Get Ready to Excel in Direct Contracting

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Tune into another episode of Start Your Day with Avalere. In this segment, experts from our Policy team and the Center for Healthcare Transformation discuss distinct features and frequent questions for CMS direct contracting payment model and its future outlook.


Natascha Dixon Edelin , Principal, Associate Immersion Program

Natascha Dixon Edelin partners with clients to navigate dynamic market changes, understand their strategic opportunities and implement innovative payment and delivery models.

Tom Kornfield , Senior Consultant, Policy

Tom Kornfield provides analytical support and strategic advice for clients on Medicare Advantage risk adjustment and payment, and on Part D issues.

Gabriel Sullivan , Consultant II, Center for Healthcare Transformation

Gabe Sullivan supports clients with research and analysis that span a variety of healthcare sectors and stakeholders.

This interview was originally published as a podcast. The audio is no longer available, but you can read the transcript below. For updates on our newly released content, visit our Insight Subscription page.


Natascha: Hello and welcome to another episode of Avalere Health Essential Voice in our Start Your Day with Avalere podcast series. My name is Natascha Dixon Edelin, and I’m an Associate Principal in the Center for Healthcare Transformation.

I am joined today by Tom Kornfield, who is a Senior Consultant on our Policy team, and Gabe Sullivan, who is a Consultant in the Center for Healthcare Transformation. Tom has over 20 years of experience analyzing and developing Medicare and Medicare Advantage payment and risk adjustment policies. Gabe’s expertise encompasses value-based care, accountable care organizations (ACOs), and bundled payments.

Over the last several months, the 3 of us have had the opportunity to help clients better understand direct contracting. We developed a financial payment model to help clients not only understand the model’s payment mechanisms, but also estimate the potential savings and losses over the life of the program. So, Gabe and Tom, welcome. It’s great to have you here.

The Center for Medicare & Medicaid Innovation (CMMI) set out to create a streamlined advanced primary care payment model built on the original ACO framework. If you’ve had a chance to look at the methodology, you know it is highly complex, but even with this complexity, it has strong participation.

Currently, there are 51 organizations that have signed up to participate in the first cohort. To give you a frame of reference, when the Next Generation ACO model was first launched, it only had 18 participants. So again, tremendous support.

During today’s podcast, we’re going to walk through the questions we frequently hear from both current and prospective participants such as, why is Centers for Medicare & Medicaid Services (CMS) doing this? What is direct contracting? Why would providers want to participate in this model? What do participants need to be successful? And finally, what is the future outlook for this payment model?

Now, I would be remiss if I didn’t address the question that is on many people’s minds. Folks want to understand how healthcare, and payment models as part of that, will be impacted by the incoming administration. I think it’s important to note that value-based payment arrangements have traditionally garnered bipartisan support. It is our belief that the direct contracting model will continue as originally designed.

So now, Tom, rather than diving right into the model, let’s take a step back and look at why CMS created this new payment model. What problem are they looking to solve?

Tom: Thanks, Natascha. So, for many years, particularly since the Affordable Care Act was passed, CMS has been focused on ways to reduce costs and improve the quality of care provided to each Medicare beneficiary. A key part of that effort is moving providers away from paying based on volume to paying based on value. Value is a tricky term, but it can be measured both in terms of cost savings, as well as in terms of the improved health outcomes for Medicare enrollees.

So, this new model ties additional financial incentives to these quality outcomes and that’s how it incentivizes performance for physicians. Some might wonder, though, how this model differs from Medicare Advantage. We’ve seen a lot of growth in the private plan market, and in the private plan market, plans are paid capitated payment. In this new model, providers are paid a capitated payment.

The key difference here is that Medicare Advantage plans, while they get this capitated or per person per month payment, may not necessarily put their providers at financial risk. With this model, CMS is trying to encourage providers to take financial risk in a much more direct fashion by establishing payment with the providers rather than going through a health plan to get that payment.

Natascha: So, Gabe, as Tom mentioned, CMS is really focused on improving quality and value for those Medicare beneficiaries. Can you tell our listeners what direct contracting is and what makes it different from the other payment models currently available?

Gabe: Absolutely. So, the direct contracting model, or the DC model, is really the next evolution of primary care models where providers take on greater levels of risk than previously available in other alternative payment models, or APMs. It’s similar to an ACO in that it allows organizations to take on risk and earn financial returns based on the efficiency and effectiveness of care provided to patients.

But with a DC model, there are three distinct features: participation options, the payment mechanism, and patient engagement.

For participation options, CMS has created three tracks to increase overall provider participation and patients included in the model. The first track, the standard track, is for providers who have experience with Medicare fee-for-service and alternative payment models. Providers in this track will have tougher requirements such as the number of patients that must be included in the model. The second track is the new entrant track, which is for providers new to Medicare fee-for-service, and they have the option of beginning the model with a smaller number of required patients. The final track is the high-needs population track, which is for provider groups servicing high-needs patients, such as those who are eligible for both Medicare and Medicaid.

The second distinct feature to this model is the payment mechanism. CMS is offering both capitated and partially capitated payments, which we typically see in a Medicare Advantage or commercial risk model.

The final distinct feature is patient engagement. CMS designed this model to empower patients to self-select the provider that they want to treat them, and then will ultimately be included in this model.

So, these are just a few of the main features of the DC model, and there are a lot more details to be explored.

Natascha: Thanks, Gabe. Now, Tom, given the number of value-based programs that are already established, why might a provider consider participating in the direct contracting model?

Tom: Right. So as Gabe mentioned, CMS is trying to broaden participation and attract new participants to take on financial risks, such as those that are currently only operating within the Medicare Advantage, commercial, or Medicaid spaces. They are not taking financial risks in the Medicare fee-for-service side. So, plans may or may not put their providers at financial risk.

