How Digital Health Companies Contract with Payors

Very few healthcare startups succeed without taking insurance. Consumers expect insurance to pay for healthcare and tend to resist paying for digital health services on their own. As a result, most companies eventually surrender to the hard realities of taking insurance sooner or later, with its perverse incentives, onerous requirements, and seeming unfairness. When insurance pays, the best companies don't always win—if by "best" we mean the most satisfying, helpful, and economical to consumers.

When a company depends on insurance contracts, providing a great product that leads to improvements in health is not enough to create a viable healthcare business. If you can help an insurer avoid costs, you have a better chance at securing good insurance contracts. However, payor decisions on who to contract with, what services to cover, and how much to reimburse for those services are heavily influenced by factors that have nothing to do with the clinical or economic value of a company's healthcare services. These factors include, among others, the payor's (unstated) role as a rationer of healthcare services, the orbiting of commercial insurance policies around Medicare, and weak incentives for payors to drive positive, long-term health outcomes. The reality is that individuals change insurance coverage frequently, leading payors to focus on short-term economic wins instead of the long-term health of their members. Institutional inertia, resistant to nonconventional clinical care models, also creates friction for providers. An insurance contract with a payor can take 6–24 months to finalize, even if the payor wants it.

Because of these factors, startups navigating insurance have tough options to choose from, each requiring difficult tradeoffs. Many young companies pursue standard, non-negotiated payor contracts, while some succeed in winning negotiated contracts. Negotiated contracts open up a number of new avenues that aren't available with standard non-negotiated contracts, such as terms for both professional and technology services (i.e., non-covered services), customized value-based care payments (e.g., downside and upside risk and specific quality payments), and other nonstandard terms. Let's look at each of these in turn.

1. STANDARD PROVIDER CONTRACTS

Since the COVID-19 pandemic, a common approach to coverage for virtual care services is direct enrollment with health plans, where a company's closely affiliated medical group enrolls and contracts with insurers without negotiating terms or interacting with the payor beyond submitting standard enrollment, contracting, and credentialing documents. Under this process, the enrolling medical group approaches the payor as if it were a small-office medical practice.

A key advantage of this approach is the simplicity of contracting without a sales and legal process. This is the off-the-shelf approach that is take-it-or-leave-it. If you're small, it may also be your only option for coverage at first. However, these contracts often provide below-market fee-for-service rates, restrict coverage for many types of services (e.g., RPM, some telemedicine, care management, etc.), and strongly favor the payor in all respects. Some payors also offer standard value-based care provider agreements with incentives for all similarly situated provider groups, but the financial terms in these contracts are typically below market and not customized to the company's unique value proposition.

Many companies sign these contracts and later abandon them because the fee-for-service rates are too low, they do not reimburse for resource-intensive, value-enhancing activities that differentiate a digital health company's products and services (e.g., navigation, care support, technology platform, etc.), and they do not support or sometimes even restrict member outreach and engagement activities. In the early years, these contracts can serve as a helpful starting point for obtaining coverage, but they are often not sustainable over time. However, they can serve as valuable proof points for a company's value proposition in negotiating a contract with a payor, as the company can point to the payor's own data on its performance for the payor's members.

2. NEGOTIATED INSURANCE CONTRACTS

Forging payor relationships requires companies to tailor their services to the needs of payors and to make tradeoffs that are especially difficult for companies with a strong patient-first ethos.

To work with payors, you may have to do things you don't want to do, such as adjust visit lengths, require more paperwork from patients and professionals, offer new modalities for virtual visits, make services available during off-hours (even if nobody uses them), implement new supervision, reporting, and compliance protocols, adjust and unbundle direct-to-consumer pricing, refer patients to in-network specialists, labs, and pharmacies, manage prior-authorization rules, hire coders and billers to implement a claim submission process, restrict marketing activities, and screen for specific patient populations.

After making these sacrifices and investing in a long sales process, the last thing anyone wants is a negotiated contract that resembles a weak standard-provider contract like those described above. And yet, this happens all too often. When negotiating a contract with a payor, pay close attention to 02 what you're actually getting. Are you getting better rates than Medicare? Does the contract include special payments for platform or value-enhancing services such as a PMPM (per member per month)? Does it pay for any services not covered in a standard fee-schedule-based provider contract, support marketing activities, or allow you to bypass prior authorizations? Does the contract simplify credentialing, eliminate the need for separate contracts in every state where the payor operates, and include your company as a preferred provider? If the answer is no to all of these questions, then you're getting far less than you probably realize through your hard-fought contracting efforts.

Moreover, sometimes payors introduce terms far worse than those in a standard provider contract. For example, they may insist on terms giving them influence or veto rights over key operational decisions such as provider selection, approval of subcontractors, and offshoring of data. Even worse, they may demand most-favored nation pricing or a promise not to market or sell your services directly to self-funded employers they support through ASO (Administrative Services Only) and TPA (Third-Party Administrator) arrangements.

In most contracts, the payor only pays for services actually performed for patients (i.e., services performed on engaged patients) via fee-for-service payments, per-engaged-member-per-month fees, or risk payments tied to clinical and financial outcomes.

These contracts provide no guaranteed revenue, and their profitability depends on the company's success in engaging the payor's health plan members. However, engaging health plan members can be extremely difficult, especially without a payor's support. Therefore, a payor's commitment to supporting health plan member engagement by sharing member lists and permitting outreach campaigns can be an essential element of payor contracting. Yet, it's uncommon to see a payor contract with strong marketing and engagement terms. Instead, payors tend to strongly resist these commitments, and after a long sales and contracting process, companies often feel compelled to give in.

Relying on a payor's informal promises to support marketing activities without binding commitments in the contract is risky. Payor priorities and staff assignments change frequently, and new personnel may be less interested in using political capital to support marketing efforts not required by the contract.

The challenges associated with payor contracting and obtaining payment terms that generously compensate providers for the economic value they generate by reducing overall healthcare costs have motivated an increasing number of digital health companies to pursue financial risk in payor contracts. These contracts require the payor to work more closely with companies to support marketing, data-sharing, and other value-enhancing activities. However, they also significantly increase the stakes for companies and can be very difficult to navigate in a way that does not introduce dangerous financial risks. In a future post, we will dive into value-based care contracts and the promises and pitfalls of pay-for-performance contracting with health plans.