To help reduce Medicare expenses while preserving or enhancing the quality of care provided to beneficiaries, the Centers for Medicare & Medicaid Services (CMS) introduced its Direct Contracting model in 2019.
The model builds on Next Generation Accountable Care Organization (ACO) concepts and combines them with designs from Medicare Advantage and commercial risk-sharing arrangements.
How Direct Contracting Works
To create a Direct Contracting Entity (DCE), health care providers and suppliers come together under a common legal structure and enter an arrangement with CMS that requires accepting financial accountability for the overall quality and cost of medical care furnished to Medicare fee-for-service (FFS) beneficiaries aligned to the DCE.
Incentives are heavily weighted toward health outcomes and patient satisfaction versus administrative improvements. The potential for success remains to be seen, but, from the reinsurance perspective, there is an interesting subset of the model, including the pros and cons of private sector options and pricing for DCE programs outside the corresponding CMS offering.
Types of DCEs:
- Standard – Already serves Medicare FFS beneficiaries
- New Entrant – Hasn’t traditionally provided services to Medicare FFS populations
- High-Needs Population – Serves Medicare FFS beneficiaries with complex needs as defined by CMS
In 2021, two voluntary risk-sharing options were made available: professional and global.
The professional option offers a 50 percent risk-sharing arrangement and provides Primary Care Capitation (PCC), a capitated, risk-adjusted monthly payment for enhanced primary care services provided by DCE participant providers and preferred providers participating in PCC.
The global option offers a 100 percent risk-sharing arrangement and two alternative payment types – either PCC or Total Care Capitation (TCC), a capitated, risk-adjusted monthly payment for all services provided by DCE participant providers and preferred providers participating in TCC.
How Payments Work
The Direct Contracting Model offers DCEs several options for receiving monthly payments. Capitated DCEs receive a capitation payment covering total cost of care or cost of primary care services, while Advanced Payment DCEs selecting PCCs receive an advanced payment of FFS non-primary care claims.
Under these arrangements, CMS can incorporate more robust care management not inherent to the traditional Medicare program. Claims paid for services occurring outside the TCC agreement are debited from the DCE’s TCC amount.
Protection from Extreme Costs
Unlike traditional reinsurance – and to protect against extreme scenarios – CMS withholds funds for each DCE and, at year-end, reconciles actual expenditures against the amount withheld. This aspect of the CMS “reinsurance” program has mixed reviews.
All DCEs have the option of participating in a stop loss reinsurance arrangement designed to reduce the financial uncertainty associated with infrequent – but high-cost – expenditures.
How Stop Loss Works
The CMS stop loss attachment points are developed based on expenditure data derived from the DC National Reference Population of Medicare FFS beneficiaries and adjusted to reflect regional differences in Medicare payment rates for each DCE. They are then calculated against the projected performance year benchmark. The stop loss payout is disbursed to the DCE by CMS as a reduction to the plan year expenditure; there is no separate payment for stop loss.
For the purposes of the stop loss arrangement, the payout is equal to a variable percentage of the expenditure incurred by an aligned beneficiary whose total expenditure exceeds the prospectively established attachment point. Essentially, CMS applies a PBPM stop loss charge to the DCE as an addition to the DCE’s plan year expenditure (claims).
The predetermined CMS model fits well for a start-up projecting smaller numbers of aligned beneficiaries or with a modest risk tolerance entering a new financial structure. Furthermore, a cash flow advantage exists, as there is no monthly premium payment to CMS as required by a commercial carrier.
The converse issue is the DCE needs to wait for reimbursement for high-cost claims months after the year-end settlement date, compared to immediate reimbursement in commercial markets.
Pricing is complicated – the data being used for commercial pricing is not typical experience data, but, instead, member data under FFS versus data from the DCE. Underwriters must do extensive work combing through the notorious “CCLF” (Claim and Claim Line Feed) files to understand what is being presented. Beneficiaries are only included in the current year’s data and dropped in the event of death, certain diagnoses, opt-out or settlement. Through experience, actual DCE claims will mature, and the drawbacks will diminish.
Additional difficulties for underwriters:
- Retrospective effective dates
- Disclosure limitations
- Last minute regulatory shifts
Bringing options to this space has been well received by the buyers and their brokers. Offering corridors/aggregating specs and higher retentions gives pricing advantage to those who can manage the higher risks.
The one-size-fits-all CMS model will continue to shift as both reinsurers and DCEs demand design flexibility and become increasingly comfortable with assumed risk. Time will reveal the program’s care management success. But we need to see how it plays out over the next three to five years. It’s a work-in-progress, but innovation isn’t going away, and we must determine how to work with it as programs evolve.
Information included in this article is based on HM Insurance Group internal research and experiences, as well as general industry knowledge.
With more than 30 years of experience, Adam Gottesman serves as HM Insurance Group's Director of Managed Care Reinsurance Sales.