Providers, payers see direct contracting’s capitation as an important move to value-based care
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Over the past several years, the big trend in healthcare has been to inch away from fee-for-service reimbursement and toward value-based care, in which a provider’s reimbursement is tied more to clinical quality than to volume. The industry, policymakers and the federal government have attempted this shift through a number of legal and regulatory means, and one policy that has proven popular in this regard, among both providers and payers, is direct contracting.
In basic terms, direct contracting is a population-based model that allows for the use of capitation. This is what sets it apart: Aside from Next Gen and Pioneer, virtually all of the other compensation-based models from the Centers for Medicare and Medicaid Services are billed as fee-for-service, with a reconciliation 18 months later.
According to Valinda Rutledge, executive vice president of federal affairs at America’s Physician Groups, this is a crucial difference between direct contracting and other models.
“We think there’s a lot of value with a model that starts with capitation, with money on the front end, because it moves away from fee-for-service and billing around every little interaction you have,” said Rutledge. “Doing capitation on the front end allows additional money to fund some of the infrastructure and new programs you think will affect healthcare design and improve the quality of care with Medicare beneficiaries.”
Dr. Rushika Fernandopulle, APG’s chair of direct contracting, described it as a kind of latent alternative payment model coming out of CMS.
“There’s a long history of this, from Pioneer ACOs and Next Gen, and all of those have been rooted essentially in fee-for-service,” said Fernandopulle. “This is the first one of these models which applies to 40 million people on original Medicare, that you get a fixed amount for patients. When you care better, you reinvest that money back in care.
“It used to be we could do this with Medicare Advantage plans, but this gets us off the fee-for-service chassis and allows us to do the right thing for patients,” he said.
The concept of direct contracting can be traced back to the Obama Administration, but it truly came into its own under President Trump’s term, when it evolved into essentially an ACO model that allowed for better managing of the relationships between Medicare, doctors and hospitals. It was the idea of capitation that truly gave it its identity.
Also, the model also allows insurer DCEs to maximize reimbursement through inflated Hierarchical Condition Category (HCC) codes and the model may significantly increase costs and add risks for beneficiaries without adding value, said U.S. Reps. Bill Pascrell, Jr. (D-NJ), Mark Pocan (D-WI), Katie Porter (D-CA), and Lloyd Doggett (D-TX) in a letter to U.S. Secretary of Health and Human Services Xavier Beccera and to CMS.
“We are concerned that funneling people into Medicare Advantage-like plans not only eliminates beneficiary choice, but also erects more barriers and provides fewer consumer protections for beneficiaries,” they said. “This model has less accountability than Medicare Advantage plans, which have been overpaid $143 billion between 2008 and 2020 according to MedPAC.”
“Under direct contracting, you can enter into one of two different types of capitation, primary care capitation or total care capitation,” said David Pittman, senior policy advisor for the National Association of ACOs. “CMS will look at where patients receive most of their care, and if it’s on one of those, you’re financially responsible for the patient. Medicare will look back at the historic spending of those patients, figure out what their spending has been the past few years and give you a projected target or benchmark, a spending goal.
“Up to 7% of that benchmark will be given to you piecemeal over installments to care for those patients,” he said. “The idea is to get you off of fee-for-service and let you manage patients without constantly billing for this or that, and reducing the administrative burden.”
Total care capitation is just what it sounds like: CMS will take the spending estimate, divide it by 12 and dole it out every month, with the funds earmarked for patient care. Capitation was not prominently featured in traditional ACO models; this makes direct contracting more like Medicare Advantage in practice.
Because of this, Aisha Pittman, vice president of policy at Premier, calls it a more sustainable approach, especially during a pandemic, because billing for every item and service can become problematic when there’s a stop in service, as happened among various providers and specialties as they dealt with COVID-19.
To that end, bundled payments can operate within a direct contracting entity as well. Bundled payments can be created for, say, hip and knee replacements, and the parties can agree to a capitation bundle to maximize savings.
“An ACO is a total cost-of-care entity,” said Aisha Pittman. “It allows the ACO to work with providers to save costs. Many have been in the model for a very long time and have had savings. If you think about the next step, direct contracting is the next step. Next generation ACOs are now going to direct contracting because of the ability to do so much more than in the Medicare Shared Savings Program. MSSP can’t change what you pay providers — in direct contracting, you can change what you pay your underlying providers.”
THE PAYER PERSPECTIVE
Not all payers are getting onboard with direct contracting, and indeed, not all payers have a provider presence. But Humana fits both of those descriptors, and as an organization, it’s fully onboard with direct contracting, at least conceptually.
According to Matthew Eirich, Humana’s chief growth officer, direct contracting gives the insurer total cost and quality accountability with its patients, with reimbursement that looks similar to MA plans. For Humana, the attraction is that it aligns the economic model with clinical expectations for the original Medicare population.
In basic terms, he said, direct contracting builds on the population health models that CMS has been putting out for a little over a decade. They were explicit about designing programs in part to target advanced senior-focused care groups that have recently come into prominence, and which didn’t participate in original Medicare because of the mismatch between the reimbursement model and the clinical model.
“You do see CMS continuing to provide flexibility to the risk-taking entity, whether it’s the MA plan or the provider group, to provide enhancements to the experience … to get better outcomes,” said Eirich. “So in the direct contracting program, CMS allows the providers to effectively fund certain cost-sharing programs or benefit enhancements to get better outcomes.”
