Key Issues in Direct Health Care Contracting with Employers

March 17, 2022

As more mid-size to large employers utilize self-insured health plans to offer health benefits to their workforce, such employers now have more incentives to actively control health care costs and obtain cost-efficient, high quality care. Among various measures to reduce, or at least control, costs while maintaining quality (e.g., high deductible plans, tiered networks, narrow networks, value-based contracting, etc.), employers have sought to directly negotiate with hospitals, physicians, accountable care organizations, clinically integrated networks and other health care providers to provide care to their employees and other enrollees.

Generally speaking, the traditional self-insured employer health plan would contract with a commercial insurance company or other third party to serve as the plan’s third-party administrator or “TPA.” While the TPA would not assume insurance risk, the TPA would typically perform many of the same functions that would be performed by the insurer in a fully-insured health plan arrangement (e.g., enrollment, member relations, claims processing, plan administration and design, provider negotiations, etc.). Notably here, the TPA, as part of its service offerings, would provide the self-insured plan with access to its provider network and negotiated reimbursement rates.

However, some employers have taken this part upon themselves and have sought to directly negotiate and contract with providers in the hopes of improving care quality, enhancing patient engagement/satisfaction, avoiding complications and obtaining more generous discounts or other favorable financial arrangements (sometimes referred to direct-to-employer or “DTE” contracts). Sometimes these arrangements apply to all health care services while others target (and seek to limit expenditures with respect to) specific high-cost, high-risk and/or high-volume conditions and treatments/procedures.

Below is a list of some (but certainly not all) high-level questions for health care providers to consider when directly contracting with employer plans:

What specific services, treatments, preventative care, etc. are covered by the arrangement? Is the arrangement focused on certain services/treatment of specified conditions or does it apply more broadly?
What reimbursement model is being proposed (e.g., fee-for-service/volume-based, capitation/PMPM rate, value-based and/or quality incentives, bundled payments, risk-sharing/gain-sharing, etc.)?
What are the volume and reimbursement increases likely associated with the arrangement? Would such increases outweigh any additional discounts, investments, and administrative/professional costs associated with the arrangement?
If the reimbursement methodology involves value-based payments, bundles, and/or risk-based payments (including population health management), do the parties have viable clinical coordination, oversight, and analysis capabilities to ensure that financial, clinical, and quality objectives are met?
Does the arrangement require the provider to hire additional administrative or professional personnel and/or establish new facilities/locations? Must any professional personnel be available on-site at the employer (e.g., onsite clinic, vaccinations, etc.)?
What is the size of the employer in terms of number of employees/plan enrollees? Are the employees concentrated geographically in the provider’s service area? What are the current utilization rates by plan enrollees?
Who will be handling processing and payment of provider claims (i.e., the employer, the TPA, or other)?
What is the term of the arrangement? Can it be terminated early with or without cause? If long-term, are there provisions addressing material changes/escalation in reimbursement rates, costs, service offerings, volumes, enrollee numbers, etc.?
How will the employer publicize the arrangement to employees/enrollees and direct them to the provider for care (e.g., lower or no co-pays, preferred access/scheduling, preferred status in tiered network, etc.)?
Is the arrangement exclusive such that the provider is the sole preferred provider of the services covered by the arrangement?
Is the provider assuming responsibility for any other delegated managed care functions (e.g., claims processing, plan design, utilization management, prior authorizations, etc.)?
Have the parties adequately assessed regulatory compliance implications and addressed them as appropriate via the contractual terms (e.g., HIPAA and other patient data privacy laws, insurance/insurer licensure and regulation, ERISA and employee plan regulations, state and federal antitrust laws, etc.)?

Contractual arrangements directly between self-insured employer health plans and health care providers/networks can benefit both the plan/enrollees and the provider by improving quality of, and access to, care in a cost-efficient manner—if the arrangement successfully aligns the incentives and objectives of the parties. However, before entering into such arrangements, health care providers should carefully assess the likely financial, clinical, legal, and operational implications and risks of the arrangement, including, but not limited to, those listed above.