Understand your market before you get started

Get a handle on costs before starting

Direct contracting with self-funded employers can be a lucrative venture for your practice, but only if you work hard, plan carefully, and keep in mind good business principles.

"Many physicians believe that by starting their own organization or their own insurance enterprise they can practice medicine the way they want and all the problems of health insurance will go away. That’s unrealistic, not just in the terms of the way claims are paid but in the amount of money available. The market is there but they have to be willing to understand the market," says David Main, JD, of Shaw Pittman, a Washington, DC-based health care law practice.

First and foremost, physicians need to get a handle on the fundamentals of cost management, asserts Bo Bobbitt, an attorney who leads the health law team at Smith Anderson LLP in Raleigh, NC. "Look at any other business, except government and health care, and cost management is done routinely." Learn from California and other locations where physicians attempted to take risk without a proper infrastructure.

"A common mistake providers make is entering into a risk-taking agreement without a clear idea of what it will cost. That’s why so many become disillusioned and have gotten out of managed care. The HMOs have out-negotiated them on price, and they’ve lost a lot of money," Main says.

The use of diagnosis related groups has given the health care industry the ability to tabulate the cost of care and to link diagnosis, cost, and outcomes.

If you’re contracting with managed care plans and have done your homework, you should already know what it costs to deliver care. But you also need data on the populations you will cover to get an idea of what types of patients you are likely to see and how many will have which diagnoses.

Before you embark on a direct contracting effort get patient data from the employer, the employer’s former insurance company, or hire a good actuarial firm to get the information.

"Data are one of the most important commodities in health care. Not everyone has got it but if you’ve got it, you’ve got a lot," Main says.

This is where the experts come in. Rely on the expertise of consultants and other advisors to tell you what has and hasn’t worked in other communities and to help you set up a delivery system that will work in your community.

Choose a consultant who has expertise in setting up community based health care plans and who is a physician advocate. Check his or her credentials and references carefully.

Seek expert legal advice before you sign any kind of contractual arrangement. For instance, when you enter into a five-year contract, you want to make sure you have an option to get out the contract if something goes wrong.

Consider starting out on a limited basis. For instance you might limit the number of people you cover, or limit the benefits package to items you know you can do well. For instance, you might have limits on the types of drugs you cover. Pharmaceutical costs can get out of control. Or you might limit the very specialized kind of surgeries.

Include a provision that in the case of severely ill patients, the employer pays the specialists directly. In addition to making sure the patients get the best care, this lets you off the hook financially for an extremely sick patient.

"It’s the difference that working within a budget makes. With a budget you are compelled to find out who can do the best. It’s a real cultural shift," DeMarco says.

Here are some other tips from the experts:

• Make sure you have good re-insurance so that if catastrophic events happen, you’re not stuck with a catastrophic bill, advises Mary Beth Johnson, a partner in Womble Carlyle, a law firm in Research Triangl, NC.

• Insist the company assigns adequate co-payments and deductibles to the employees participating in the plan so they have some stake in controlling the costs.

• Make sure there is an easy way of determining if a person is still covered. The contract should include a requirement for timely notification if an employee is no longer employed or no longer covered by the plan.

• Make sure the contract specifies that you’ll be paid in a timely manner. Include a clause that says that if you give a discount and you’re not paid in the agreed-upon time frame, you get paid the full amount.

• Carefully study the compensation arrangement to make sure the contract doesn’t hold you at risk, Johnson advises.

"You wouldn’t want to be in a situation where you are paid a certain amount to cover an episode of care regardless of cost. Discounted fee for service would be preferable," she says.