The Payvider Movement
Part 2 of 3: What is the business impetus to become a payvider?
A concept whose time has arrived.
Health system leaders are feeling increasing pressure to achieve greater financial and strategic impact for their organizations. At the same time, the current healthcare environment is making it more challenging for them to do so. In their efforts to find viable solutions, many health systems are now weighing the pros and cons of creating their own payvider solution, taking on the roles of both payor and provider. As covered in Part One of this three-part series, the timing for the payvider strategy appears to be right for those health systems seeking to secure greater control of both financial and clinical realms of healthcare and interested in pursuing new avenues of growth. But, while market forces are making this move feel intuitively right, it is important to take a hard look at whether this is the right move for your organization, both strategically and financially. In this installment, we will present the business case for establishing a payvider solution.
What the payvider model can do for today’s health systems
Becoming a payvider offers financial value, such as driving additional revenue for the health system, as well as strategic value. That can include building the health system’s brand and position, developing relationships with regional employers and individuals, and providing greater control in negotiations with other payors. Perhaps most important, it can give health systems the opportunity to lead in healthcare reform by providing them with a mechanism to align incentives and deliver high-quality care at a fair price.
The Hard Facts: Tangible Values of Becoming a Payvider
Market share growth
An increasingly attractive way for health systems to establish growth is to introduce a payvider solution that can enable them to capture a greater portion of their market by engaging area employers. The payvider model can ensure a steady stream of patients, with fair reimbursement rates that are paid by those patients’ employers. Establishing prepaid (also known as capitated) plans or services can further help to drive steady and predictable revenue. For even greater growth, the most successful payviders participate within narrow networks that can efficiently drive patient care volume to high-quality providers while eliminating low-value providers that tend to be high-cost and/or low-quality options. In addition to driving growth for the health system, it can be both clinically and financially beneficial for patients.
Although health plan profits likely won’t outpace the delivery-side revenue, the payvider model can create a steady revenue stream opportunity that is separate from the health system’s traditional care-delivery income. Those diverse revenue streams can be generated by a combination of administrative fees, wellness and disease management programs, pharmacy, stop-loss insurance, voluntary benefits, and more.
Value-based care success
Although many systems have had success in value-based care arrangements, partial or full capitation, and other risk-based arrangements without becoming a payvider, becoming a payvider and offering products like this directly to employers without another intermediary can be financially rewarding for health systems. Using all the levers of population, including plan design and member incentives and engagement, coupled with the health system’s resources, providers who become payviders are in the enviable position to make at-risk payment arrangements profitable.
The Softer Side: The Nonfinancial Value of Becoming a Payvider
Be a catalyst for change
While medicine continues to make great advancements in the twenty-first century, healthcare providers largely remain stuck in an outdated twentieth-century health system construct. Most health systems continue to carry the burden of enormous overhead and human resource fixed costs. Meanwhile, population health needs are becoming increasingly less episodic and more longitudinal, setting the stage for long-term management of chronic conditions (e.g., metabolic disease, behavioral health, and subacute conditions such as autoimmune diseases and some cancers). However, the archaic health system construct is simply not set up to deliver the care needed in today’s rapidly evolving landscape. Here are just three examples of how the construct is mismatched to today’s needs, capabilities, and market demands:
- Health systems are heavy on facilities, but a significant portion of care can now be delivered effectively as outpatient or in-home.
- Care delivery models are overly physician-centric and would benefit by evolving to leverage other qualified providers, including nurse practitioners and pharmacists, to deliver care where appropriate.
- Current practices do not take advantage of available technology and remain too focused on the in-person visit rather than taking advantage of asynchronous communication and automation of repetitive tasks.
For a payvider, the incentives are all aligned for health system leaders to drive real change—not just payment reform, but also care transformation. By consolidating both delivery and finance under one strategic leadership team, payviders create opportunities to reconstruct the system and make progress toward the Quadruple Aim.
