By: Jon Jablon, Esq.

Maybe I should be, but I’m not ashamed to admit that when I first heard of Occam’s Razor, I assumed it had something to do with shaving. Whatever the context, many know Occam’s Razor as a principle of decision-making holding that “the simplest explanation is the best one”. Although the real idea is similar, William of Ockham’s logic is a bit more formulaic than that. To paraphrase, Occam’s Razor suggests that when choosing between multiple options, the best choice is the one that requires the fewest assumptions to reach. Put another way, the best option is the one that has the highest likelihood of actually being the case, by requiring the fewest assumptions to achieve it.

If you’re reading this, you know that the self-funded industry has been rapidly evolving in recent years, and one of the most significant trends is the use of direct contracting arrangements with hospitals or entire hospital systems. Especially considering the No Surprises Act – which throws a wrench into the administration process for many claims – direct contracting is more popular than ever as a way for employers to reduce healthcare costs, improve the quality of care for their employees, and avoid protracted claims payment conflicts.

One significant advantage of direct contracting with hospital systems is that it can help decrease the number of assumptions and variables inherent in the system set up by the No Surprises Act. In other words, it tends to satisfy Occam’s Razor when choosing between direct contracting and not direct contracting. The NSA sets rules for resolving payment disputes between insurers and providers; by directly contracting with a hospital system, a self-funded health plan can significantly reduce the likelihood of payment disputes and avoid the need for Independent Dispute Resolution (IDR) in many cases.

Many consider avoiding the need for IDR to be the best option for a few reasons:

• IDR payment calculations are complicated (i.e., there is an assumption of reasonableness of the plan’s payment);
• The IDR Entity is a human being exercising discretion rather than a mathematical formula determining the correct amount (i.e., there is an assumption of impartiality, logic, and predictability); and
• The regulations are in a state of flux due to the large-scale confusion and dissatisfaction with historical rule-making on the topic (i.e., there is an assumption that the IDR Entity can understand and correctly apply the rules)

From a TPA’s perspective, there is also an assumption that the employer or health plan will act reasonably and logically under the circumstances, rather than sticking to its disputed initial payment without being willing to make a higher offer, and of course the assumption that the plan won’t attempt to hold the TPA responsible for making a too-low initial payment on behalf of the plan to begin with! That’s a lot of assumptions, and William of Ockham is not happy.

In contrast, though, by entering into a direct contracting arrangement, TPAs or employers themselves can negotiate payment terms that are specific to their needs and employee population. By eliminating the waste of having hundreds or even thousands of providers across the entire country in a network (and paying dearly for it in access fees as well as meager discounts off inflated charges), and by eliminating the potential for balance billing or IDR disputes, the plan can be more efficient, avoid paying out the nose for a large national network of providers that will largely go unused except in the core operating area of the plan’s members, and avoid all those assumptions inherent to the No Surprises Act’s payment processes (thereby making William of Ockham happy once again).

Another advantage of direct contracting with a hospital or hospital system is that it can lead to better quality of care, since the employer can pick and choose its hospital partners based on quality metrics. In addition, medical providers that are part of a direct contracting arrangement have a strong incentive to provide high-quality care at a lower cost, as they are competing for an intentionally limited number of contracts. The larger the pool of potential lives subject to a contract, the more intense this incentive becomes, too, which is why many direct contracts tend to be with TPAs rather than with individual employers.

At the end of the day, by negotiating payment terms directly with individually-curated healthcare providers rather than through a wasteful national network or having no contracts whatsoever, plans can save money, eliminate waste, decrease member noise, and – perhaps more importantly – satisfy Occam’s Razor by opting for variable-free direct contracts in place of the uncertainty inherent in NSA-related claims processing.