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Reasons to Consider Direct Contracting

Reasons To Consider Direct Contracting Web

CMS has given organizations a second chance to apply to become Direct Contracting Entities (DCEs). On June 18, 2020, CMS announced that it was reopening the DCE application cycle that will allow a choice of starting dates of either April 1, 2021, or January 1, 2022. Before the announcement, only entities that had submitted a letter of intent at the end of 2019 were eligible to participate, and there was no indication that there would be any future opportunities. This follows on the heels of the notification by CMS that, because of the COVID-19 public health emergency, CMS has forgone applications for the new Medicare Shared Savings Program (MSSP) starting in 2021. To help you decide if your organization should apply to be a DCE, this blog compares the DCE and MSSP models, considers strategic opportunities, and explains the differences in the financial arrangements between the two models.

What is the Direct Contracting Model?

The CMS Direct Contracting Model allows providers to accept between 50% and 100% upside and downside risk for traditional Medicare beneficiaries. The model incorporates features of the MSSP, the Next Generation ACO Model, Medicare Advantage, and commercial plans, including capitation.

How is a DCE Different from the MSSP?

While there are many differences between the DCE and MSSP ACO, as shown in table 1, the major differences are the payment methodology and levels of risk.

Table 1: Key Differences between MSSP and DCE

Other significant differences include:


In the MSSP ACO model, CMS pays all providers according to the normal Medicare methodologies. In the DCE, primary care services are capitated and the DCE has the option (but is not required) to negotiate alternative payment approaches for its preferred providers.

The global option offers essentially 100% upside and downside risk and allows the DCE to choose either primary care capitation (which includes enhanced capitation for infrastructure) or TCOC capitation (which includes specialty and facility expenses for participating and preferred providers).

A lower level of risk is possible with the professional option, which only includes primary care capitation.

Levels of Risk

At its highest level of risk, the Pathways to Success MSSP model glide path limits the total amount of upside potential to 75% of savings. DCE, on the other hand, allows up to 100% upside potential, although CMS has built in a progressive 2%–5% discount to guarantee it realizes some savings from successful DCEs.

To help mitigate the risk, CMS will also offer DCEs stop-loss insurance at a rate not yet determined.

Split Tax Identification Numbers (TINs)

DCE participant providers are defined at both the TIN and the individual national provider identifier levels. By contrast, the MSSP model is an all-or-none model; all providers within a TIN must participate. This means that medical groups with large primary care or specialty components can customize their provider complement based on their geography or for other reasons.

Additional Options and Waivers

Providers in the DCE model will have additional tools to help manage their populations. DCEs will be able to offer benefit enhancements or patient engagement incentives that are intended to make it easier to manage patient populations by reducing barriers to care. In addition to the SNF 3-Day Rule waiver offered to two-sided MSSPs, DCEs will be able to use asynchronous telehealth and will have relaxed rules regarding postdischarge and care management home visits. Even more aggressive enhancements and incentives are proposed or under consideration.

Patient Engagement

DCEs will be allowed to offer patient engagement incentives for beneficiaries that are not allowed in the MSSP. Some examples include:

  • Over-the-counter medication vouchers.
  • Transportation vouchers.
  • Home improvements to support the management of chronic diseases or prevent reinjuries (e.g., air filtering, railings).
  • Waiving some or all of patient out-of-pocket expenses for Medicare Part B services.
  • Gift cards (up to $75) for participation in chronic disease management programs.

What Organizations Should Consider Applying?

The DCE opportunity is an attractive component of an overarching payer strategy for organizations looking to move aggressively into performance-based arrangements. The types of organizations likely to be successful as a DCE include health systems, medical groups, ACOs, or clinically integrated networks (CINs) that:

  • Have demonstrated the ability to successfully manage financial risk for MSSP and Medicare Advantage (or commercial) arrangements.
  • Can report excellent quality scores.

What Are the Strategic Implications?

Organizations contemplating applying to a DCE have important strategic opportunities to consider; DCEs can be a strong tool to create alignment between independent medical groups, health systems, other ACOs, or CINs and other providers or suppliers. It may also offer opportunities to align with Medicare Advantage plans that could provide important infrastructure to support the program.

Additionally, the DCE model can support the creation of CINs. The Federal Trade Commission has indicated that MSSP ACOs meet the criteria for clinical integration.[1] Because the DCE adds additional financial integration and includes many of the same characteristics that define clinical integration, it is expected that the statement would also apply to DCEs. Thus, becoming an approved DCE contracted with CMS would also allow the entity to become a CIN, enabling its participant providers to jointly negotiate arrangements with Medicare Advantage and commercial insurers.

The added economies of scale would benefit organizations making investments to support population health. The investments and ongoing operating costs could be spread over a larger population. The capitation payment methodology would provide predictable cash flow to support the infrastructure.


What Are the Financial Opportunities?

In addition to strategic considerations, it is critical to understand the financial implications; the upside can be considerable, but that comes with comparable downside risk.

Shared Savings and Losses

The range of opportunity (and risk) varies depending on whether the DCE participates in the professional (partial risk of 50% with narrow risk corridors) or global (100% risk with broad corridors) option.

Organizations that can provide care management, successfully reduce inpatient admissions and emergency department utilization, and move care to lower cost settings may be able to realize significant savings. Careful analysis is important to understand the range of likely outcomes.

Predictable Cash Flow (capitation)

One hard lesson learned from the COVID-19 crisis is that when patients stay away, so does the fee for service revenue. With a capitated model, revenue is predictable and not tied to volume. With the enhanced capitation, DCEs would still have cash flow to fund their operations.

Unlike the MSSP model in which hospitals lose their revenue when the ACO reduces utilization, in the DCE under the global option (after the CMS discount), the first dollar surplus would mitigate the reduction in revenue with the added benefit of variable costs also being reduced.

How Do Organizations Apply?

The time to apply is limited. A letter of intent must be submitted for the April 2021 performance year, and the application must be completed by July 6, 2020. Unless a legal entity already meets the requirements to be a DCE, this is a daunting time frame. For organizations that need time to develop DCEs, there will be a second application cycle in 2021 for the January 2022 start.

In either case, submitting the application is nonbinding. If the organization is approved as a DCE, the actual decision to participate can wait until just before the start date, giving the DCE time to complete any actuarial or other analytics needed after CMS releases updated information about the benchmarks. ECG can help organizations evaluate the strategic opportunities, model the range of performance and expenses, facilitate the agreements among potential participating providers, and generally shepherd the organization through the application process.