EP383: Direct Contracting as a Health System Business Strategy, With Nick Stefanizzi

The show on direct contracting with Doug Hetherington (EP367) and also the one with Katy Talento (EP350), both of these experts have said that if an employer direct contracts with a provider organization, in general, the employer gets about 20% savings over the status quo. This makes sense—just cut out the middleman with an MLR (medical loss ratio) of plus or minus about 15% and you’re at three-quarters of the way there.

You might be thinking, “Well, maybe not so fast here, because then wouldn’t FFS (fee-for-service) rates go up? Is it not Slide 1 on most carriers’ sales decks how great they are at leveraging their vast buying power to negotiate discounts with hospitals?” Hmmm … if you think this, you’re about to be shook.

Turns out, carriers are not so good at negotiating rates with hospitals. For more on this topic, follow Leon Wisniewski on LinkedIn. Or check out an article entitled “Hospital prices vary widely, often higher with insurance than cash, The New York Times finds.”

The big concerns for employers looking to direct contract, I think, are going to be threefold. And right now, I’m just speaking in general. This has nothing to do with the conversation that follows. But I think the three big concerns are this:

1. Let’s say the employer gets actual fee-for-service rates that are 20% less than average carrier negotiated rates. So, great … but will utilization go up if the wolf is watching the henhouse, so to speak? Especially if PCPs are owned by the hospital system and incented, as many are, to drive downstream utilization. It’s been estimated that PCPs can drive $1,000,000+ of revenue when they refer in network to profitable service lines. What happens when this is unfettered, meaning no third party to do prior auth stuff for utilization management, for example? Some employers, for sure, could and certainly do hire a third party to do utilization management; but sometimes one of the contractual requirements of a health system direct contract is an easing of, let’s just say, at least the most aggressive PA (prior auth) requirements. So now, all of a sudden, are more plan members getting more services that, even at a 20% discount, add up to a greater total spend?
   
   A counterpoint: I’ve heard more than one person who would know say that most PA programs don’t actually do a whole lot except defer spend at best. Here’s a quote from Scott Haas. He said, “The only value I have observed of the prior authorization process is the accumulation of data that is required of the stop-loss industry to establish known risk for them to laser risk. Cost shifting at its best. Other than that, I have rarely observed value to the patient, provider, or the plan sponsor.”
   
   One thing I am noticing is that those providers offering direct contracts are aware of this whole line of questioning and fear of the health system driving overutilization because incentives and might be doing things (the health system looking to direct contract) to mitigate those fears. Some are discussed later in this podcast.
   
   So, I don’t know about whether plan sponsor spend would net-net go up if you get rid of PAs and profit-driven utilization management or go up enough to offset all of the admin costs and care gaps that crappy prior auths or prior auth processes slam patients and providers with.
   
   
2. Big concern for employers (besides even if the price goes down will utilization go up—and then what’s the net effect of that?): Will the provider’s PPO (preferred provider organization) network be too narrow if I go with a direct contract with a health system, either legally running afoul of network adequacy rules or run afoul of employees just getting pissed off because their doctors are no longer in network? I guess there’s a bunch of ways you can do things if you are a plan sponsor that might mitigate this, but I could still see it certainly being a concern.
   
   
3. By aligning the plan sponsor with the provider, including getting all the data and just from a pop health perspective being able to align around priorities, does care quality, preventative care stuff, social determinants of health, and equity concerns … does this stuff actually start to improve patient health? There are plenty of examples—some that Nick Stefanizzi talks about in this podcast, including a great one with Whole Foods—where this is certainly the case.
   
   But as we in healthcare all know, not all cases are the same. As soon as any party in the mix starts trying to maximize their revenue with little regard to its impact on patients and clinicians, things can go south.
   
   For example, just speaking in general here, but I might bring up the whole “remember consolidating health systems?” They promised all kinds of care quality improvements as a result of owning the entire patient journey and consolidating data and … yeah, not so much with that. As we know, hospital systems who consolidated have no greater or better quality on the whole as unconsolidated health systems, despite the fact that their prices went up a lot.
   