Build the brand and defend the strategic position
Becoming a payvider can enable a health system to regain control and create a strategic moat around themselves that can help prevent other payors or disrupters, such as independent direct primary care or virtual care companies, from significantly impacting their markets. The payvider model can also create a desirable “sticky” ecosystem that encourages high loyalty from both patients and referring physicians, leading to sustained revenue streams and growth. Because the payvider model puts the provider in the driver’s seat, health systems are better able to drive care transformation, enabling them to do the right thing for the patient while simultaneously contributing to much-needed payment reform. It’s what some might call a win-win scenario.
Exploring the Business Case for Payvider
In today’s healthcare climate, there appears to be no shortage of factors that make the payvider solution attractive and worth pursuing. But is it a good financial decision? One of the most important factors for any health system considering the move is the business case for becoming a payvider. While it is not practical in this format to present the specific financial picture for every size and type of health system in every U.S. market (although individual scenarios can be provided by Contigo Health, LLC upon request), it is possible to illustrate the business case by using a midsized health system model and reliable national health plan membership data to represent a typical scenario. First things first: let’s begin by creating the framework.
Establishing a baseline
What might the numbers look like for an average health system? Let us begin by establishing a workable baseline. Considering national averages,1 we can approximate the numbers for health plan membership in the United States:
- Administrative and network access costs are approximately $40 per member per month (PMPM)
- Wellness and disease management programs beyond core health plan fees (a.k.a. buy-ups) are about $4 PMPM
- Care-delivery fees average about $5,904 per member per year (PMPY)*
*The above is based on a report from the Kaiser Family Foundation indicating that the average employee total annual premium for health insurance in the U.S. is $7,380.2 Since administrative costs and profits account for about 20 percent of that premium, the amortized care costs per health plan member per year would be $5,904.
For our hypothetical example, we will apply those figures to a midsized health system in a top-25 midwestern city having 2,000 beds and 18,000 employees.
With a baseline set, we can examine the business case for the payvider solution over a five-year span that begins with the health system’s own health plan in the first year and then expands to area employers and beyond in subsequent years.
Year One: Payvider for the Health System
In the first year of implementation, Contigo Health recommends that the health system create its payvider model for its own employees. This enables the health system to build, learn, and refine its payvider offering within its own enterprise while creating a case study that can be leveraged later when promoting their payvider solution to other employers. Here is how the payvider model could benefit the health system, even when limiting the solution to its own employees. Assuming a health plan covering 40,000 lives, composed of health system employees and their dependents, and a total benefit budget of approximately $295 million, the following can be surmised: Savings can be achieved through flexibility and smart design. If the payvider’s employee benefit plan is a traditional ASO (administrative services only) contract with a large national carrier, then in switching to their own plan administered by a neutral third party, they can experience savings driven by increasing domestic utilization, creating direct contracts with high-utilization nondomestic providers, and using their own care management and care navigation capabilities to ensure their employees access only high-quality, appropriate care.
Our example health system payvider, through smart benefit design and improved provider selection programs managed by the health system, successfully increases domestic utilization from 70 percent to 80 percent, resulting in $29.5 million in cost savings. They save another 5 percent, or about $15 million, by creating direct contracts with a local children’s hospital and oncology centers. Finally, our example health system payvider holds their total utilization flat, primarily by increasing access and incentivizing their employees to use their advanced primary care teams. Those teams effectively manage chronic disease and reduce inappropriate care, enabling the system to counter the projected 7 percent increase across the industry. Even if the health system maintains a flat trend, the health plan’s projected savings would still be $20.65 million.
In Year One, by applying its payvider solution only to its own employees, the average midsized health system could expect to see a combination of savings and cost avoidance totaling close to $65 million.
