EP367: Why Would a Hospital Direct Contract With an Employer Looking to Pay Less? With Doug Hetherington

Lots of talk about direct contracting going on these days. Many of you will be familiar with the term, but in short, direct contracting means when a self-insured employer directly contracts with a provider organization with no payer in the middle of that arrangement. And when I say “employer,” I mean the employer and all their peeps—their TPAs, repricers, other vendors, and consultants.

Most of this talk, though, seems to come from the point of view of the employer. It’s super easy to quantify what’s in it for employers. US healthcare costs get blamed for all kinds of things: companies who have lost big global contracts because all of those fringe benefits cost way too much around here.

If we’re looking around for a why on that point, let me refer you to last week’s episode (EP366) with Dr. Kevin Schulman entitled “An In-Depth Dissection of Our Dysfunctional Healthcare Benefits Market.” Or the show with Dr. Wayne Jenkins (EP358) about how premium and deductible financial toxicity negatively impacts plan members. Never forget that financial toxicity is clinical toxicity.  

So, like a knight riding in on a white horse, direct contracting with a provider organization has some interesting potential. Most obviously, when an employer contracts directly with a provider organization, they cut out the middleman. They put the direct in direct contracting. Considering the multi-billions of dollars that some of these middle people are raking in every quarter in profits and/or “margins,” cutting out the middle people could have a financial upside as big as those billions in profit.

If those billions get passed on to patients in the form of lower co-pays/coinsurance or premiums, there could be some big benefits to direct contracting for pretty much all involved … except the middle people, of course.

My guest in this healthcare podcast, Doug Hetherington, says that it’s not uncommon to see on the low end a 10% reduction in costs to maybe up to 50% reduction in costs. It’s amazing what can be accomplished when everybody starts working together for the good of the local community and patient and is held accountable for more than just revenue maximization.

But there’s also quality and patient outcomes upsides to these cost reductions. Here’s a few we can speculate about: For example, if the middle people add layers of bureaucracy and administrative burden that make it really hard and/or upsettingly inefficient for anyone trying to serve their patients’ needs to actually serve their patients’ needs, then yeah, direct contracting can make getting the right care to patients faster and easier. That matters to burned-out clinicians.

Also, here’s another potential point to ponder: benefit designs. Listen to the show with Dr. Mark Fendrick (EP308) on this, but most benefit designs offered by middle people are really, as they call them, blunt instruments. High-value care costs as much (or more) as low-value care. Deductibles don’t care if you need your diabetic foot ulcers checked urgently or you might get your foot amputated. It’s a known fact that health outcomes plummet in January when, all of a sudden, cancer meds or whatever essential lifesaving medical innovation cost as much as a patient’s deductible. So, patients abandon care—and outcomes go down.  

When an employer direct contracts with a provider, in its most sophisticated form—which my guest, Doug Hetherington, calls a “full-pay open contract”—the employer and the provider work together to construct a benefit design that helps patients get the best outcomes.

Or here’s another benefit, for the whole community, not just the employer: The whole community keeps the money local. Many of these middle people are big national companies. As Dave Chase and others have said often, when these Fortune whatever companies arrive on the scene, lots of money exits stage left out of the community. If local employers contract with local providers, the money stays local.

So, all that I have said has been said before. What I wanted to dig into in this episode is the why and the how from the provider organization standpoint.

I got curious about this after my conversation with Katy Talento (EP350). She talks about a major barrier for self-insured employers who want to work with local hospitals is that the local hospitals couldn’t, frankly, get out of their own way. Maybe they couldn’t see the benefit for themselves that made the juice worth the squeeze? That’s what I talk about in this episode with Doug Hetherington: what’s in it for providers and what a provider organization interested in direct contracting needs to actually pull it off. 

Doug Hetherington is CEO of Health2Business, and he has done and continues to do pioneering work with community hospitals in eastern Idaho and elsewhere. Health2Business helps facilitate direct contracting between hospitals and local employers.

You can learn more at health2business.com and connect with Doug on LinkedIn. 

You can also learn how to engage in direct contracts from Doug’s presentation, “Beyond the Direct Contract.” 

Doug Hetherington is a health plan visionary, innovator, and program architect who believes providers are the key to sustainable and meaningful healthcare in our communities.

Midway through his 20-year tenure as a benefit advisor, Doug began innovating around self-funding, captives, reference-based pricing (RBP), and population management in search of viable solutions that gave his employer clients control over cost and plan design. His creativity and tenacity for change drove his development of several first-of-their-kind innovations, including RB EmCap, a national access captive program for RBP employers.

Doug founded Health2Business (H2B) in 2019 after successful proof of concept that better healthcare results when employers, providers, and health systems work together at the local level through direct contracts.

Tackling one aspect of our broken healthcare system, H2B solves for how we access and pay for care. While establishing scalable direct contracts with some of the largest flagship health systems in the country, Doug realized that in order to truly decapitalize healthcare, direct contracts need to be transparent, open, and free for employers of all sizes to access. By establishing H2B’s independent, agnostic, and collaborative direct contract administrative platform infrastructure, Doug has created an entirely new vendor class known as direct contract administration.

An optimist by nature, Doug truly believes that the more we work together, the faster we can restore value to our healthcare system and create a sustainable mutual benefit for provider, employer, and employee/member stakeholders.

05:38 Why are health systems interested in direct contracting?
09:43 EP308 with Mark Fendrick, MD.
10:06 What are the essentials for direct contracting between a health system and an employer or payer?
11:16 What are the three categories of open direct contracting agreements?
12:44 EP350 with Katy Talento.
12:59 EP363 with David Scheinker, PhD.
14:43 What direction do we need to be moving to solve the cost problems in healthcare?
18:10 “What does a value-based model begin to look like?”
20:31 What is one of the inherent benefits of a direct contracting environment?
21:01 What data should we actually be capturing?
25:01 “Sometimes you really begin to wonder, why is there such a high level of misalignment?”
25:16 How much can an employer save, on average, with a direct contract?
26:33 What are healthcare costs going up by per year?
26:50 “We pay for these insurance plans … and yet what you’re paying for that and how they’re assessing the risk is not … in line with the actual cost of care.”
30:20 “I would say that … consolidation … is one of the reasons why we’re … seeing more movement towards direct contracting.”

You can learn more at health2business.com and connect with Doug on LinkedIn. 

You can also learn how to engage in direct contracts from Doug’s presentation, “Beyond the Direct Contract.”