When the concept of direct contracting was first announced by the Centers for Medicare and Medicaid Innovation, Humana was intrigued by the prospect of extending its services to so many more seniors. The organization submitted an application, as well as specs on its clinical model outcomes, technology capabilities and financial capacity to take accountability for cost and quality outcomes. After a period of back-and-forth with CMMI, Humana was admitted into the program in 2020.
The Centers for Medicare and Medicaid Innovation announced late last year that 51 provider and accountable care organizations had joined direct contracting.
Because Humana already had a hand in the provider space, it didn’t have to make any major changes to its model; many of its patients already receive their care from Humana, and so the changes are all but invisible to them in the long term.
“We’ll be growing more of our locations and establishing relationships with new patients who have original Medicare, growing staff and capacity,” said Eirich. “That is normal course. Sixty percent of those eligible for Medicare select original Medicare rather than Medicare Advantage, so this allows us to think of those populations as a single group, who we now have the flexibility and the financial resources to care for in the exact same fashion.
“We want to be part of the solution,” he said. “We’re walking that journey with CMS, and if it turns out there will be bumps along the road, as there almost certainly will be, we’ll be at the table trying to work through those.”
So about those bumps in the road.
According to Fernandopulle, there are ways to make direct contracting better. One way, which is linked to equity, is thinking about how providers do risk adjustment to account for social and economic factors. One of the things APG wants to do is allow the programs to preferentially serve people who need it most. One way to do that is to ensure that providers get paid for those whose care is more complicated.
“This is an incredibly complex program,” said Fernandopulle. “Expecting it to be perfect from the get-go is unrealistic. These programs get better. There are a number of tracks, and one of the realities is medical groups are at different stages of this evolution. Some have the wherewithal and the infrastructure to participate in the full-ris version of this model. Others might play with training wheels, and step up over time.”
Other bumps along the road include CMS, under the Biden Administration, shelving a Geographic Direct Contracting model after getting concerns about tying Medicare payments to spending and quality for an entire region.
Mike Barrett, vice president of strategy and development at Collaborative Health Systems, praised CMMI for showing flexibility in reaching out to provider groups and different populations, as well as new entrants, and said more tools have found their way into the hands of providers that allow them to influence care in their communities. But he said changes will be required.
“There aren’t very many people who would tell you that our healthcare system is fixed and perfect in every way,” said Barrett. “If a lawyer represents themselves in court we tell them they have a fool for a client. We don’t have that vehicle, nor does the patient or the physician know what questions to ask. There’s a lot of that support system that goes to patient advocacy.”
Barrett expects that the move to some form of capitation is a paradigm shift, and if a physician is focused in the granular details of care and doesn’t step abc and assess the larger picture, direct contracting can prove complicated.
“What providers need to be careful about is taking that financial risk,” he said. “Insurance companies have been around for hundreds of years. They manage risk; they don’t necessarily take it. They have an infrastructure that providers have never been exposed to. We as an industry need to be humble about how we manage financial risk when we approve these models.”
Aisha Pittman said Premier likes the direct contracting model in concept, but wants to see some changes to its structure. It comes down to the budget an entity has in caring for patients.
“There are some policies that favor entities that have never been in an ACO or risk-based Medicare arrangement before, giving them a more favorable benchmark compared to those who have been working and saving and improving costs over time,” she said. “The discount increases significantly over time — it goes from 2 to 5% at the end of the model. A significant part of your budget is taken away at the start. We think the incentives should be lowered over time, and then some of those retention and quality thresholds should be lowered, so you have a more appropriate budget at the start.”
David Pittman of NAACOS agrees with that assessment, pointing out that the discounts under direct contracting are basically savings that CMS takes off the top. Because of the nature of how the model is set up, CMS will take the initial savings a provider generates and put it toward Medicare. The discount can get as high as 5% during the later years of the model, so in order to generate true savings, the provider has to save more than 5% of their benchmark, which Pittman said is a very large number.
“Based on whether you think you can save more than 5% of the benchmark, it favors those who are more experienced with caring for patients and the management tools that go into that,” said David Pittman. “That’s why it’s causing a lot of more inexperienced folks from entering into this program, because that discount is very steep. NAACOS has been calling on CMS to make it more realistic, and more attractive for folks to get into the model to succeed.”
For its part, Premier has been advocating for the Biden Administration to make changes to the benchmarking and quality withholds. While it’s still unclear whether this will result in real changes, Aisha Pittman said Premier wants to see more shared savings on one of the tracks.
“If we see more reasonable discounts and withholds, if we get rid of this disparity and change the shared savings approach, I think this model will really flourish. It could be ripe for expansion.”
Rutledge and Fernandopulle expect there will be changes in payment and in how care is delivered, and anticipate the current administration to make some modifications that will allow later adopters to jump on board — the ones who needed a longer glide path to get there, and who can’t accept 100% of the capitation, or the risk, in the first year.
“The reason for the demonstrations is that people learn the rules and which ones make sense,” said Fernandopulle. “In value-based care, some rules get in the way — what you can and can’t do with technology, etc. They have the authority within the program to grant waivers to let people like us break some of those rules, and prove they were stupid rules to begin with, and perhaps change them for people.”
David Pittman said direct contracting certainly holds promise.
“We learned during the pandemic that providers needed more financial certainty for caring for their patients,” he said. “ACOs did better at caring for those patients because they had relationships, more incentive to reach out to folks. And care managers to help them bridge gaps in care when a lot of folks were going without care because they couldn’t go into the doctor’s office.
“Direct contracting will allow providers more financial certainty than they’ve had under traditional fee-for-service,” he said. “It gets us further away from fee-for-service than what we’ve seen from past iterations of ACO models from CMMI, and that will kind of help push the envelope in moving into other care models for larger sets of providers.”