How to make direct contracting finances work

As direct contracting arrangements grow — including one state requiring health systems to offer them — a leading provider identified keys to boosting their finances.

Nick Stefanizzi, CEO of Northwell Direct, leads Northwell Health’s for-profit direct contracting subsidiary. Since adding its first customer in 2022, it has grown to serve more than 300,000 employee members from more than 75 local, regional and national employers and unions.

Financial sustainability

A key achievement is figuring out a financially sustainable approach to direct contracting — a challenge that has tripped up some health systems that previously tried it.

Financial sustainability is a clear challenge to direct contracting because it inevitably shifts a portion of a health system’s patient population from standard commercial rates to discounted rates offered directly to employers, Stefanizzi said in an interview. Those discounts are key to providing employer customers with average savings of about 20% compared with that of traditional insurance companies.

“And the big concern is: Are we cannibalizing more than we’re bringing in that’s new?” he said.

To track that key question, Northwell Direct established conservative definitions of existing conditions and existing members of the health system and compares that revenue to the revenue generated from each employer group it adds.

“We are contributing more net-new incremental volume and margin to the clinical services enterprise of the health system than they are cannibalized with [reduced] rates for them,” Stefanizzi said. “So, we’re positive on our contribution to the clinical enterprise; we’re profitable as a business in our own P&L [profit and loss statement].”

Critical for that accomplishment is careful analysis — before a new direct contract goes live — of the previous utilization of those patients and creation of new utilization targets. Meeting those targets is where he credits the robust clinical access and navigation capabilities also available from Northwell Direct.

“You go in with eyes wide open and a plan that you can execute on each of these employer groups. But, if you do it, you can do this in a way that will contribute more net margin into the clinical enterprise than you’re cannibalizing,” Stefanizzi said.

Lessons learned

Like every new business, Northwell Direct has learned as it has grown. Stefanizzi highlighted a few of those hard-won lessons.

Importance of stop-loss. A critical insight was the importance of working with stop-loss carriers to help them understand the strength of Northwell Direct’s care management capabilities and network that includes providers from both Northwell and other systems. Spelling out the cost-control results from its care management capabilities, customers were able to keep their annual stop-loss costs flat or hold them to small increases.

That compares with average 13% stop-loss coverage premium increases, according to a recent report.

That additional financial benefit of direct contracting over commercial insurers, especially for small-to-medium size employers, has been a major sales driver for Northwell Direct, he said.

Hire sales staff faster. Northwell Direct focused on finding experienced salespeople with established relationships to brokers — given their position with employers. Stefanizzi said the company’s sales function is fully staffed, but doing so faster would have helped.

Assess partners. Some early partner companies ultimately proved a poor fit for Northwell Direct. So, Stefanizzi emphasized the importance of careful assessment of potential partners.

Savings key

Stefanizzi credits the company’s growth and its 97% customer retention rate to the average savings of about 20% it provides to employer customers. That has translated to what Northwell Direct estimates is about $150 million in savings to those companies and unions.

Customers range from sole proprietors to the New York area employees of Whole Foods. In December, it garnered the largest direct contracting relationship in the country when it began covering 170,000 members of a large union (32BJ SEIU), which generally represents New York City building workers, security officers, and food and service workers.

“So, we think that this is a significant opportunity for us to be the leader on the issue of affordability, actually bringing a solution to the affordability crisis in healthcare to the market first,” Stefanizzi said. “We see the interest and the momentum behind this, and we believe that this will help further position us as the health system of choice as we go forward.”

Northwell Direct expanded to add non-Northwell providers to ensure that its network would effectively cover the New York metro area. Although Northwell is the largest integrated delivery system in the state of New York, it recognized that it needed more providers in metro areas like northern New Jersey and the Hudson Valley.

Those additions have grown its network to more than 55 hospitals, more than 125 urgent care centers, medical groups affiliated with Optum and many independent providers, including more than 5,000 behavioral health providers.

“That’s an incredibly high number when you think about the fact that most of those guys do not participate in insurance plans — the independents, anyway,” Stefanizzi said.

Organizational keys

Several early organizational decisions also were key to the company’s success, said Stefanizzi.

Structure. Stefanizzi underscored the importance of Northwell Direct’s commercial business structure, which drives its functioning with the discipline and structure of a commercial business. “Setting this up as an autonomous entity, governed by the health system that could move quickly and aggressively, almost with more of a startup mentality, an entrepreneurial kind of mentality, I think was really important,” he said.

Partnerships. Also, key was the early decision for Northwell Direct to focus on core competencies and then partner with other organizations to provide the related services its employer customers would need when replacing commercial insurance.

“There was this question of how much of the product do we need to own, and sometimes there can be a tendency to want to be able to say, ‘We do this all on our own,’” he said. “We resisted that temptation.”

While Northwell Direct focused on building high-quality networks and care management, its partner organizations provide services like third-party administrators for utilization management, stop-loss carriers and managing relationships with pharmacy benefit managers.

That decision allowed Northwell Direct to move faster into the market, cut up-front investment and eliminated the need to develop a wide range of expertise.

Market focus. The company also used Northwell’s experience with since-ended insurance offerings to focus on self-funded employers. Importantly, those employers retain the risk for employee costs, which eliminated the need for large, legally mandated reserves.

“That decision to focus on self-funded individuals allowed us to do this in a way that didn’t require massive capital holdings that could have been a bit of a barrier entry to this market,” he said.

Executive focus. Stefanizzi noted that his only job is leading Northwell Direct. It’s an important distinction because health systems commonly decide to appoint an executive to lead their health plans, one who already has other significant responsibilities like population health.

“Sometimes what ends up happening is those individuals can get distracted by the other priorities of the day for the health system, whereas my team and I are laser-focused on the employers and unions that we serve, and to be able to execute in a disciplined and focused way in this space,” Stefanizzi said.