Self-Funded Health Plans

The Power of Direct Contracting for Self-Funded Health Plans

04/26/2024 Written by: Christopher Bayer and Chris Boling

Direct contracting is gaining traction as a financial tool for high-performing self-funded health plans to control claims costs and improve member care. Self-funded health plans, or a group of plans, work directly with the medical providers to establish a mutually beneficial fee schedule. Often, the self-funded health plan pays the medical provider directly for services received by their members and bypasses the traditional health insurance PPO or HMO networks. Some direct contracts are facilitated by a third-party administrator who receives the medical claims and bills the self-funded health plans and remits payment to the provider. In both cases, the self-funded health plan and the provider have agreed on specific pricing, payment terms, and care expectations. This can lead to more consistent pricing for the health plan, faster cash flow for the provider, and improved access to top-level care for the members.

Traditional health plan networks, while offering access to a broad range of providers, fail to standardize reimbursements for identical medical procedures within the same community or service area. This leads to inconsistent pricing based on individual contracts, making it difficult for self-funded health plans to control claim costs. Network pricing for the same services can fluctuate dramatically based on where the member receives care. The cost disparity leads to increased plan cost and member out-of-pocket expenses.

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An alternative to traditional PPO or HMO networks, reference-based pricing (RBP), does away with the network and reimburses providers based on a percentage of Medicare; however, this model is not without its own challenges. The reimbursement percentage is imposed on the provider with little or no negotiation. The lower reimbursement level can lead to members being denied access to the provider. Also, members can be balance billed for costs above the RBP reimbursement not paid by the health plan.

Direct contracting offers a potential solution to these issues. It provides the cost control of RBP without the associated member disruption. In this model, the employer negotiates a fixed price for care with the provider and pays the claim cost directly from health plan funds. Most direct contracts use a bundled arrangement, where the entire episode of care is billed as one cost, rather than multiple billing codes in the traditional fee-for-service model. For instance, a hip replacement procedure, encompassing the surgery center, surgeon, consults, anesthesia, physical therapy, imaging, etc., is billed as one bundled cost through the direct contract.

This approach offers benefits to both employers and plan members. Employers can see reduced and more predictable costs. Plan members, on the other hand, receive care from top-tier providers as required by well-structured direct contracts. Employers can also eliminate member cost share for using the direct contract, providing no-cost medical care and incentivizing members to opt for the best care at the best cost.

As the healthcare landscape continues to evolve, direct contracting is set to play a pivotal role in the future of self-funded health plans as it continues to deliver financial predictability and improved overall patient care. For more information on direct contracting and to evaluate whether this strategy is appropriate for your organization, contact your AssuredPartners team.

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