Demystifying Direct Contracting

Joe Nicholson, DO – Chief Medical Officer

Direct Contracting is a term that has been floating around a lot across our industry recently. Although many providers understand it is some sort of new risk-sharing arrangement, few have dug deep into the nuances. So, here is a quick look at what it is, what makes it different from more familiar risk-sharing structures, and why it is important.

What is Direct Contracting?

Formally called the Global and Professional Direct Contracting (GPDC) Model, Direct Contracting is a demonstration model being run by the Centers for Medicare & Medicaid Innovation Center. The first performance year started in April 2021 with 53 Direct Contracting Entities (DCEs), and 19 additional DCEs were recently announced, with more to come, for the 2022 performance year. Additional performance years will go through calendar year 2026, and although the Innovation Center is not accepting new applications right now, it may for future years.

Direct Contracting qualifies as an Advanced Alternative Payment Model (APM), and the goal is to try to attract organizations that have not yet participated in federal risk contracts. Eligible organizations can include, for example: Independent physician associations (IPAs), integrated delivery systems, practice/hospital partnerships or commercial accountable care organizations (ACOs). Although providers can participate in both a commercial ACO and DCE, the same is not true for the Medicare Shared Savings Program (SSP). Providers who participate in SSP and wish to join a DCE must first leave their current ACO.

Direct Contracting is widely regarded as “the next step” in population-based accountable care.

How is it different?

So, how does Direct Contracting differ from other value-based models? One word: capitation. The current Direct Contracting arrangements allow providers to choose one of two capitation options: primary care capitation or total care capitation.

Direct Contracting is essentially an ACO, only with upfront payments that are calculated based on spending benchmarks. That way, providers have some means to pay for the infrastructure and care delivery changes necessary to improve outcomes.

Most other ACOs are basically modified fee-for-service (FFS) contracts. Providers bill and get reimbursed for each service, but then reconcile costs and savings up to 20 months later. For example, in the SSP, reimbursement follows the Medicare fee schedule with opportunities to share in savings if the minimum threshold is met. By comparison, Direct Contracting eliminates any ties to FFS. Instead, it is based solely on capitation, even allowing for capitated bundled payments.

The closest correlation between Direct Contracting and an existing model is a risk-based arrangement through Medicare Advantage (MA). However, Direct Contracting applies to patients with original Medicare FFS coverage (Medicare Parts A and B). Patients do not enroll in a network as they do under an MA plan. They can seek care from any provider, which means providers must ensure their practices have the tools and workflows in place to properly coordinate care. Otherwise, providers—who are responsible for managing the care of any patients aligned to their DCE—risk financial losses in this transition.

Alignment to a DCE is made either because a patient chooses a participanting provider as their primary provider, or because claims data shows that the patient received most of their primary care from the provider. Performance measures, too, are different than those used by MA plans. 

As the Innovation Center describes in an FAQ guide, Direct Contracting opens up risk-sharing to new entities and gives providers and patients more choice and flexibility, but incentivizes better, more targeted care coordination and service delivery.

Why is it important?

Direct Contracting is an integral part of the evolution to value-based contracts because it finally allows providers to break free from a FFS foundation. It enables practices to care for patients the right way—proactively—while ensuring greater financial stability when patients are managed appropriately. 

Although the pandemic has highlighted why health care must move in this direction, Direct Contracting still represents a hefty transition. Patient populations under Direct Contracting must be as carefully managed as in other value-based models to enhance care coordination, outcomes and revenue. But as practices that have participated in risk-based arrangements through MA plans, ACOs and other models can attest, it has the potential to offer a better way to run our practices and care for our patients.