Sep 28 2020 | Thought Leadership | By

4 Takeaways from the Direct Contracting Financial Methodology Release

On Thursday, September 17th, the Center for Medicare & Medicaid Innovation (CMMI) released its highly anticipated series of financial guidelines for the Direct Contracting (DC) program. While many organizations have applied for the implementation period and first performance year of the program, the viability of their participation has hinged on the release of the financial details. Now that they are available, it is critical that applicants assess these details in the context of their own long-term value strategy and operational capabilities.

Upon review, we at Lumeris still see Direct Contracting as a great opportunity for providers to continue their value journey and diversify their risk portfolio. As outlined by CMS, DC contains many of the lessons learned in Medicare Advantage (MA) and is well positioned as a glidepath to managing MA risk.

Direct Contracting: A Refresher
As a reminder, DC builds upon lessons learned in the Medicare Shared Savings Program/ Pathways to Success (MSSP) and the Next Generation ACO model (NextGen) while incorporating successful approaches from MA and other private risk-sharing arrangements.

In addition, DC improves upon MSSP by offering more operating levers to help providers successfully manage their population such as:

  • beneficiary engagement incentives,
  • benefit enhancements, and
  • pass through of benefits to “preferred providers” to create a “virtual network.”

As part of the CMS Primary Cares Initiative, DC provides new payment models that aim to transform primary care to deliver better value for patients throughout the healthcare system. It allows providers to develop value-based care capabilities within Medicare populations that typically make up the largest share of a provider’s panel, thus creating a halo effect for managing risk in commercial and MA populations. While this program is now extended to six years starting in April 2021, it can be a critical element of a long-term Medicare strategy that can help health systems surge ahead on their value journey and keep up with the national payers anticipated to join DC.

What Should Our Health System Do Now?
What does the newly released financial methodology mean for your organization? Below are four recommendations on what health systems should do now:

1. Analyze current and historical performance of your network and understand where you stack up against your region’s benchmark. Benchmarks differ depending on whether beneficiaries are attributed through claims-based or voluntary-based alignment.Understanding the historical expenditure experience will be critical to Direct Contracting Entities (DCEs) with a majority of their beneficiaries sourced via claims-alignment. In contrast, any beneficiaries who are attributed via voluntary-based alignment will be regionally benchmarked, which is why understanding the regional lift is so important.

The financial details advise that Standard DCEs, under which a majority of existing ACOs will fall, will work off of a blend of historical and regional expenditure benchmark due to many of their beneficiaries being attributed through claims-based alignment. Unlike MSSP, this is a TIN/NPI-aligned program and understanding how each participating provider contributes to the DCE performance is essential.

Take note that the 2017, 2018, and 2019 baseline years remain consistent through all six performance years (through 2026), but the expenditures will be re-calculated each year to account for changes in the DC Participant Providers and beneficiaries who would have been claims-aligned. If the base years are already at a benchmark with a very well-managed expenditure rate, there may be limited opportunity in DC; likewise, the opposite may be true if the historical benchmark is loosely managed.

2. Review the preliminary rate book to understand your benchmark and expected capitation PBPM rate. Lumeris recommends that organizations interested in DC evaluate the DC rate book by assessing the service area counties where the aligned beneficiaries resided in each of the base years. Given that the benchmark is either a blend of historical/regional or regional data alone, it is important to generate a regional rate for a benchmark.

CMMI offers a detailed calculation to estimate the regional rate in the financial methodology details. Meanwhile, the blended/regionally-adjusted benchmark will also be important for calculating the expected capitation your DCE will receive to be distributed to your participant providers and fund DCE activities.

3. Calculate your network’s CMS-HCC risk score and determine the expected impact on your DCE benchmark. Recognizing that the benchmark is dependent on risk score, it is important to understand how the risk score is generated. For standard/new entrant DCEs, after normalization to ensure beneficiaries scale on a bell curve, an annual retrospective Coding Intensity Factor will offer a symmetric 3% annual cap to risk score growth. The intention is to “mitigate the incentive for organizations to redirect valuable resources toward coding optimization and risk score growth.” This is similar to the methodology in MSSP/Pathways.

Calculate where your regional risk adjustment factor is today by incorporating your expected attributed population into CMS-HCC risk software and evaluating how much of an impact the “cap” will have on the true acuity of the population and expected benchmark.

4. Take voluntary alignment seriously in DC. Voluntary alignment provides a great opportunity to strengthen consumer/beneficiary engagement, promote brand loyalty and encourage more coordinated care. In prior ACO programs, patients were typically attributed based on a plurality of services received. In contrast, voluntary alignment is a key component of the DC model and, depending on the uptake, could impact all Medicare ACOs.

DCEs should view voluntary alignment as:

    • a defensive play against new entrant DCEs (such as national payers and newly Medicare-enrolled physician aggregators),
    • a strategy to retain existing aligned beneficiaries, and
    • an opportunity for those with high per capita regional benchmarks to drive down medical costs.

Building a Long-Term Medicare Strategy with DC
Now that most of the program details are available, DC has the potential to be a differentiating platform for organizations to launch into a value-based world. In combination with many of the components of a proven program in MA and the lessons learned from prior Medicare ACO programs, DC is shaping up to be advantageous.

Providers are not the only organizations that need to be aware of this program. Payers and private equity-backed physician aggregators have been betting on the upside of this program as a major entry point to managing the Medicare dollar. Partnership with a proven operator to execute your Medicare strategy, with DC as a contributing population, starts immediately.

Not sure where to start? Talk to one of our advisors.

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