Specialty Care Component: Employee friendly direct contracting with high-quality referral centers

Tom Emerick, consultant and coauthor of Cracking Health Costs and An Illustrated Guide to Personal Health.

This is part of a series of essays on the Health Rosetta’s Principles.

NOTE: This essay is part of a chapter from the Institute's upcoming book, the CEO's Guide to Restoring the American Dream: How to deliver world class healthcare to your employees at half the cost.


I will describe an excellent and proven way to provide better healthcare to employees and save big dollars as well…all in an employee-friendly way.

I described this “solution” to a senior executive of one of the world’s largest banks, a non-US bank. After listening carefully he said, and I paraphrase, “Tom, if I understand correctly, employees get better quality healthcare.” I replied, “Yes”.

He asked, “Employees also save money, correct?”  “Yes."

The executive then said “And the health plans saves money too, no?” Again, I replied, “Yes”.

His final question was “Then why isn’t every company in the US doing this.” Alas, I did not have a good answer to that question.

What I had described to him was a solution in which self-insured employers contract directly with excellent health centers to provide certain types of care for their employees and covered family members. I will describe that opportunity in detail in this chapter.  For a detailed examination of this solution, I refer you to a book on this topic that Al Lewis and I wrote, called Cracking Health Costs. That book was published in 2013 by John Wiley and Sons and turned out to be an Amazon trade best seller. I will give you the executive summary version in this chapter.



In my career, I managed benefit programs for some of the world’s largest companies: British Petroleum in the US, Burger King Corporation, and Walmart Stores, Inc.

In the 1980’s when I was managing BP’s US health plans out of its then US office in Cleveland, Ohio, I was observing covered employees and family members having what I considered dubious surgery.  The Cleveland Clinic was nearby and was used by many BP plan enrollees, but I did not see them doing the same dubious surgeries.

I set up a meeting with the executives of the Cleveland clinic basically to find out why other hospitals were doing certain types of doubtful surgery but not the Cleveland Clinic. What I discovered set my career on a whole new track.

Basically they explained that the surgery I had my doubts about did not in fact have any evidence behind it and was often harmful to patients. They said that their ethical standards prevented them from doing surgery on patients who simply did not need it. Further, the Cleveland Clinic had a model for diagnosing patients with great accuracy (more about that later in this chapter) and for prescribing the safest and least invasive health solutions that would solve patients’ problems.

Not long after that I set up what was at that time the largest directly contracted preferred provider network in the United States. I put the Cleveland Clinic in as the primary referral center.  A fascinating thing followed, namely, surgery rates, almost across the board, dropped considerably. What I learned was that there are extreme differences in referral centers in terms of getting patients diagnoses correct, giving patients the best treatment plans, and giving patients the safest and least invasive treatment to deal with their health problems.

That program was extremely successful and led to me be recruited for the top benefit executive spot at Burger King Corporation. I implemented the same type of program at Burger King. I did direct contracting with providers around the country and was careful to include referral centers that were similar in many ways to the Cleveland Clinic model. That program also got excellent results, which in turn resulted in me being recruited by Walmart stores Inc. to manage their benefit programs, not just in the US but globally.

At Walmart, I was in charge of design, implementation, and administration for the benefit programs for Walmart in United States and in several other countries.  In the Walmart’s US benefit plans, we did an abundance of direct contracting with excellent referral centers.  These were all successful.

About 10 years ago I resigned from my position as vice president of global benefit design at Walmart stores to become a consultant. While I liked working at Walmart, I wanted to show other companies how to do direct contracting with centers of excellence so they could have the same great results for their employees as I got for the companies where I worked.


Where we are today

In health benefit plans today about 6 to 8 percent of plan members are spending 80 percent of the plan dollars.  We’ll call that small subset of members ”outliers” for purposes of this chapter. I have studied the attributes of the outliers most of my career.

