As more Integrated Delivery Networks (IDNs) and employers move towards contracting directly with each other for health care services, the ripple effects are being felt in the supply chain and in old relationships with other players, including PBMs and pharmaceutical manufacturers. Precision’s Avi Mamidi discusses the benefits and obstacles of cutting out health insurance middlemen and moving towards direct employer-IDN partnerships.

IDNs and Employers Are Seeking Savings By Cutting Out Health Insurer ‘Middlemen’

Integrated delivery networks (IDNs) and employers both have good reasons for interest in contracting directly with each other for health care services, including cutting out health insurance middlemen and potentially providing better outcomes for workers enrolled in such directly contracted plans, stakeholders say.

But as more employers and IDNs jump in, these contracts lead to ripple effects and additional complications in the supply chain, disrupting old relationships with other players, including PBMs and pharmaceutical manufacturers. And they can be complicated to run: Direct IDN-employer contracts most likely still will require a separate third-party administrator (TPA) to run the plan and may even involve outcomes-based contracts with suppliers on the pharma side to complement value-based efforts.

Performance-based contracting is the goal of many IDNs, but several are still lacking in the infrastructure and staff needed to execute such agreements, says William DeMarco, president, Pendulum HealthCare Development Corp., who currently is working with employers negotiating direct IDN contracts.

“Those [IDNs] that have been working to achieve better outcomes and costs are seeing their contracts with employers growing,” DeMarco says. “For those without this capability, they may flounder for a while, being underpaid by third parties and/or eliminated from the value-based contracting process altogether until they can actually prove their performance.”

That being said, “there is more interest and desire to simplify the health care supply chain and minimize middlemen markups,” says F. Randy Vogenberg, Ph.D., principal, Institute for Integrated Healthcare. “That is part of the relationship shifts underway already by insurers as ASOs [i.e., administrative services only], along with IDNs, who have more infrastructure to provide better [quality and outcome] measures that can be agreed upon by all parties directly.”

All this can be confusing to pharmaceutical manufacturers as they try to gain access to market for their products, Vogenberg says. Right now, he points out, “pharma is not at that table when decisions are being made, nor effectively represented by their surrogates — plans or PBMs.” Vogenberg says he sees plenty of interest on the part of IDNs to market their services to providers directly, but actual growth is slow.

Financial Concerns Are Main Driver

Avi Mamidi, Pharm.D., R.Ph., senior director, access experience team for PRECISIONvalue, estimates that only around 6% of all employer-based health care management agreements involve direct employer-IDN partnerships. “The main motivations are financial and indirect fees-cost avoidance for employers to contract directly with a provider group, IDN or health system,” Mamidi tells AIS Health. “The main drivers for this are due to administrative fees from the payer, rebates and middlemen costs associated with PBMs and growing negative perceptions of perceived payer savings that employers see no part of.” He adds, “insurers are not happy with this trend, but the marketplace is still dominated by employers using payers for health care management.”

Pandemic Disrupts Here, Too

Prior to March 2020, the trend line for direct IDN-employer contracting seemed to be rising very gradually. But just as for nearly every other health care issue, the COVID-19 pandemic could have a huge effect on whether this contracting accelerates or plateaus. However, opinions differ on which way it might go.

Ashraf Shehata, KPMG national sector leader for health care and life sciences, says he expects IDNs to pull back from risk-taking because of the pandemic, since many provider systems don’t have the capability to handle the unexpected risk associated with COVID-19. “I think post-COVID, there’s going to be a very careful review of that business,” Shehata says.

Provider organizations with more experience in accepting risk — perhaps ones that had run their own health plans at some point — might be able to handle this type of unanticipated event more handily, Shehata says. Still, he says, “I think it’s going to be dramatically scaled down. Health systems are going to be looking at more cash-up-front relationships, rather than cash on the back end, because cash is king right now.”

At the same time, one area could see a bump: telemedicine. With the rise of telemedicine as part of the pandemic response, Shehata says he views the possibility of contracts between IDNs and employers just for the provision of certain telemedicine consultation services. “So the future might be they don’t have to have a full health plan relationship, but they could offer a telemedicine relationship through a partner or vendor or their own solutions that might give them an opportunity to sell their services to employers. Maybe the future is a telemedicine service-based relationship, not a traditional health insurance relationship.”

Pacific Business Group on Health (PBGH) President and CEO Elizabeth Mitchell doesn’t agree that the pandemic will have a negative effect on direct employer-IDN contracting. Mitchell says her organization’s members — which include very large, multinational corporations — have around 19 such agreements among them currently, and “the interest in direct contracting is growing significantly — there is a readiness among the large employers to do things differently that actually get them better value for the money they’re spending on health care, and direct contracting is high on that list of strategies they are ready to pursue.”

