits to direct contracting for pretty much all involved … except the middle people, of course.

My guest in this healthcare podcast, Doug Hetherington, says that it's not uncommon to see on the low end a 10% reduction in costs to maybe up to 50% reduction in costs. It's amazing what can be accomplished when everybody starts working together for the good of the local community and patient and is held accountable for more than just revenue maximization.

But there's also quality and patient outcomes upsides to these cost reductions. Here's a few we can speculate about: For example, if the middle people add layers of bureaucracy and administrative burden that make it really hard and/or upsettingly inefficient for anyone trying to serve their patients' needs to actually serve their patients' needs, then yeah, direct contracting can make getting the right care to patients faster and easier. That matters to burned-out clinicians.

Also, here's another potential point to ponder: benefit designs. Listen to the show with Dr. Mark Fendrick (EP308) on this, but most benefit designs offered by middle people are really, as they call them, blunt instruments. High-value care costs as much (or more) as low-value care. Deductibles don't care if you need your diabetic foot ulcers checked urgently or you might get your foot amputated. It's a known fact that health outcomes plummet in January when, all of a sudden, cancer meds or whatever essential lifesaving medical innovation cost as much as a patient's deductible. So, patients abandon care—and outcomes go down.

When an employer direct contracts with a provider, in its most sophisticated form—which my guest, Doug Hetherington, calls a "full-pay open contract"—the employer and the provider work together to construct a benefit design that helps patients get the best outcomes.

Or here's another benefit, for the whole community, not just the employer: The whole c