St. Croix Valley Healthcare in Stillwater, Minn., has eliminated the middleman.
Its more than 152 physicians began contracting Jan. 1, 1998, with Buyers Health Care Action Group, an influential coalition of Minnesota employers. BHCAG awarded the group a $100,000 bonus in addition to its contract for healthcare quality, access and patient satisfaction, says St. Croix Medical Director Andrew Dorwart, M.D. He declined to specify the amount of the contract.
How did St. Croix do it?
"We're allowed to choose which providers (local primary-care physicians and specialists) we want in the network, rather than having someone else do it," Dorwart says. "We can organize the way we prefer and use local specialists. Now the market can decide who's going to be the winner or loser."
St. Croix Valley, which includes 42 primary-care doctors and 110 specialists, is a contracting network affiliated with Stillwater Medical Group. It has a total patient load of 60,000, of whom 1,900 are covered by direct contracts with employers.
A physician involved in direct contracting probably won't see a dramatic difference in his or her daily practice, Dorwart says. But there will be a change on the business side, "without an HMO staring at (him or her)," he adds.
"It's forced us to be directly accountable, instead of the health plan," he says. "We can . . . develop a business relationship with specialists by sharing risk. There's more dialogue with specialists. Now we're reimbursed in the same way."
For example, physicians can focus on disease management for patients with lower-back pain without creating payment conflicts with orthopedic specialists, since both are reimbursed the same way.
The idea of eliminating the middleman is what fuels interest in direct contracting. By contracting directly with provider groups, employers bypass HMOs and indemnity insurers. They can set their own prices, and the profits HMOs normally would siphon off go back into physicians' pockets. Direct contracting allows healthcare providers to compete in the market the way any other service provider does -- on the basis of price and value.
The National Conference of State Legislatures recently surveyed 78 employer coalitions, and 17 reported they were involved in some form of contracting, in some cases through a direct-contracting PPO model.
BHCAG blazed the trail when it began direct contracting with two dozen area providers in 1996. Today, 30 employers contract through the coalition's Choice Plus plan, serving 135,000 enrollees through 29 networks comprising 7,000 providers.
Although direct contracting has been slow to catch on, other groups are considering it -- at least as a future option.
The California Public Employees Retirement System, for example, is "very cautious and does not have any plans to undertake (direct contracting) at this time," says spokesman Bill Branch. "But it is a concept for the future. At this point, it's merely exploratory." CalPERS provides benefits to more than 1 million current and retired state employees and their dependents.
Groups that are hesitant to take the plunge nevertheless recognize direct contracting's appeal. It allows physicians to remove the extra layer managed care has added between the patient and the medical organization. Ideally, physicians can manage patient care as they see fit.
The question is: Can you really eliminate the middleman? The catch is that providers still must hire a third party to handle administrative responsibilities such as consumer complaints, claims administration, utilization reviews and credentialing. But by bypassing HMOs, providers get to determine how much and when they will be paid for their medical services.
"Most physicians perceive direct contracting as just another contract," says Suzanne Nutt, vice president of managed care at Mount Sinai Health System in New York. In fact, Nutt says, Mount Sinai began direct contracting in response to inquiries from employers, not physicians.
The system has a half-dozen contracts with several employers, including Ullico, a union-owned insurance company; Quad Graphics; and Formost, a national PPO company.
"Some doctors are seeing (direct-contracting) patients," Nutt says. "But most of the volume is yet to be experienced. We're waiting to see what happens."
Physicians affiliated with Mount Sinai teamed up to form a medical management committee and were in on the ground floor during the direct-contracting negotiations. "The physicians' committee was involved in every step of the product," Nutt says. "They had a lot of interesting discussions (about) what physicians wanted and employers were willing to do."
The committee members have been able to go back to their communities and serve as conduits to physicians at the local level. "We never would have developed the product without physician input," Nutt adds.
"I think the opportunities are huge," says William Mahood, M.D., a gastroenterologist and trustee of the American Medical Association. The AMA supports the concept of direct contracting but has taken no specific policy action in this arena, he says.
"Physicians will develop and compete on quality," Mahood says. One possibility is that physicians will be able to better develop best practices by tracking their own outcomes.
Currently, many HMOs gather such information, although it typically isn't available to potential patients.
"It will help patients shop (for healthcare services) -- instead of going by word of mouth, which isn't a good way to judge quality," Mahood says.
Direct contracting also may encourage managed-care companies to increase the involvement of medical staff in approving and vetoing services, he says.
Despite its advantages, direct contracting is not a cure-all for HMO headaches. Downsides do exist.
"The demand from employers needs to be there," Nutt says. While employer coalitions aren't a requirement for direct contracting, their involvement helps ensure the effectiveness of the endeavor, she contends.
New York, for example, has a large, diverse business community, but employers there aren't actively pushing direct contracting. Minnesota's success involves having a well-organized health system already in place, as well as employer interest in direct contracting, Nutt says.
However, even when employer interest and volume exist, there's no guarantee. "The patient base is too small," Dorwart points out, referring to the fact that less than 5% of St. Croix's business is direct contracting. "And it's a lot of work," he says. "We're in charge of tracking information, utilization review and credentialing, and it's all new."
In addition, Mahood says, "when a provider goes to an employer, they can be looked at askance by the competition."
The advent of direct contracting can put providers in competition with the very managed-care companies that are sources for other contracts, he notes.
There are additional concerns, including the need for excellent legal advice to avoid antitrust problems. Also, depending on the state, providers make themselves subject to many of the same requirements insurance companies must meet, including financial reserve minimums.
"This requires considerable capital and (for some) might be impossible," Mahood says.
But medicine is an evolving field, and Mahood compares working with some HMOs to the archaic thinking of Victorian times, when a sheet was placed between the physician and a female patient during a gynecological exam. While the sheet was intended to maintain the patient's privacy, it also obstructed the exam.
Whether direct contracting will be the force to remove the sheet of HMO bureaucracy from patient care remains to be seen. "The jury's still out
nationally," Nutt says.
Anne Brennan is a Chicago-based freelancer.