Jun 30 2020 | Thought Leadership | By

Innovating in Time of Uncertainty: Revenue Model Diversification with Direct Contracting

John Fryer, Vice President, Lumeris

The Healthcare Dollar Challenge During COVID-19

As healthcare organizations move beyond crisis response and begin plotting their recovery path, the need for health systems to transform has jumped to the forefront of the national dialogue. COVID-19 highlighted the best and worst parts of our unique delivery system and will forever reshape the landscape.

One of the most problematic areas exposed by the pandemic was the dependence on a volume-based revenue model. As elective procedures and office visits were cancelled or postponed in an effort to reduce the spread of the virus, it became painfully obvious that organizations dependent on the fee-for-service (FFS) payment system would struggle to cope with what became 40-60% declines in revenue. Given that healthcare providers operate on razor thin margins (1-3% on average), withstanding this dramatic revenue decline would be nearly impossible for more than a short period.

It is also important to note that during this time, the overall amount of “healthcare dollars” in the market didn’t change (i.e., premiums), but the flow of the dollars certainly did. How could health systems have avoided some of this negative revenue impact? By climbing further up in the healthcare value chain by obtaining first dollar risk through pre-paid or capitated arrangements with payers (e.g., government, employers, commercial). Via first dollar risk, organizations’ revenue streams do not fluctuate with the volume of services provided for a population. Instead, providers are paid a pre-determined amount (usually on a monthly basis) and are expected to manage the health outcomes and cost for providing services to this population.

The Direct Contracting Opportunity

The restructuring of the healthcare revenue model is not an overnight transition and must be done in conjunction with broad care delivery redesign. That being said, the government (as the nation’s largest payer) is well on its way to moving organizations toward this transformational revenue model.

Given the many changes likely to occur to the healthcare ecosystem over the next year, organizations should specifically consider the CMMI Direct Contracting (DC) program as a means to accelerate their transition away from the broken, volume-based revenue model pervasive today.

HEADS UP: The deadline for submitting the Letter of Intent (LOI) and Application for Direct Contracting starting in April 2021 (Cohort 1) is July 6th. In addition, CMS will make applications for January 2022 starters available to all interested organizations (an LOI is not required to access the 2022 application). Planning starts now!1

Direct Contracting Program Elements

Announced in early 2019 by the Center for Medicare & Medicaid Innovation (CMMI), DC set ambitious goals to transform risk-sharing arrangements across the Medicare FFS population by offering participants both capitated and partially capitated population-based payments. While CMS has been experimenting with “value-based” programs that shift away from volume-based reimbursement over the years (e.g., MSSP ACO, CPC+, Next Gen ACO) with moderate levels of success, the DC program is the most aggressive move by CMS toward true first-dollar risk through capitation payment to participating providers.

When balanced with appropriate quality and outcomes-based standards of care, capitation has many potential benefits:

  • more predictable cash flows
  • reduced administrative burden (e.g., revenue cycle)
  • greater incentive for encouraging and providing preventative care
  • increased focus on the “value” (cost/outcome) of healthcare interventions
  • greater accountability at the individual provider level
  • increased flexibility to provide “non-traditional” services that may influence the health of a population (e.g., social determinants of health).
Preparing for Direct Contracting

However, jumping into an arrangement like DC is not for the faint of heart and requires new organizational capabilities—some that many healthcare delivery systems have been building but are in varying stages of maturity. Below are illustrative descriptions of how providers and DC entities will need to be organized to succeed in the program (refer to the program site for necessary requirements).2


Enabling and Funding True Population Health

While it would be expected that organizations have some foundational population health capabilities in place prior to entering into a DC arrangement, the program is designed to encourage and even financially support investments in strengthening/growing the capabilities that will be required for long-term success in managing first-dollar risk arrangements. How is that possible? By providing an up-front payment for the lives attributed to the direct contracting entity (DCE), CMS is encouraging and providing flexibility to DCEs to direct the dollars to the operational areas that will drive the best return in patient outcomes (quality, cost, satisfaction). These areas could include technology enhancements, digital tools, human capital (e.g., social workers, data analysts, care managers), or even social items (e.g., food, transportation, air conditioners). This feature presents a significant opportunity for healthcare delivery systems to accelerate investment in capabilities most have acknowledged they will need in the future but paired with a short-term funding source for capital required commitments.

Aligning with Consumer and Provider Network Realities

The DC program also aligns with two strategic focus areas for healthcare delivery systems that have accelerated over the last several years: 1) consumerism and 2) network alignment and growth.3


Voluntary alignment of the Medicare beneficiaries (i.e., encouraging patients to self-select their desired provider) helps the patient to take a more active role in choosing their provider relationships. If the beneficiaries’ chosen provider is a participant in a DCE, they would then become attributed to that organization. To support this selection process, CMS is giving DCEs additional tools, called patient engagement incentives, to kickstart the DCE’s member engagement efforts. These tools include items like vouchers for dental care, wellness memberships, and phone apps, and mimic many of the supplemental benefits currently available in Medicare Advantage. CMS will also allow continuous attribution to DCEs on a rolling quarterly basis which offers opportunities for significant growth in populations as capabilities mature. Healthcare delivery systems should see this element of the DC program as an opportunity to proactively connect with potential new patients while building capabilities to directly engage the fastest growing segment of the population at-large (65+).

Network Alignment & Growth

Both the Professional and Global tracks with the DC program offer flexibility in how DCEs structure their provider network. In the professional track, the advanced payment option creates an upfront cash inflow to the DCE that can support new value-based collaborative arrangements with preferred providers (i.e., those who provide contracted services but are not direct participants). This allows the DCE to engage a broader set of providers in their value-based initiatives without having to secure these providers commitment to the risk-based relationship with CMS. The Global track offers even more potential as the DCE can enter a total capitation arrangement with CMS and then define their own bundles across a broad network of providers to drive performance improvements. Both tracks should provide optionality for DCEs and their respective provider networks to create value-based models that engage both primary care and specialist physicians.


Non-Traditional Competitors See the Opportunity—Are Health Systems Prepared?

As organizations evaluate their own DC strategy, it is equally important to assess the impact that a competitor or new entrant may pose if they establish a DCE in overlapping or contiguous geographies. Given the programmatic opportunities highlighted above, DC creates multiple scenarios where provider networks narrow, high-value providers are established, and referral patterns shift away from the unaligned providers in the market. Couple these trends with the likelihood of physician aggregators using DC as an additional avenue to disintermediate and commoditize health systems, and the industry could be in for an extremely transformative next few years as the program rolls out. Below is the currently proposed timeline for the program.4



As organizations prioritize strategic initiatives coming out of the current crisis, DC should be a key consideration. As a vehicle to jumpstart innovation within the current revenue model in a product line—Medicare—that has traditionally offered minimal margin contribution, DC is a scalable program that can encourage and reward growth. Organizations that are able to engage beneficiaries and grow attribution, deploy infrastructure to manage and perform in capitation, and align incentives across their respective networks will be best positioned for a future healthcare environment.


1 Email notification from CMS, Now Available: Letter of Intent now open for Direct Contracting Model (Global and Professional Options), dated June 17, 2020.

2 https://innovation.cms.gov/innovation-models/direct-contracting-model-options

3 https://www.natlawreview.com/article/5-key-considerations-direct-contracting-adjusted-timeline-providers-may-want-to-take

4 https://innovation.cms.gov/innovation-models/direct-contracting-model-options. Most recent timeline announced June 3, 2020.


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