Mitchell views direct provider-IDN contracts around specific services — joint replacement, for example — as an effective “on ramp” for these types of contracts. PBGH members are able to do innovative work with provider partners, she says, and strong results drive further uptake among members: “They are learning from each other.”

In addition, DeMarco sees an opportunity for IDNs to work directly with employers to help them provide a safe work environment for employees as they return to work, plus primary care for anyone stricken with COVID-19. This could be a game-changer for employers who would be on the hook for workers’ compensation for workplace-acquired COVID-19, he says.

Market Forces Are Key to Startups

When it comes to determining potential candidates for direct IDN-employer contracts, larger employers — those with 150 workers or more — are the best suited for those types of arrangements, DeMarco says. He also notes that he has worked to bring groups of smaller employers together into a purchasing coalition.

Health systems typically are the ones to initiate discussions with large local employers around the possibility of a direct IDN-employer contract, Shehata says. “The health system will say to the employer, ‘You know what? You’re down the street from me here, I’m the majority organization in town, and I believe that I can give you more capacity and more capability if you join my network.’ So there’s what I would call proximity, and it’s usually initiated by the health care system.”

Any given IDN will have limits on how many employees it can serve, says Mamidi. “Most IDNs have only a regional footprint, so geographically speaking, they could not service the needs of employees from a national large-scale employer,” he says, adding, “having a large national employer contract directly with a smaller, geographically located IDN would not be ideal, but a large national IDN such as Kaiser Permanente could be seen as the gold standard for any type of employer. Still, Kaiser has operations in only 10 of the 50 U.S. states.”

While provider organizations may be interested at least in theory in contracting directly, other market forces — possibly a provider organization that’s not happy with the terms of its contract with a dominant health insurer — also can drive this transition, says Shehata. If a local provider group has a particular preeminent specialist, employers might be tempted to contract directly, he says.

Still, those same market forces can torpedo an existing agreement, Shehata notes — for example, if a local employer and an IDN build a specialty direct-to-employer program around a specific prominent medical provider who subsequently leaves the IDN, it might cause the employer to discontinue that program or lead to losses by the IDN.

Quality of care — and disappointment with the current standards — is top-of-mind for employers engaging in discussions with IDNs, Mitchell says. “They know that quality varies wildly, and the difference in outcomes based on where you get your care is just unacceptable. And unfortunately the intermediaries that they have relied on to actually measure and ensure quality have pretty much failed at that. So we are not seeing quality improvements that we should see.” Robust quality measures that look at patient outcomes are key to these arrangements, she says.

High Quality Is Essential for IDNs

Any provider group seeking to contract directly with an employer needs to make certain its program is truly excellent, says Mitchell: “It can’t just be marketing.” For PBGH’s Centers of Excellence direct-contracting program, IDNs often push back after they receive the request for proposal, claiming that “the bar is too high,” she says. “Then they may not be a fit. It’s a matter of being ready to meet metrics that are selected by the customers.”

“This all boils down to creating a win-win for both the IDN and the employer to focus on one of the highest areas of spend in this country: health care costs per capita,” Mamidi says. “The challenges that could — and should — arise could be in logistics, contract terms, understanding two-sided risk, agreeable metrics to measure success and outcomes and making sure that transparency and a symbiotic relationship are at the heart of every decision the IDN and employer make in this alliance.”

Starting at the exploration phase of the partnership, there need to be clear timetables and goals set up around the IDN’s infrastructure, capacities and services being offered, Mamidi says.

The benefits of direct employer-IDN contracts for both parties can be financial and nonfinancial, Vogenberg says. “Hospitals and employers are local and many times intertwined in their communities, so that is important,” he says, noting that a high-performing plan can be good for the community. “Financial performance of a plan among the parties is another key feature,” and the IDN can use its own success to market the benefits and outcomes of its services. The parties need to agree on performance measures and the level of risk the IDN will take, he says.

Entities May Share Savings, Losses

Most of the agreements still are driven mainly by fee-for-service pricing, Shehata says, although many also feature shared savings if expected costs for the employer fall below an annual per-member per-year limit. Similarly, he says, losses may also be shared with the employer in some instances, and the agreements generally are structured around cost, quality and utilization metrics.

The agreements also are likely to contain a requirement around primary care — for example, they may require the IDN to offer same-day primary care appointments and have some limit on how long a plan member must wait to see a specialist.

There’s also a potential disconnect in contracting that lies in how each party measures success, says Vogenberg. “Measures require data-sharing and agreement on performance metrics that matter to the employer. Typically, IDNs — and pharma — are protective of themselves and mostly utilize clinical or claims data that was useful to insurers. That doesn’t work for employers.” As a result, he says, new types of measures and metrics need to be adopted, tracked and shared between the parties “so that they are aligned towards a common set of outcomes.” The Employer-Provider Interface Council (EPIC), for which Vogenberg serves as board chair, is collaborating with other value-based initiatives and groups to develop those measures.

