For many employers, moving from a fully-funded healthcare program to one that is self-funded can be a smart decision because self-funded plans provide more control over expenditures. A self-funded plan is when an employer assumes the financial risk associated with providing healthcare benefits to its employees. Instead of paying fixed premiums to an insurer — which, in turn, assumes the financial risk of paying claims — the employer pays for medical claims out of pocket as they are incurred.
There are many strategies a self-funded employer can implement to manage costs, including establishing a direct-contracting arrangement with healthcare providers for their services. Having a direct relationship with hospitals, physician offices, and facilities enables employers to negotiate rates for healthcare services and eliminates the “middle man” – the insurer. Employers receive discounted prices, putting additional cost savings into their hands. Just as you negotiate with suppliers directly for other products and services, you are now doing the same with healthcare providers to establish pricing for your organization as a preferred client. You could get better pricing, and the provider has a built-in network of patients.
The lack of healthcare price transparency
There is little to no transparency in the cost of healthcare procedures and treatments. Oftentimes, patients don’t know the prices of healthcare services before they are provided. How could they? The starting price points are unknown, and hospitals or physicians charge different payers different amounts for the same services.
Facilities and physicians have a charge master for reporting the cost of procedures to the Centers for Medicare & Medicaid Services (CMS). There is, however, very little insight into what comprises those charges. Depending on where you go, knee surgery can cost $25,000, $50,000, or as high as $80,000.
Why direct contracting makes sense
Upfront pricing helps employers establish payment models with providers, such as direct contracting, that would lower spending and reduce the administrative role, and associated costs, of insurance intermediaries. Reference pricing, in which an employer pays up to an established price – the “reference price” – for a healthcare service, is another strategy that helps create transparency and manage costs.
A growing number of healthcare providers are ready to engage in direct-contracting arrangements as these types of contracts guarantee steerage of business and revenue diversification. If you’re a large employer in a specific town or city responsible for hundreds or thousands of employees, you have clout with the providers in your area. They will want to negotiate pricing for their services with you to keep the business. In essence, direct-contracting arrangements embody the belief that “health care is local” and can serve to build valuable bonds between healthcare providers and local employers and their patients.
In addition, a provider’s claims with a direct contract are paid much more quickly. If everyone knows and agrees to the price points for specific procedures, a claim typically will be paid by the employer within 30 to 60 days rather than by the insurance company, which can take 120 days to pay the claim. For many hospitals, their biggest complaint is the time it takes to receive payments. The self-funded employer pays the claims as they come in, so the providers are willing to offer better-negotiated rates.
It’s important to be aware that direct contracting is complex and requires navigating and coordinating relationships between the employer, the provider, and the third-party administrator (TPA) to facilitate claims payments and audits. In addition, network adequacy and capacity must be carefully assessed to ensure that employees have convenient, reasonably timely access to care. Employers and providers negotiating direct-contract arrangements will also need to ensure compliance with an array of legal issues.
The Baldwin Group is here to help by providing assistance with establishing direct-contracting arrangements between providers and employers. Our goal is to help improve the financial performance and quality of an employer’s health plan. We’ll analyze the resources available to help improve overall financial performance and employees’ healthcare experience and outcomes, with the goal to provide high-quality, low-cost care.
For more information
We’re ready to help when you are. Get in touch and one of our experienced Baldwin advisors will reach out to have a conversation about your business or individual needs and goals, then make a plan to map your path to the possible.
This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The content of this document is made available on an “as is” basis, without warranty of any kind. The Baldwin Insurance Group Holdings, LLC (“The Baldwin Group”), its affiliates, and subsidiaries do not guarantee that this information is, or can be relied on for, compliance with any law or regulation, assurance against preventable losses, or freedom from legal liability. This publication is not intended to be legal, underwriting, or any other type of professional advice. The Baldwin Group does not guarantee any particular outcome and makes no commitment to update any information herein or remove any items that are no longer accurate or complete. Furthermore, The Baldwin Group does not assume any liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Persons requiring advice should always consult an independent adviser.
