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Direct Contracting with Health Providers Can Lower Costs

Employers are better equipped than employees to shop for health care

Two business people looking at a cell phone.

Self-insured employers should contract directly with local health care providers to lock in reasonable pricing for health services because expecting employees to comparison shop isn't working, according to health-benefit managers.

"It's fundamentally up to employers to drive the creation of an employer-driven health care economy, which means it's up to employers to ensure that we're creating a real market in health care, and we don't have one today," said Rajaie Batniji, co-founder and chief health officer at Collective Health, a cloud-based platform for administering self-insured health plans. He spoke as a panelist at the recent 2018 EBN Benefits Forum and Expo in New Orleans.

The shift toward high-deductible health plans was supposed to encourage employees to shop for cost-effective health services, but "we're 10 years into this price-transparency experiment, if you will, and the data suggests people aren't really interested in becoming consumers—they don't know how to, because health care is too complicated," said co-panelist Jon Rankin, president of the North Carolina Business Group on Health, an employers group.

Rankin pointed to research showing that few employees are selecting more cost-effective care, even among employers that dropped traditional health plans and offer only plans with high deductibles. He noted that these organizations "did see some cost savings, which came from a reduction in care and primarily a reduction in preventive care," including fewer colonoscopies, for example, "even though colonoscopies were exempt from the deductible," as are other preventive care services.

The takeaway from these studies, Rankin said, is that with regard to health care consumerism, "people didn't understand how this whole thing works—which is why it's up to employers, as the largest health care purchasers, to make it easier for people to make those right decisions."

Not Yet Like Shopping on Amazon

Insurance companies and independent vendors have made online cost-estimator tools for health care services readily available, but "we're still in the process of going to whoever our doctor refers us to, not shopping whatsoever," Rankin said. "Hopefully, the Millennials are breaking that mold a little bit and are a little more apt to go online and shop with transparency tools," using the same mindset they bring to online shopping at Amazon and other sites.

"I don't find the shopping analogy convincing, frankly," said Milt Ezzard, vice president of global benefits at video game developer Activision Blizzard.

Activision gives employees a price-comparison tool to use when looking for "commodity" health care services that are prescreened for quality, such as advanced imaging, microscopic knee surgery or ear tubes for children, Ezzard said. "We give people a sizable financial incentive to use that product—hundreds of dollars if, for instance, you go to an MRI freestanding clinic and pay $500 versus a health system that is going to charge you $2,000 for the same test. We market it again and again," yet employee use remains stubbornly meager.

"The fact of the matter is that shopping for health care is nowhere near like shopping for a product at Amazon," Ezzard said. "Something you want on Amazon is something that's going to give you some satisfaction, some utility. Health care isn't [that]. It's something we deny, something we put off. There's nothing pleasant that comes out of it except maybe you don't die, or maybe your leg isn't hurting anymore. And it's going to cost you a fortune on top of it."

[SHRM members-only toolkit: Managing Health Care Costs]

Employers Take the Lead

What can work, Ezzard said, is direct contracting with health care providers.

Cutting out "middleman" third-party administrators, who take a hefty percentage of plan premiums and are not incentivized to hold costs down, can translate into big savings for employers, he said.

Employers are contracting directly with local hospitals, outpatient clinics and specialized providers (e.g., cancer treatment centers) rated as "centers of excellence" for specialized care. When contracting with care centers that aren't local, employers can reimburse workers and family members for medical travel, and there are services that can help make these arrangements. Some hospitals provide support services for out-of-towners as well.

Most contracting, however, is done with local hospitals and clinics. Ezzard gave this example:

Babies are being delivered for Activision's employee population at hospitals scattered around the Santa Monica, Calif., area where the company is based. "We saw that the cost of delivering a baby at one hospital was $12,000. At another, it's $26,000, with the same basic service," he said. "The one that cost $26,000 advertised its beautiful ocean view, and our people were flocking there."

Ezzard said he contacted administrators at the more-expensive hospital and told them, " 'Look, I don't understand what the difference is here, but we're going to start actively steering people away from your organization if you don't bring your prices down to reality.' They actually listened, and we're not big—we have maybe 30 births at their hospital per year."

He advised, "That's what it's going to take for employers to manage health care costs. It's going to be up to the employer to work this out on the back end."

Related SHRM Articles:

Can Tech Tools, Incentives and Advice Inspire Health Care Shopping?, SHRM Online, October 2018

Employers Hold Down Health Plan Cost for 2019, SHRM Online, September 2018

Self-Insurance Is Just the Start, Say Health Plan Innovators, SHRM Online, May 2018

Health Plans Shift Toward Paying Doctors for Value Provided, SHRM Online, January 2017

Related Resource:

A Tough Negotiator Proves Employers Can Bargain Down Health Care Prices,, October 2018


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