Why the Biden Administration Should Not Stop Direct Contracting

Why the Biden Administration Should Not Stop Direct Contracting | Pearl Health | Gabriel Drapos

Much ink has been spilled on the Centers for Medicare and Medicaid Services (CMS) value-based care pilot known as Direct Contracting (see: Washington Post OpEd, BuzzFeed News, Senator Warren’s Subcommittee on Fiscal Responsibility and Economic Growth from February 2nd, and Representative Jayapal’s letter to the HHS Secretary). Here, I address the main criticisms of Direct Contracting in an effort to clarify why it is not the spectre of Medicare’s impending death knell many are decrying it.

Responding to: “Direct Contracting is a plot by the Trump Administration to privatize Medicare.”

The first critique is that Direct Contracting was part of an insidious plot by the Trump Administration to privatize Medicare, which the Biden Administration has inexplicably continued. Perhaps the previous administration did indeed intend Direct Contracting to be a first step on this path; the Geographic variant of the model would hint at this. But the Biden Administration wisely paused (and likely cancelled) this approach. 

Nonetheless, much of the criticism circulating confusedly incorporates references to this variant’s rules and powers, despite it being defunct and therefore irrelevant. What remains (the Global and Professional variants of Direct Contracting, henceforth GPDC) is simply an incremental evolution of previous value-based care models the government has tested. This is not a fruit of the poisonous tree.

GPDC allows healthcare providers, especially primary care providers (PCPs), to choose to participate in a model that will give them the tools they need to generate savings through diligent care of their patient populations, shifting the value they create to their own practices. The GPDC model is motivated by the view that high costs of care in Medicare stem from a lack of coordination and misaligned incentives. 

By sharing the savings realized from more active care management with the PCPs who actually generate the value, the GPDC model realigns the economic focus — away from high-cost facilities and reactive care and to individual providers and preventative care. At a time when our nation faces both a healthcare affordability crisis and a primary care supply crisis, these are necessary shifts.

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I understand the term “privatization” to imply concern that private actors, motivated by profits, will impose structural barriers, coercion, or deception to curtail patient access to care, so I will focus on those implications.

Let’s be precise: Direct Contracting Entities (DCEs) have no power to create gated benefit designs (i.e. referral requirements) or otherwise degrade the Medicare benefit structure (e.g. through increased patient cost-sharing), create closed networks of providers from which beneficiaries must receive care, or barricade care behind prior authorization or utilization management processes. Further, all communications a DCE has with Medicare beneficiaries must be pre-approved by CMS.

In short, they cannot avail themselves of any of the painful tools private health insurers use to achieve profits at the expense of patient access and consumer experience, nor can they engage in deceptive messaging. These points are critical to understand in the context of criticisms levied at the model.

In her February 2nd opening remarks, Senator Warren referenced a notion that private enterprises could “pocket as much as 40% in profits” under Direct Contracting. I can find no such rule in either the CMS Request for Applications to GPDC or the GPDC 2021-22 Participation Agreement (the agreement CMS and DCEs sign to participate in the model, not a publicly available document). I therefore assume this is a reference to the diminishing returns a DCE gets from CMS as part of the model’s risk corridor programs (available on pages 27-8 of the above linked RFA). Risk corridors are an actuarial mechanism meant, in part, to reward DCEs (and their member providers) less as they achieve greater tranches of savings, retaining more for the Medicare trust fund; they are not an indication of expected outcomes.

Moreover, it is worth noting that no DCEs are experiencing or expecting that degree of savings generation. In fact, Clover Health, one of the private Medicare Advantage health plans participating in GPDC, reported a 102.4% medical loss ratio on its DCE business for Q3 2021 as highlighted in its November Investor Relations report — meaning it will actually lose 2.4% for the quarter. Even in the rosy context of investor relations, Clover only cites a hypothetical 15% savings rate — nothing near 40% profits. (They also note some of the same points I highlighted above: “The lack of narrow networks and traditional levers such as utilization management make it more difficult to enter the Original Medicare market.”)

Stepping back, similar savings arrangements have been available to ‘private entities’ via the Medicare Shared Savings Program since its launch in 2012 under the Obama administration (where Enhanced track ACOs can earn as much as 75% of the cost savings they generate, capped at 20% of total benchmark). We believe GPDC is favorable to MSSP due to the former’s flexibility and lower administrative burden, not because of preconstructed biases that allow participating entities to achieve greater profits. I find it puzzling that MSSP ACOs have existed for so long as a program designed by Democrats without such accusations around Medicare privatization. As a Massachusetts resident who voted for Senator Warren, I am nonetheless forced to conclude this has more to do with politics than the substance of the GPDC model.

Another recurring charge is that this ‘privatization’ is happening without the knowledge or consent of the Medicare beneficiaries being allocated to DCEs. While it is true that beneficiaries can be aligned to a provider participating in Direct Contracting (and, therefore, a DCE) without taking any action if they have substantial history of receiving care from that provider, it is appropriate for CMS to make use of such a passive process in the context of a model that can only enhance beneficiaries’ experience in the healthcare system.

Let’s be very clear: the only changes a Medicare beneficiary should experience for being aligned to a DCE are: (1) a more attentive PCP that is more engaged with managing their care, and (2) optional “beneficiary engagement incentives” a DCE may apply for to reward patients for adhering to care plans or otherwise incentivize healthy behaviors. In other words: all carrots, no sticks.

Responding to: “Direct Contracting Entities and Medicare Advantage plans will have similar inflationary impacts to healthcare costs of Medicare beneficiaries managed in the models.”

The final main criticism levied against GPDC is that DCEs and Medicare Advantage (MA) plans are sufficiently similar that GPDC is destined to have a similarly inflationary impact to the healthcare costs of Medicare beneficiaries managed in the model. As noted above, the similarities between DCEs and MA plans are grossly overstated, but this charge accurately notes that MA plans have not generated savings for the Medicare Trust Fund. Will the same be true of DCEs?

The main mechanism by which MA plans inflate the reimbursements they receive from Medicare for managing their patient populations is called risk adjustment — a tool that allows MA plans to receive more money from Medicare for managing sicker patients. It was intended to ensure MA plans were not biased towards attracting healthier patient populations but has instead spawned an industry focused on increasing risk scores as much as possible.

The architects of the GPDC model learned from the mistakes of MA and, while they still incorporate the notion of risk adjustment, they enacted two critical changes to avoid a similar arms race: (1) the aggregate risk score of beneficiaries aligned to a DCE cannot increase more than 3% year-over-year, and (2) each year, all DCEs are re-indexed to the average risk score of beneficiaries aligned to DCEs nationwide.

Conceptually, this means that risk adjustment efforts will allow DCEs to “keep up with the pack” but will not lead to the same inflationary phenomenon experienced in MA. This will save Medicare money.

The year-over-year increase of Medicare costs is unsustainable. Personally, I am supportive of guaranteed national coverage, but increasing coverage on a fee-for-service chassis without addressing the underlying systemic inefficiencies in American healthcare will exacerbate the cost problem. Direct Contracting is currently the best plan that exists to further progress along this path. Moreover, being in favor of guaranteed coverage does not mean that there cannot be a place for private actors, working in partnership with that public guarantee and competing to create a more accountable healthcare system.

Being in favor of guaranteed coverage does not mean that there cannot be a place for private actors, working in partnership with that public guarantee and competing to create a more accountable healthcare system.

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Gabriel Drapos | Pearl Health | Chief of Staff

Gabe Drapos

Chief of Staff