Direct contracting: a Minnesota case study

Healthcare Financial Management, August, 1997 by Steven N. Burrows, Robert C. Moravec

During 1996, HealthEast Care, Inc., a healthcare provider-owned and governed direct-contracting company, successfully responded to a request for proposal from the metropolitan Minneapolis-St. Paul-based Buyers Health Care Action Group (BHCAG), a coalition of self-insured employers, to provide healthcare services to members of BHCAG's Choice Plus health plan.

HealthEast Care developed a care system proposal for BHCAG that balanced consumer and purchaser expectations with historical healthcare costs. Providers are reimbursed for contracted healthcare services according to a unique fee-for-service, budget-based payment model. BHCAG chose to contract with HealthEast Care and 23 other care systems in the metropolitan Minneapolis-St. Paul area and other parts of Minnesota to serve more than 117,500 Choice Plus enrollees.

In December 1995, the Buyers Health Care Action Group (BHCAG), a coalition of 26 large, self-funded, Minneapolis-St. Paul-based employers, issued a request for proposal (RFP) for integrated healthcare services directly to Minnesota healthcare providers. This direct-contracting initiative became a catalyst for significant healthcare market reform in the Minneapolis-St. Paul and surrounding areas.

BHCAG member employers include American Express Financial Advisors, Inc., Carlson Companies, Dayton Hudson Corporation, General Mills, Inc., Honeywell, Inc., Cenex, Inc., Land O'Lakes, Inc., Pillsbury Corporation, and 3M Corporation. The Minnesota Department of Employee Relations (DOER), which represents state employers, is an associate member. An estimated 250,000 people living in the Minneapolis-St. Paul metropolitan area, and another 150,000 living in other parts of Minnesota and border communities in Wisconsin, North Dakota, and South Dakota, are currently employed by BHCAG member employers and the Minnesota DOER.

Since January 1, 1994, a self-insured BHCAG Choice Plus group medical plan has been offered by individual BHCAG member employers either as the only health plan choice or as one of several plan choices. The 1995 RFP the coalition issued requested integrated healthcare services for an estimated 100,000 employees, retirees, and their family members then enrolled in the Choice Plus health plan.

BHCAG requested that these services be provided by "care systems," which it defined as primary-care-centered health systems with affiliated specialty physician, hospital, and allied professional contractual arrangements organized to provide the continuum of medically necessary services to enrolled populations. The RFP defined primary-care providers as family practice and general internal medicine physicians, and stipulated that for purposes of contracting to provide services to Choice Plus enrollees, these physicians would have to be affiliated with one care system only.

Not all providers that received an RFP were part of a care system. Therefore, from mid-1995 through 1996, BHCAG staff and member employer representatives worked closely with Minnesota providers to help them prepare for and respond to the RFP.

BHCAG chose 24 provider-owned and governed healthcare systems to service its Choice Plus members. Choice Plus plan members selected from 14 Minneapolis-St. Paul metropolitan and 10 other Minnesota care systems approved by BHCAG during their open enrollment period. Service began on January 1, 1997.

DIRECT-CONTRACTING CHARACTERISTICS

Direct-contracting arrangements between large, self-insured private employers and provider systems were developed in Minnesota in the early 1990s. Their rise was facilitated because they are regulated under the Federal Employee Retirement Income Security Act of 1974 (ERISA), and are, therefore, exempt from state regulation, which can often be more restrictive and costly.

Direct contracting establishes direct links between self-insured health purchasers and provider systems. It is intended to maximize consumer choice, access, and satisfaction by putting consumers and providers at the center of the purchasing process. Direct contracting also can stimulate competition, encourage local control and innovation, and reduce unnecessary administrative overhead, thereby lowering employer health plan costs.

Although direct-contracting arrangements vary, they emphasize provider accountability. Direct-contracting payment models normally reward providers for being efficient. Toward that end, these models may introduce methods that prevent provider compensation from increasing at the same rate as increases in service volumes.

BHCAG'S PROVIDER PAYMENT MODEL

BHCAG's payment model for Choice Plus plan providers uses fee-for-service reimbursement but requires the care systems to propose annually a prospective claim target (ie, per-member-per-month [PMPM] amount) for the entire year. Features of the model include the following:

* Care systems set their own yearly PMPM claim target amount, or bid;

* Employers pass on to employees the price difference of the care system PMPM amount and the employer's contribution through monthly employee health plan contributions;