IDNs May Face Unanticipated Costs

In addition, employer-direct contracting can bring unanticipated costs to IDNs as well, mainly in the form of data and analytics development but also in the form of call centers and other member-facing infrastructure, Shehata says. “The investment costs to get that up and running are usually pretty high,” he says. “Sometimes it takes many years of the contract to recover those costs. So health systems have to be willing to make an investment and maybe take some more moderate returns or suppressed returns until that investment is made up, and then maybe they pick up another employer. So it’s not a short-term deal — it’s usually three to five years.”

Many IDNs can’t manage shared risk because it usually evolves to an arrangement where the employer wants a “not-to-exceed” per-member per-month spending limit, explains DeMarco. The three to five years it often takes to reach that downside risk requirement “giv[es] both parties and an independent actuary time to calculate out a solid benchmark fair to both parties.”

Some IDNs have purchased TPA software and obtained licenses within their own states to become a TPA, often starting with their own employees, DeMarco says. Others have contracted out to a neutral third party that can connect employers and IDNs to build a clinical database, he says, adding, “this database can and should report pharma data and, at some point, work with a PBM to create a formulary that shares savings back to the IDN and employers.”

The employer benefits that may stem from direct contracts with IDNs are numerous, Mamidi says, and may include reduced fees for health care management of their employees, plus a move to more value-based and outcomes-based contracts that hold the potential to improve the health of workers. “The advantages for the IDN or health system are that they can engage with providers using innovative health care delivery, digital therapeutics and new methods of patient engagement. There is also the prestige or reward of being recognized as an IDN that partners with employers directly,” he says.

Employee Choice May Be Seen as Issue

Still, there are some drawbacks, both for employers and for the IDNs themselves, says Mamidi. Employee choice is a major challenge, he says: “Some employees will see this as being too restrictive, and it may create a negative perception that their employer is not offering a buffet of options for their health care,” he states. “But this comes with a caveat for both the employer and employee: More choices mean more administration, which means higher costs to both the employers and employees in the form of copays and higher out-of-pocket costs.”

Vogenberg agrees that drawbacks for employers are related to employer size and geography. “Larger firms with multistate or international footprints need larger networks and the ability to deal with complex contracting situations, but that is more the minority than the majority of employers,” he says. Meanwhile, he says, for IDNs, the “related opposite” is true: “While they are a big local player, they are not a big national player. This has led to various affiliation agreements among marquis specialty provider entities (such as The Mayo Clinic and Memorial Sloan Kettering Cancer Center) or surgical specialty affiliations among multiple institutions that cover more geography or offer intra-USA medical travel programs (such as Harvard-Massachusetts General Hospital and Ochsner Health).”

On the IDN side, Mamidi sees fewer drawbacks. Still, he says, employers could expect an IDN to provide a full range of services and specialties, including “having pediatric specialists in-house for all disease states and conditions. There may also be pressure from the employer to the IDN to continue to demonstrate value-based care at a fixed cost, which may create unrealistic financial and resource utilization for the IDN.”

Pharmacy benefits also can become more complicated and problematic for direct-contracting IDNs, Shehata says. Over the last several years, major national insurers have brought PBMs in-house, either by building their own PBMs or purchasing an existing large PBM, he says, meaning that IDNs now have more limited leverage with PBMs, just at the time employers are becoming more concerned with pharmaceutical costs.

To solve that problem, “many of the providers will have to contract with a third-party PBM,” Shehata says. “That third-party PBM will have to integrate with their TPA, which is also not a trivial task. And that pharmacy benefit also has to integrate with the retail environment, and, on top of that, the health system itself has its own pharmacy distribution and specialty pharmacy business. So the PBM and pharmacy-related benefit question becomes much more complicated for a provider-owned health offering.”

Pharmaceutical partners working within this environment “should expect a similar level of accountability that we are seeking from provider partners,” Mitchell says. “Our members are asking us to also help them find better value in their pharmacy spend. They know there is enormous opportunity for savings and still achieving optimal care and treatment for their employees.” This might involve different sites of care, changes to the formulary or a specific pharmacy network, she says. Regardless, employers “have been relying on intermediaries to bring value, and they just have not done so, so they are looking to be more engaged in the purchasing to ensure that they are getting good value for spend.”

This is particularly true in the new post-COVID landscape, Mitchell says: “Many of their businesses have taken a big hit. They are going to be looking for savings, and pharmacy is one place they will definitely be looking.” Quality is still key, she says, but “when we have [PBGH] members who realize they can save hundreds of thousands of dollars on a single employee just by changing the site of care, they’re going to be looking, because there are opportunities.”

Contact DeMarco at, Mamidi via spokesperson Tess Rollano at, Mitchell via spokesperson Lisa Zamosky at, Shehata via spokesperson William Borden at and Vogenberg at

by Jane Anderson
AIS Health