Direct contracting - employers and hospitals

Business & Health, Feb, 1995 by Geoffrey Leavenworth

Deals with hospitals are on the rise, we found. But employers are still learning how best to use this strategy to control costs.

Direct contracting is becoming increasingly popular, and anecdotal evidence indicates that this strategy can accomplish its goal--to reduce health costs. But few employers seek the quality and performance data usually required to justify such a big-ticket buying decision. And most are choosing a reimbursement strategy, discounting, that may quickly become outmoded.

These are among the conclusions of a Business & Health survey of hospitals on the subject of direct contracting with employers and health plans. Sixty-six hospitals responded to a questionnaire in the summer of 1994. The survey was conducted by Quorum Health Resources Inc., a hospital management and consulting firm in Chicago.

Thirty-eight, or 57 percent, of the surveyed hospitals had direct contracts with employers, up from 36 percent of respondents to a similar study in 1993. But only 13 hospitals had direct contracts with business coalitions, and 16 with other health-care buyers--including labor unions and third-party administrators. The preponderance of contracts were for full medical and surgical services.

DISCOUNTING RATES

The survey turned up some surprising results with respect to reimbursement. Of the four major types of direct-contract payment arrangements--capitation, DRG (diagnosis-related group)-based fixed rates, per-diem rates, and straight discounts on billed charges---employers overwhelmingly (77 percent) chose discounts, probably the least effective tool for holding down costs. Twenty of the 66 hospitals said they had per-diem contracts, and only 9 said their contracts were based on DRG rates.

The problem with discounts is that they still expose an employer to unlimited fee-for-service charges, with no control on volume of services and no way to prevent having the discount based on inflated prices.

A DRG arrangement doesn't limit volume, either, but at least it fixes the price of each service or procedure. Capitation puts a ceiling on an employer's total health-care costs. And per-diems make costs more predictable.

"In the future, employers will most likely move toward per-diem-based agreements and DRG or case-based rates," says Allan Fine, vice president and director of the Center for Managed Care at Quorum, a member of B&H's editorial board, and author of the survey. Regardless of the payment arrangement, it's essential to establish strong utilization management as well, he notes.

One employer's experience illustrates the choices employers face. Union Pacific Railroad, which provides health benefits to 38,000 unionized workers and retirees in 22 states, has been negotiating discounts with 28 hospitals, some of which reduce hospital charges as much as 50 percent. Dell Butterfield, UPR's vice president and comptroller, says the company calculates it has saved about $2 million a year with such contracts.

Nevertheless, Butterfield is looking to change. "Discounted fee-for-service contracts are not the way to go," he says. "Per-diems, though better, can create an adversarial situation. When we're trying to get doctors to release patients sooner, it doesn't make sense to give hospitals a reason to keep them longer. We plan to install a DRG-type arrangement, so there's an incentive for the hospital to release the patient."

COMMUNICATING QUALITY

As surprising as employers' preference for discounted hospital charges is their apparent reticence about asking hospitals for data on quality. The majority of survey respondents said they receive few requests for hospital quality data from employers or coalitions. Why aren't they asking? Despite increasing use, direct contracting is still a new enough concept that many employers are just beginning to learn how to interpret and use hospital data, says Quorum's Allan Fine.

Employers trail HMOs and other buyers of health care in the use of hospital data, for example. While 23 hospitals in the survey said they'd received data requests from HMOs, only a handful had received even one from an employer, and none had received any from a purchasing coalition.

In addition, it appears that those employers who are beginning to get involved in data collection are having start-up problems. Nine hospitals said they'd received data requests from employers that were unfocused and impossible to respond to accurately. The reasons included unclear requests, no access to the specific data requested, and an inability to generate it economically.

The hospitals' suggestions for employers:

* Create an industry standard request form, so providers don't have to prepare a customized report for every inquiry;

* Be specific in explaining requirements, objectives, and the intended use of the data;

* Meet with the provider to review the significance of the data.

The last suggestion may be particularly important. A number of hospital executives were skeptical about the ability of employers, business coalitions, or even insurers to interpret quality and performance data. "I don't think payers understand how to use the information that's available," says survey respondent John D. Fry, director of clinical-services contracting at the University of Utah School of Medicine in Salt Lake City. "They also don't realize how limited the value of it may be."