Direct Contracting Fundamentals for Negotiating with Providers

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By and large, self-insured group health plan sponsors look to their third party administrators (“TPAs”) to establish networks and negotiate rates with providers. Those TPAs are often subsidiaries or divisions of large insurance companies, which offer the same networks and rates consistently across the range of plans they underwrite and service. Consequently, the specific needs of self-insured plan sponsors and their participant populations may be neglected when relying solely on insurer/TPA network arrangements. This is where direct provider contracts can help plan sponsors reduce costs while also potentially increasing the quality of care for certain treatments and procedures.

Overview of Direct Provider Contracts

Over the last decade, it has become increasingly common for self-insured plans to negotiate direct arrangements with healthcare providers—typically, large hospital systems or provider networks—under which the plan and its participants receive care pursuant to customized terms and reimbursement rates. These arrangements may apply to the entire spectrum of health care services for which benefits are provided, or they may be tailored to a specific subset of services, like joint replacements, cardiac procedures, or other high-volume, high-cost procedures.

Direct provider contracts offer self-insured plan sponsors a unique opportunity to gain control over both the quality of care and escalating claims costs. Working directly with providers allows self-insured employers to design an arrangement that is tailored to meet the specific needs of its employee population. At the same time, employers negotiating direct contracts with providers should be aware of a number of potential legal compliance issues and contractual considerations when structuring and negotiating such arrangements.

Compliance and Contractual Considerations

As with any other group health plan, employers with self-insured plans entering into direct provider contracts must ensure that the plan, and thus the direct provider contracts, are designed and administered in accordance with applicable laws, including ERISA, the ACA, HIPAA, the Mental Health Parity and Addiction Equity Act, etc. Employers must be particularly attentive to certain ERISA fiduciary and prohibited transaction concerns. For example, if the provider contracts directly with the self-insured plan to provide plan administrative services, the contract will be subject to ERISA’s prohibited transaction rules governing service provider contracts, which generally state that the compensation paid to the provider must be reasonable, and which necessitate that the contract itself must be terminable upon reasonably short notice to prevent the plan from becoming locked into an arrangement that has become disadvantageous to participants.

If the provider assumes certain administrative responsibilities, doing so may make the provider an ERISA fiduciary with respect to the plan and its participants. In such cases, the contract must be structured to ensure that the provider will act in accordance with its fiduciary duties of care and loyalty under ERISA, avoid conflicts of interest, and refrain from participating in prohibited transactions. For example, a fiduciary generally cannot use its authority to cause the plan to pay compensation to itself or to another related party (i.e., fiduciary self-dealing). Accordingly, if any part of claims administration is delegated to the provider, the parties should ensure that the arrangement is structured such that the provider is not permitted to use discretionary claims and appeals authority to direct the use of plan assets to pay itself or related parties.

Some direct provider contracts are designed to create cost savings for the plan and its participants through rebates or “revenue sharing” reimbursements back to the plan sponsor. For example, while the health plan’s primary TPA may continue to administer applicable claims and, thus, may continue to apply its own contracted reimbursement rates, the provider may agree to rebate a portion of that reimbursement back to the plan sponsor as part of their direct contract for certain procedures. When direct provider contracts are designed in a way that results in rebates/reimbursements back to the employer, those funds likely should be treated as plan assets, meaning the funds are subject to ERISA’s “exclusive benefit rule” (i.e., the funds must be used exclusively to provide benefits and/or to pay for the reasonable expenses of plan administration).

Additionally, there is some risk to the employer that the above rebate/reimbursement arrangements could result in the plan being deemed a “funded” plan. Funded plans are not eligible for the relief from ERISA’s trust rules under DOL Technical Release 92-01 or the exemptions from various Form 5500 reporting requirements under 29 CFR §§ 2520.104-20 and 104-44, including most notably the annual audit requirement. Based on available guidance, it is unclear how the DOL would apply the funding rules in this context; however, analogous guidance relating to MLR rebates suggests that a plan receiving plan assets back from a service provider may be able to avoid “funded” plan status by using those plan assets for permissible plan purposes within three months of receipt.

From a contractual perspective, insurers and TPAs with their own provider networks often will design their in-network contracts with providers and service agreements with plans to limit the ability of providers and plan sponsors to enter into direct contracts with one another that may undercut the insurers/TPAs’ rates and eat into their revenues. Employers and providers seeking to enter into direct arrangements should carefully review their existing contracts with TPAs/network providers. If entering into a direct provider contract runs afoul of any provision of those contracts, the employer and provider should mutually determine whether their actions constitute breaches of contract, the extent of potential liabilities stemming from those breaches, and what actions may be taken to eliminate the breaches and/or potential liabilities stemming therefrom.

The Upshot

Direct provider contracts can be a great way for self-insured plan sponsors to work with healthcare providers to reduce costs for the plan and participants and potentially create better quality of care, while also increasing revenues for the provider. However, direct provider contracts are complex and require navigating and coordinating relationships between and among the employer, the provider (and, possibly, the TPA). The provider may assume responsibilities and provide services typically provided by TPAs, such as case management, quality improvement, and even member service functions. Thus, an employer will want to be satisfied that the provider has the administrative capacity and expertise necessary to provide such services. In addition, both the employer and provider will want to ensure that their arrangement does not create any compliance failures or contractual breaches, which may expose the parties to potential liabilities from TPA, participant, or other third party litigation or governmental enforcement efforts.