Catalyst for Payment Reform

Direct Contracting


Direct Contracting

 What Is Direct Contracting?

Direct contracting is a strategy that some, typically large, self-funded employers and other health care purchasers use when they believe it will be advantageous to buy health care services directly from a facility, group of physicians, and/or integrated health care system on behalf of their covered population.  Direct contracting can occur for specific services (e.g. joint replacements at a center of excellence) or for comprehensive services (e.g. accountable care organization, or ACO).  Health care purchasers may opt for this approach in circumstances where they want to customize the health care they procure, which may be difficult to do through an existing contract with a health insurance plan.


Why Should Employers and Other Health Care Purchasers Care About Direct Contracting?

Employers and other health care purchasers routinely look for ways to make their health care benefits more efficient and affordable, and increasingly they are pushing for improvements to the quality of care for their covered populations. Many purchasers work with their traditional partners, such as health plans or TPAs, to push for these changes.  But some purchasers find that their traditional partners do not meet their needs.  For example, while health plans create efficiency with standardized products and provider contracts, self-funded purchasers often desire product and provider network customization.  The willingness of health plans to meet a purchaser’s specific needs varies; contracting directly with providers is an alternative strategy.  Purchasers and providers can design a model that meets their mutual needs.  Direct contracting has the potential to give a purchaser more control over pricing, which providers are included, and greater insight into the quality of care.


What Are the Latest Trends in Direct Contracting?

As we cover in a January 2020 blog post, the 2019 Kaiser Family foundation Employer Health Benefits Survey found that among large employers with at least one self-funded health plan, 8% contract directly with certain health plans or health systems, outside of their established provider networks, to treat patients with specified conditions.

  • The most common direct contract COEs focus on bariatric surgery, infertility, cardiac surgery, orthopedic surgery, oncology, maternity and transplants.[2]
  • Leading edge purchasers experimenting with this strategy typically have a large geographic concentration of employees and contract with large health systems that provide a full range of health care services (e.g. ACO or PCMH). Some contracts may require travel by some patients, as well as a supportive benefit design.


How Can Purchasers Apply Direct Contracting to Implement a High-Value Strategy?

Purchasers might consider direct contracting if they are dissatisfied with current health plan or TPA services and/or want to have direct control and customization of the delivery of care.  There are many options purchasers can consider, including:

  • Identifying specific health care needs that are not being met by traditional partners, and exploring whether there are willing provider partners in a particular market.
  • Contracting directly for specific services such as cardiac surgery, orthopedic surgery, oncology, and transplants, while maintaining a relationship with a health plan for all other services.
  • Designing a customized ACO agreement with an integrated health system.

All of these options require purchasers to take an active role in the management of health benefits and require adequate knowledge and staffing.  Direct contracts also require sophisticated data management and analysis systems.


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[1] National Business Group on Health, Press Release. “Large U.S. Employers Eye Changes to Health Care Delivery System as Cost to Provide Health Benefits Nears $15,000 per Employee,” August 7, 2018.