Below is a list of traits of the outliers in benefit plans:

  • They tend to have complex health problems, meaning they usually have multiple comorbidities.
  • They are often seeing three or four specialists.
  • The specialists these outliers are seeing rarely collaborate.
  • In any given year about 20 percent of the outlier group have been completely misdiagnosed. They do not have the disease they’re being treated for. This means that about 16 percent of plan dollars are being wasted on outliers who have been misdiagnosed. This is a big deal.
  • About 40 percent of the outliers have completely erroneous treatment plans or treatment plans that are clearly sub-optimal. This means that about 32 percent of plan dollars are being wasted in total. Another result is a huge amount of medical harm to the outlier population.
  • Only a handful of the outlier health problems are preventable. Let me reiterate, very few of the health problems the outliers have are preventable in any sense.  According to my friend and colleague, Al Lewis, who has studied this as well, perhaps 7 percent of conditions of the outlier population are possibly preventable.  While the notion of workplace wellness and prevention was a noble idea, we now know that company after company is spending a huge amount of plan dollars and resources trying to prevent outlier conditions that are essentially not preventable.

A senior executive at a Fortune 10 company wisely told me recently that the biggest healthcare error is when someone is misdiagnosed. When a patient is misdiagnosed everything that follows harms the patient. Misdiagnoses of the outliers in benefit plans today ought to be rare but, alas, it is common.


The future

Those who will succeed in the future in controlling plan costs will do so by focusing on the outliers. That is where the low-hanging fruit is.

Why aren’t more companies focusing on the outliers today? There are several reasons. Some are simply not aware that such a small group of enrollees are spending so much of the plan dollars. How can that be? For one thing, their consultants are often not doing a good job for them in this area.

Here is an example. Recently I was discussing these points with an HR executive of a medium-size company. I told her that about 6 percent of their enrollees were spending 80 percent of the dollars. She disagreed and argued that maybe 30 percent of their enrollees were spending 80 percent of plan dollars. I suggested that she check it out. She called me about three months later and said that I was wrong. She said that in her company only 5 percent of the enrollees were spending 95 percent of plan dollars. She then asked me two questions. The first question was why hadn’t her consultant told her this before. I told her I didn’t know and the she should ask her regular consultant that question.

She then asked me why her benefit plan administrator had not told them that so few people are spending so much money. I told her that the reason was that she and her team were probably asking for averages and not distributions when they look at their own data.

If I could wave a magic wand I’d ban benefit managers from looking at averages. When you focus on the distribution of spending, the outliers become abundantly clear.

An excellent solution for outliers, one that I believe will make future benefit managers very successful, is using limited networks, especially centers of excellence, for medical travel for their outliers. Again, large numbers of outliers have been misdiagnosed and a large number have deeply flawed treatment plans.  Benefit managers need to take advantage of superior referral centers to help ensure their outliers are diagnosed correctly and that they given the optimal treatment plan. This protects employees from harm and is very successful. The companies that are doing this kind of thing are very successful.

The typical model is for an employer to pay the travel expenses for a patient and a companion to go to the center of excellence to ensure the diagnosis is correct, and if surgery is needed, have excellent surgery on the same trip.

Not all doctors and hospitals are equal. In a typical benefit plan provider network half the doctors and hospitals are below average. The bottom 10 percent of doctors and hospitals in a network are, well, in the bottom 10 percent. There are not a lot of serious errors in diagnosing sore throats, flu, and upset stomachs, etc., but in the world of outliers who have complex conditions the variation between referral centers is extreme, really extreme.

Most companies are spending 90 percent of their efforts trying to control the cost 94 percent of employees who only spent 20 percent of plan dollars. That needs to be reversed. Success in managing benefit costs will be done by those who reverse that.

Over the last 30 years, I have compiled data on patients who have been sent to first-class referral centers for second opinions. Following is a list of health conditions and the rate at which they are typically misdiagnosed.

  • New cancer cases---20 percent misdiagnosis rate*
  • Spine surgery---67 percent misdiagnosis rate
  • Orthopedic surgery…as much as 30 percent misdiagnoses
  • Bypass surgery---60 percent misdiagnosis rate
  • Stents---50 percent in some parts of the US**
  • Solid organ transplants---40 percent misdiagnosis rate***

Here is a partial list of referral centers in the US that do it right with respect to outliers:

  • Mayo
  • Virginia Mason in Seattle
  • Mercy in Springfield MO
  • Ochsner in New Orleans
  • Intermountain in Salt Lake
  • Kaiser
  • Geisinger in Western Pennsylvania
  • Baptist in Little Rock for cardiology

Health City in the Caymans Islands is emerging as possibly the best diagnostic and surgery center in the Western Hemisphere.