   Now, I just have to say, this is not a parallel situation. When the health system consolidated, it was just providers consolidating, which may have actually exacerbated relationships with plan sponsors and payers as opposed to driving greater alignments. So, as I said, not a parallel situation.

   I think the point that I’m making is just because better patient care is theoretically possible doesn’t necessarily mean it will happen when there are profits at stake. However, when incentives do align and true collaborations can occur amongst payers and providers or amongst any of the other stakeholders along the patient journey … yeah, some great stuff can happen.

As I mentioned earlier, I am talking with Nick Stefanizzi, who is CEO over at Northwell Direct, which is Northwell’s stand-alone, for-profit entity looking to direct contract with employers and their TPAs (third-party administrators). The board of Northwell, meaning the tax-exempt hospital system mother ship, that same board also oversees Northwell Direct. Northwell Direct has two main categories of product offerings. One is that they offer on-site and virtual clinics for employers. The other is that they offer a network to direct contract with.

According to Nick Stefanizzi, a health system can offer significant price reductions because—and this mirrors a lot, as I mentioned earlier, what Doug Hetherington (EP367) and Katy Talento (EP350) said in earlier episodes—you can get rid of a ton of administrative burden that payers place on hospital systems, plus you get rid of the middleman carrier profit margins, plus the health system can drive additional volume, I’m assuming to profitable service lines with profitable commercial patients … patients who are profitable despite the 20% cut because, yes, commercial rates are still way higher than Medicare even if you cut 20% off the top. It’s also, as Nick talks about in this episode, more possible to do value-based things and care for populations because there’s plan sponsor/provider alignment and far better data capture.

You can learn more at northwelldirect.northwell.edu.

Nick Stefanizzi is the chief executive officer of Northwell Health’s direct-to-employer organization, Northwell Direct, which supports businesses through a full spectrum of customized employer health services. Prior to joining Northwell Direct, Nick served as chief administrative officer and later as interim chief executive officer of Formativ Health, a for-profit joint venture aimed at enhancing the patient and provider experience of and access to care. Nick also spent over eight years in various leadership roles within the Northwell Health system, focused on human resources (HR), organizational effectiveness, talent management, and HR technology. He was a leader within the health system’s ambulatory network of over 450 physician offices and ambulatory locations, where he was responsible for the direct development, coordination, and administration of central administrative services, as well as the integration of the health system’s network of clinical joint ventures. He also served as the chief of staff for the health system’s chief information officer. Nick received a degree in international relations from Boston University and his MBA in healthcare administration from Hofstra University.

07:22 What do Northwell Health’s main services look like?

08:05 How does Northwell Health save their clients 20%?

12:53 “Look, it is a selective network.”

13:22 What are the factors that allow Northwell Health to provide this 20% discount?

13:36 How does getting rid of the payer help the patient and provider relationship and reduce costs?

17:00 Why Northwell Health is selective, not narrow, in their network.

18:28 How does Northwell Health operationalize their direct network?

19:39 “Communication and change management and engagement.”

22:17 “Providers also want to be a part of this. They also have ideas.”

23:04 Where does the TPA fit into this model?

25:05 EP127 with Kris Smith, MD, MPP.

25:54 What are Northwell Health’s must-haves for their TPA partners?

30:27 What’s different about Northwell Health’s approach?

You can learn more at northwelldirect.northwell.edu.

Brian Klepper (Encore! EP335), Dr Aaron Mitchell (EP382), Karen Root, Mark Miller, AJ Loiacono, Josh LaRosa, Stacey Richter (INBW35), Rebecca Etz (Encore! EP295), Olivia Webb (Encore! EP337), Mike Baldzicki, Lisa Bari, Betsy Seals (EP375), Dave Chase, Cora Opsahl (EP373), Cora Opsahl (EP372), Dr Mark Fendrick (Encore! EP308), Erik Davis and Autumn Yongchu (EP371), Erik Davis and Autumn Yongchu (EP370), Keith Hartman, Dr Aaron Mitchell (Encore! EP282), Stacey Richter (INBW34), Ashleigh Gunter, Doug Hetherington, Dr Kevin Schulman, Scott Haas, David Muhlestein, David Scheinker, Ali Ucar