Medicare's Direct Contracting - Financial Impact

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The financial impact of Direct Contracting

Medicare’s Direct Contracting payment model provides an opportunity for primary care providers (PCPs) to capture the full dollar value generated from effectively managing care for Medicare patients. PCPs can use these funds to reinvest in their staff, their practices, and their patients.

Let’s walk through a simulated example for Dr. Ruiz.

Meet Dr. Ruiz

She is a Primary Care Physician (PCP) who practices in Raleigh, NC 27604. She has 213 Traditional Medicare patients in her practice.

(Dr. Ruiz is not a real physician, and the data shown in this example is a representative example of the Direct Contracting model)

She is part of a Direct Contracting Entity (DCE)

When she signed up with the DCE, they reviewed the historical spending patterns for her Medicare members.

The 2019 spend for primary care office visits for her Medicare patients was $56.00 Per Member Per Month (PMPM).

This PMPM amount is approximately what she will get paid for each active Medicare patient that is attributed to her practice.

The DCE walked Dr. Ruiz through how the overall historical cost of her Medicare patients compares to the benchmark and regional rate that Medicare sets for her community

The benchmark is a blend of her own historical performance and that of her peers. It also incorporates the clinical severity of her patients.

If the total spend for her Traditional Medicare members is less than the benchmark, she will earn back a portion of the savings. Medicare keeps some, and then the DCE and Dr. Ruiz will share the rest of the savings.

Different DCEs have different ways to share in the savings, with some offering a higher portion of the shared savings for a lower monthly per-member payment.

Some DCEs will also offer a higher portion of shared savings if the physician is also willing to take downside risk. Downside risk means that, if savings are not achieved, money is owed back to Medicare.

Dr. Ruiz’s historical spend is below the benchmark, and she is only comfortable with a moderate level of shared savings risk. She joined a DCE that best met her risk tolerance, with 25% shared savings potential.

The DCE and Dr. Ruiz looked at how her historical spend breaks down across different categories

Based on this analysis, she knows that Part B spending is one of the main cost drivers of her overall spend.

Fortunately, the DCE she belongs to is building out a preferred provider network of aligned specialists in her area that will help bring this number down. 

Now, Dr. Ruiz is in her first year of the Direct Contracting program, she is getting stable monthly payments at the per-member per-month (PMPM), or capitation, rate of $56.00

Since she has 213 active members, that means her revenue for these patients is
$11,928 per month.

By shifting to this new payment model that is not tied to the volume of visits she can fit into one day, she is able to personalize how she spends her time with patients.

For complex patients, she is able to have longer visits. For patients who need more frequent check-ins, she is able to use different ways of communicating like secure messaging and video calls. 

Dr. Ruiz can also more effectively use a team-based approach, to ensure that patients are getting not only the frequency of care that they need, but the specialized services specific to their own health and social circumstances. 

She is also on track to achieve shared savings.

While she has increased her SNF spending, this has been more than offset by a corresponding decrease in inpatient hospital spend. She has also started to leverage her DCE’s preferred network of specialists, further adding to her shared savings forecast. 

Dr. Ruiz is on track to achieve total savings of $240k across all of her Traditional Medicare patients

Based on her DCE contract, and the way that Medicare calculates shared savings with the DCE, she would then retain $23k of this amount.

In this scenario, her total annual compensation would be approximately $166k: $11,928 per month for the capitation revenue ($143k annually), plus $23k in shared savings. 

Interested in seeing how the components of the program change based on your own unique inputs? Enter in different variables below and see how the Direct Contracting program might look for you.

Panel Health

What is this?
What is this?
This variable relates to how healthy or sick your panel is total, compared to the Medicare population in your region. It is calculated based on the Medicare Risk Adjustment Factor (RAF) methodology.

Anticipated Panel Growth

What is this?
What is this?
This variable relates to your practice growth strategy. For example, if you are trying to grow your practice you will select 5%, 10%, 15%, or 20%. If your goal is to have a stable practice size, you will select 0%. If you have a closed panel, you will select -5%.

Spend Reduction Potential

What is this?
What is this?
This variable relates to how much you think you can reduce the amount of your Medicare patients’ total healthcare spend in a year.

Total Estimated
Shared Savings

Annual Savings Forecast

Estimated Annual Revenue

In this example, the amount of estimated Shared Savings is calculated based on the method Medicare uses to calculate the total amount of savings it shares with the DCE, a 25% shared savings selection by the participating physician, and full achievement of the 5% quality withhold amount. Pearl can support you in implementing strategies to reduce your patients’ total healthcare spend, meet your quality benchmarks, and achieve Shared Savings.

This example is illustrative only, intended to show how different variables could impact how the Direct Contracting program can work.

See what Direct Contracting could mean for your practice, in practice.

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