Traits of excellent referral centers:

  • Multiple specialists usually see the patients.
  • A multidisciplinary team does the diagnosis.
  • That same team prescribes the treatment plan.
  • If surgery is required it is done in an excellent way.
  • The patient experience is excellent.
  • The health center is integrated, collaborative, and accountable.

The fee-for-service model is deeply flawed. The fee-for-service method of paying providers has totally dominated corporate benefit plans. Just about all payers agree that fee-for-service has all the wrong incentives for providers. Another advantage of contracting with excellent referral centers is it can facilitate the end of fee-for-service payments, at least for most of plan dollars. Today self-insured employers are getting traction in bundled payments and global fees through direct contract arrangements with centers of excellence.  That is especially easy to achieve today for many types of very high cost cases, such as spine surgery. The time to take action on this is now.

Companies using these kinds of programs today are Walmart, Lowes, Kohl’s, Pepsi, the Pacific Business Group on Health, and many more.

These programs have been so successful that some companies, Walmart for one, are requiring members to use their directly contracted centers or have out-of-network penalties. Again, this is the future.


Good news

Admittedly, doing direct contracts with health systems that might be qualified to serve as referral centers usually takes a lot of effort, and you have to be a pretty large employer to get their attention.

The good news is that “aggregators” are available today. These specialty referral networks can help companies with, say, less than 50,000 to 100,000 employees get pre-packaged access to top-notch referral centers. For example, a company called EdisonHealth Network exists to provide large and mid-sized companies access to such centers.  For companies that either choose not to do direct contracting, or do not have enough members in their plans to figure out who the right centers are and how to negotiate really good deals, specialty networks like EdisonHealth may be a good option.

For the record, I helped create EdisonHealth to ensure that most companies large enough to be self-insured can get the best care for their employees and save money too. I believe this kind of option should not be restricted to jumbo employers. EdisonHealth’s network of providers contains many of the centers previously listed, including Health City Cayman Islands, which is a short flight from many, cities east of the Mississippi.


Beware of conflicts of interest

Some companies have expressed an interest in adopting directly contracted centers of excellence but have been unsuccessful in getting support from their consultants. There is growing evidence that some benefit consultant firms have conflicts of interest in this arena.  Some commonly used benefit brokers and consultants derive a large share of their total revenue by providing consulting services to providers. If you are hiring a consultant that gets a lot of revenue from providers, the potential for a conflict of interest exists.  If a consultant is getting 30 or so percent of its total revenue from providing services to providers in a community, they may not want to be help employers send their patients somewhere else.

An analogy is useful here. If someone hired a lawyer to sue you, it would be insane for you to try to hire the same lawyer or even the same law firm to defend you. In any other part of your business, nothing like that will ever occur. Yet some benefit consultant firms are collecting huge sums of consulting fees from providers, and at the same time providing consulting services to self-insured employers.

All benefit managers should assess their current consulting firm to see what percentage of their total revenue comes from providing consulting services to providers. If the number is material, and cannot be easily explained, the benefit manager should seriously consider finding another consultant. Furthermore, when you’re taking bids for benefit consulting services you should determine which benefit consultants have potential conflicts of interest and select from those in which such conflicts do not exist. This is just good common sense.



Future success in managing plan dollars will be contingent upon understanding and managing the outliers in your benefit plans, the 6 percent or so who spend 80 percent of the plan dollars every year.

You can provide your covered members with better quality care, help protect them from medical harm, save them money out of pocket…and save money for your plan as well.

The fee-for-service health reimbursement system needs an overhaul. Self-insured benefit manager in America have the power to create that overhaul. If we wait for the right laws to be passed, we all may die of old age first.

While implementing wellness was a noble effort, it has met with limited success at best. A superior way to manage the health of your population is, again, to micromanage the outliers.

This is very simple but true: if you want to save money in your health plan, you have to start spending less money. It is that simple. Yes, it is really that simple.

*Cancer misdiagnosis rates have been informed by information gathered from Johns Hopkins, and other sources.

**Stent overuse has been informed by data published in the Dartmouth Atlas of Health Care

***Primary research from 3,000 cases across 3 major employers

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