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Four Tips for Employer Direct Contracting

Analysis  |  By Philip Betbeze  
   April 05, 2018

Direct contracting deals between hospitals and health systems and employers are becoming more attractive as employers become more sophisticated about where the costs lie in healthcare.

Seattle's Virginia Mason Medical Center, a multispecialty group practice of more than 470 physicians, has been working directly with employers to provide specific health interventions since at least 2004.

At that time, Robert Mecklenburg, MD, medical director of the Virginia Mason Center for Healthcare Solutions, met with employers frustrated by the high cost and uncertain quality of the healthcare they purchased from Virginia Mason and others.

That initial meeting eventually led to Virginia Mason's focus on contracting with employers directly for episodes of care.

Although making this change at Virginia Mason was far from an easy journey, the program has grown, focusing on particular bundles of care related to specific conditions, such as low back pain/spinal, total joint replacement, and cardiac surgeries, along with determining whether surgery is appropriate for the patient.

Walmart, the state of Washington, and Lowe's are among the large employers who encourage patients to seek treatment at Virginia Mason by waiving all copays and coinsurance for their employees.

Don't cut out the middleman. Do determine appropriateness of care.

At Virginia Mason's core, the strategy of direct contracting with employers was not born of the idea of cutting out the health insurer middleman, but in determining best practices and appropriateness of a given healthcare intervention, says Suzanne Anderson, president of Virginia Mason Medical Center.

"We do not advocate that we need to disintermediate the payers as a strategy. I think though, some of the first to market have had to do that to get to the other side," she says. "Walmart had to do that and hired a different firm to manage that benefit, but what was more important was the wake-up call."

Payers, says Mecklenburg, are burdened by a legacy of fee-for-service.

Paying for healthcare in such a way naturally leads to paying for interventions that are "two-thirds good healthcare and one-third not-so-good," he says.

He continues: "Their task is to get out of this payment model that they have inherited, as we inherited physicians practicing in their own style. We had to understand the allure of defining best practice and executing on that. [Employers] have to get beyond this benefits mentality and into the purchasing model mentality."

Mecklenburg and Anderson have four tips for healthcare organizations that also want to get off that carousel.

1. Create a culture focused on quality and continuous improvement

Culture change is only possible by developing a long-term vision for your organization to deliver healthcare that is reliable, predictable, and has consistently good outcomes. There's no silver bullet, says Anderson.

"You have to start on the journey and create a culture that embraces climbing that hill," she says. "We have our Virginia Mason production system, and it's really how we empower everyone around for continuous improvement. The product it produces is a best practice pathway created by doctors for patients and employers. It requires a systems-based approach. It doesn't and won't come from federal regulations or health plans."

2. Believe that quality equals value

Part of Virginia Mason's strategic plan is to be the quality leader and to transform healthcare. Virginia Mason thinks quality can be expressed best in an equation as follows:

Quality = Appropriateness x (Outcomes + Service)

"Appropriateness is the hidden secret," says Anderson. "There's a lot of waste because of inappropriate care."

For example, she says, Virginia Mason has demonstrated that nearly 58% of patients who have been referred to their organization for spinal fusion by an outside surgeon really do not need it.

"They did not meet the appropriateness standards," she says. "When you use these methods, you weed out unnecessary care. You can do that analysis with many surgeries. Variation in medical practice is such that in those cases, physicians inadvertently do not add value."

3. Embrace transparency and data

Anderson says the foundation of Virginia Mason's ability to draw large employers to its system is transparency and data help physicians change the way they practice, based on appropriateness of care and likely good outcomes.

It's also how they're able to offer guarantees of good outcomes to their employer customers in areas such as joint replacement surgery.

4. Create partnerships and collaborations with key people and organizations that help advance quality

When Virginia Mason was first contracting with Walmart, Walmart's executive team told Virginia Mason that the company didn't want to spend a dime less on care than it was already spending, but that it wanted to spend money on healthcare that was highly likely to bring about positive outcomes, says Anderson.

That was a revelation to Virginia Mason's team, who knew they could deliver on that.

Even if Virginia Mason rejected invasive interventions such as back surgery based on predictive modeling, it could make up that loss by serving a larger population with guaranteed good outcomes based on data, says Mecklenburg.

"Volumes don't suffer, because more people are sent here," he says.

Philip Betbeze is the senior leadership editor at HealthLeaders.

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