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CMS and Direct Contracting Models – Is This the Future of Healthcare?

A doctor casting some sort of magic spell

For several decades, one of the most pressing political agendas has involved healthcare system reform. Going back to the Clinton administration, efforts to fix what appears to be an inefficient and expensive approach to healthcare. Major reforms occurred with Obamacare, and additional changes have since focused on various Medicare programs. Gradually, some progress has been made, but underneath it all, a fee-for-service structure has plagued effective change. The pandemic has made this even more evident over the last year and served as a catalyst in this regard. But the direct contracting model recently introduced by the Center for Medicare and Medicaid Services (CMS) may finally change that. And if successful, it may perhaps represent the future of healthcare in the U.S.

(Read more about the positive impact the pandemic has had on healthcare innovation in this Bold story.)

Direct contracting is a new model introduced this year by CMS that expands its prior accountability care organization (ACO) approaches. In many ways, it’s quite similar to ACOs, but it is also different in some very important ways. By finally eliminating a fee-for-service foundation, direct contracting lets healthcare organizations and providers focus more on value and patient outcomes. As a result, incentives encourage more of a preventative and health promotion approach to the future of healthcare. Notably, this has great potential in improving efficiency, results, and cost-effectiveness.

“By aligning payments with positive health outcomes, value-based care creates incentives for providers to keep people healthy and out of the hospital. It encourages physicians to come up with innovative solutions.” – Toyin Ajayi, M.D., Chief Health Officer and Cofounder, Cityblock

Direct Contracting Eliminates Fee-For Service

The direct contracting model introduced by CMS represents a new approach in caring for Medicare beneficiaries. Previously, both Medicare Advantage plans and ACOs attempted to create a value-based healthcare system for these patients. But both have limitations that prevented them from realizing cost and quality outcome goals. While both made healthcare organizations and payers more accountable, problems remained. Because both systems still paid providers based on a fee-for-service model, incentives to perform more services remained. As a result, a shift to value-based care was quite limited.

The reason many believe direct contracting reflects the future of healthcare involves the fact that fee-for-service reimbursements have been eliminated. In this new model, CMS contracts directly with a direct contracting entity (DCE), which is a larger healthcare system or insurer. DCEs then partner with direct contracting participant providers (DCPPs), which may be physicians, medical practices, hospices, or home health agencies. CMS pays the DCE a flat rate for each Medicare patient that the DCE covers at regularly intervals. This is known as a capitated model of care rather than a fee-for-service one. Thus, no matter how many services are rendered each month, DCEs still get the same amount from CMS.

“This model allows participating entities to build integrated relationships with healthcare providers and invest in population health in a region to better coordinate care, improve quality and lower the cost of care for Medicare beneficiaries in a community.” – Seema Verma, CMS Administrator

Direct Contracting Changes Healthcare Incentives

It’s been quite clear for some time that fee-for-service models are unsustainable for the future of healthcare. These models encourage providers to focus on diagnostic and treatment services because this generates compensation. In contrast, however, providers have no incentives to perform more services under direct contracting models. Instead, they can earn higher rewards for providing high-value care that results in optimal patient outcomes for less money. Direct contracting therefore encourages providers of all types to work together at providing the least amount of services that yield the best results. These types of value-based changes are what many believe will be required for the future of healthcare.

The word Medicare spawning all these other words
The future of healthcare–especially as it pertains to Medicare–lies with the direct contracting model.

The direct contracting model lets DCEs share in the savings they generate for CMS. Each year, CMS determines a performance year benchmark for the DCE. If the DCE spends less money than the benchmark, they get to have some or all of the savings. This is provided to them as a bonus at the end of the year by CMS. However, at the same time, if they exceed benchmark spending, the DCE will have to reimburse CMS money. This is how direct contracting models hold healthcare organizations and provider accountable. And this is what creates a system that is more focused on value rather than the number of services rendered. In essence, CMS wants the future of healthcare to be one where all stakeholders share some risk.

“This meaningful shift presents an opportunity for primary care providers across the country to assess their potential economics in direct contracting and, more importantly, manage their patients more holistically and with less administrative burden.” – Michael Kopko, CEO, Pearl Health

The Future of Healthcare Vision

The new model for value-based healthcare creates an environment that is actually better for all involved. By receiving a set payment for month, DCEs and providers can use this revenue that best serves them and their patients. Many providers appreciate how such a value-based model would have been helpful during the pandemic. Reportedly, providers saw a 32 percent reduction in fee-for-service revenues during this time. But if a value-based, direct contracting model had been in place, revenues would have remained steady. Notably, many healthcare companies recognize these advantages under direct contracting. Specifically, businesses like Pearl Health are helping organizations and providers alike navigate this new system to their advantage.

CMS naturally hopes direct contracting will prove to be highly effective for Medicare populations. If it does, their vision for the future of healthcare involves expanding this model to private industry. This is not likely to be a hard sale, given that many organizations and providers are already on board. Despite understanding that direct contracting models are far from perfect, they believe value-based healthcare is the future of healthcare. And thus far, CMS’ new model for Medicare seems to have the greatest potential of realizing this for all of healthcare.


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