Through direct contracting, CMS is creating a model that’s meeting the provider where they are, which makes it accessible to those experienced provider groups, as well as new provider groups, and even those that specialize in serving specific high-needs beneficiaries.

For those that are new to the Medicare world that have participated in risk models previously, such as in the commercial or Medicaid space, the capitated payment arrangement could be a very easy adjustment for them.

The model also includes financial protections that are meant to enable providers to participate in risk sharing, while limiting financial losses that they could incur. This is CMS’s way to encourage participation by trying to prevent financial losses for providers.

Finally, the direct contracting model enables providers to offer these benefit enhancements and certain additional services. So, the objective here is to enable the provider to create a service offering that’s encouraging efficient, high-quality care for their enrollees by properly aligning financial incentives.

Natascha: Thanks, Tom. As we’ve discussed, CMMI is intentionally targeting a wide variety of possible entrants from those that are highly experienced with the ACO model, to entrants that are new to Medicare fee-for-service. So, Gabe, can you give our listeners a sense of what they would need to do to be successful in this model?

Gabe: Sure. There are some common things providers need to do to be successful, but it also varies based on providers’ exposure to and experience with Medicare fee-for-service and alternative payment models. New entrants are really grappling with a handful of issues. How does Medicare fee-for-service work? What are the components of its reimbursement system? And what does it mean to be part of it?

Next are the mechanics of this model and the CMS withholds, which is also new for those that have not been participating in Medicare Advantage or commercial risk models.

Finally, how do you acquire fee-for-service patients using this voluntary alignment methodology, which I alluded to before.

Now, those familiar with alternative payment models and primary care models, which is ACOs, are grappling with a set of different questions, such as, how much risk to take. This model offers an array of risk-bearing options. What are providers comfortable with and ready to assume? How do you succeed under capitated payment arrangements, knowing that there are not a lot of Medicare APMs that have this type of arrangement? Finally, how does the benchmark differ from other methodologies such as ACOs, and what does it really mean to perform compared to your benchmark?

So, we’ve been helping our clients answer questions based on their unique needs. We’re also finding that there are common tasks each provider really needs to do to be successful with this model. Providers need to be thinking about how to estimate your benchmark and understand the model’s payment mechanism impact to achieving savings and losses. We’ve developed a financial model to help current and prospective participants assess their benchmark.

Providers also need to understand how projected growth and medical costs impact savings, particularly in the out years given COVID-19. Providers must also have a clear understanding of infrastructure, administrative, and operational costs. This is an area that takes a lot of providers and APMs a few years to understand. Sometimes in programs like the ACO program, providers don’t realize savings until a few years out, mostly because they are trying to understand the infrastructure and administrative pieces to this model. So, if you can get a leg up on that at the very start of the model, you will be in a much better position to succeed.

Finally, understanding the market you’re operating in. These models are not a vacuum and there are a lot of other considerations to think through, such as, what are the existing ACOs, Next Generation ACOs, and other direct contracting participants in the target market? And will those different payment models and providers in your market be targeting the same Medicare beneficiaries or different ones? What will be the makeup of patient eligibility in that market? And finally, what are the historic costs and acuity level of patients in a market? How does that compare to other potential markets?

Natascha: I’ll direct the final question to both of you. Given what we know about the model, what do you expect the future to look like for direct contracting? Gabe, why don’t we start with you?

Gabe: Sure. So, as you said earlier, we know that there are 51 providers signed up to start this new model, even during a pandemic. For reference, only 18 providers joined the initial Next Generation ACO demonstration. Given these factors, we’re expecting interest in this model to grow.

Now, it’s important to remember that there is a second cohort beginning in 2022. Those providers who are taking a more cautious approach will have time to prepare their strategy, think through the mechanics of the direct contracting model, and really see how the first cohort performs in this new payment model.

With any type of payment model, the need for innovative partnerships arises, particularly for these more challenging models. These models are confusing and have notable risk. Providers might look to life sciences companies, community-based organizations, technology companies, and other stakeholders for general education support, analytics support, engagement support, and ultimately, strategies to reduce costs and improve care. It’s important to remember that, although this is a provider-based model, we are starting to see other stakeholders work closely with alternative payment models and providers to achieve success.

Tom: There are a couple of other items I wanted to share on what the future could look like for direct contracting. The first is uncertainty. I know that’s a term that’s gotten a lot of play this year with everything going on. But with respect to the model, there are a lot of questions about how many people are going to enroll. Will the enrollment for these providers look like what they’re expecting? How would it compare to their projections?

I think a second item here is, how would a new administration conduct oversight of the program? While I think there’s generally going to be support, and I doubt that the new administration would dial it back, I do believe that there could be a different way in which the new administration conducts its oversight and scrutiny of the providers. So that’s one thing to keep an eye on.

A third area is, what’s the impact of COVID going to be? What’s that going to mean for projections around payment rates, projections of the benchmarks, and how will that be adjusted over time?

And then fourth, I think there will be several lessons that we believe will be incorporated into the new cohorts going forward.

Another point I wanted to make is that CMS has shown a willingness to learn from these Medicare Advantage, Medicaid, and commercial risk arrangements. So even with the development of the direct contracting model, we’ve seen CMS continue to adjust based on input from the provider community. I think there’s a possibility that the model could evolve over time, depending on the input that they receive from providers.

Natascha: Alright. So, thank you both. The discussion today has been really helpful in addressing those key questions that we seem to be getting from participants, prospective participants, and folks just wanting to learn about this model. Your insights are valuable to every one of our listeners. And to our listeners, I want to thank you for joining today and listening to Avalere Health Essential Voice. If you’re interested in contacting Tom, Gabe, or me, you can simply go to

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