Year Two: Payvider for the Market
Equipped to leverage its experience as a payvider to its own health system employees, the health system is prepared to go to market with a payvider health plan whose benefit design features capitated (prepaid) primary care plus fee-for-service specialty care using a point-of-service plan design. For the sake of this business case, we will assume that the health system has successfully enrolled the following employers in its payvider solution:
One large group of city employees representing a total of 17,600 lives (8,000 employees plus dependents)
Five small area employers representing a total of 1,540 lives (700 employees plus dependents)
A portion of a national employer with a significant workforce in the region, representing 1,200 enrolled lives
In this reasonable Year Two expansion scenario, the health system adds 20,340 lives beyond those already within its own employee plan. Those additional nonemployee lives generate $9,763,200 in core health plan administration fees, delivering a 5 percent margin of $488,160. They also generate $976,320 in disease management program fees, producing a 10 percent profit of $97,632. The prepaid primary care, billed at $400 per member per year, generates $8,136,000 in care delivery. All care that falls outside of the scope of primary care is estimated at $4,500 per life annually, adding up to $91,530,000. Assuming that 80 percent of that care is to be delivered domestically (after all, the payvider influences domestic utilization), that equates to $73,224,000. If the health system historically claimed 50 percent of the market, it can be assumed that 50 percent of that care, or $36,612,000, is net new revenue for the health system.
Year Two adds:
non–health system employee lives
in disease management program fee profit (10 percent of $976,320)
in ASO fee margin (5 percent of $9,763,200 in ASO fees)
in prepaid primary care ($400 PMPY)
net new revenue (assuming provider market share of 50 percent)
in nonprimary care (80 percent domestic utilization of $91,530,000)
Year Three: Payvider for the Region
Building on the success and momentum of Years One and Two, the health system can realistically continue to expand the growth of its payvider program’s nonemployee lives by 20 percent, reaching 24,408. Applying the same revenue line items presented in the Year Two example, the revenue opportunities become increasingly attractive in Year Three.
Profit on ASO fees at 5 percent now equals $263,606
Profit on disease management fees at 10 percent adds up to $117,158
Primary care capitation reaches $9,753,200
Domestic specialty care generates $87,868,800 equating to a net new revenue sum of $43,934,400
Years Four and Five: Payvider for All
With continued focus on growth, building on three years of successes, the payvider continues to establish 20 percent growth each year, resulting in new care revenue streams reaching $63,265,536.
Additional Growth via a National Narrow Network
In addition to the care revenue generated by the growing volume of lives covered by the health system’s payvider health plan, the payvider may want to consider participating in a national network composed of other payviders and health systems. As a member, the payvider can work together with others to win national account business, accelerate growth, and generate fees for members who live outside the current reach of the health plan’s service area. Conversely, the payvider can also generate additional care revenue at fair rates for those lives covered by other payviders within that narrow national network.
The Need—and the Numbers—Support Payvider
Provider acquisition by payors, the continuing shift to value-based care, and payor-provider partnerships that have failed to support the delivery systems can all create pressure on health systems. Rising costs and labor shortages compound the situation. Health system leaders seeking opportunity are looking more intently at the payvider solution. And, as has been laid out in this paper, the business case can be strong. Further, as covered in Part One of this series, technology, regulations, and market dynamics areindicating that now is the right time for health systems to make the move to become a payvider. The only remaining barrier for some is how to make it happen.
Contigo Health is a consolidated subsidiary of Premier, Inc. and is committed to leading the way to financially sustainable healthcare. As a health benefits platform that leads direct-to-employer and direct-to-provider relationships, Contigo Health is relentlessly focused on revolutionizing healthcare through appropriate, cost-effective, transparent, and thoughtful benefits design. One of those solutions is the Contigo Health® Payvider Activation program, which was developed to give health systems a comprehensive, turnkey payvider activation solution that presents everything needed to build and grow their own payvider program with confidence while minimizing risk.
Part Three of this three-part series will explore how health systems can operationalize a payvider solution and make it work while still managing their full-time responsibilities.
1. Agency for Healthcare Research and Quality. Medical Expenditure Panel Survey. Statistical Brief #543: Trends in Health Insurance at Private Employers, 2008-2021. July 2022. https://meps.ahrq.gov/data_files/publications/st543/stat543.shtml. Accessed 1/31/2024.
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