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» What is Direct Contracting in Healthcare?

August 11, 2021

Business Strategies, Healthcare Innovation, Healthcare Spending, Self-Funding

Healthcare costs are a top expense for most businesses, so companies can find great value in cost reduction strategies.

And if we can marry lower costs for a business with as good, if not better, benefits and outcomes?

That’s the goal.

One such strategy that has typically been reserved for only the largest employers is Direct Contracting. But as we will discuss, direct contracting is becoming available to the small and mid-market self-funded employers.

First, let’s define Direct Contracting, then we’ll explore how it helps employers and how it can benefit employees.

How does Contracting work in Employee Health Plans?

What happens with regular health insurance? How has an employer procured that care at a set price for their employees?

The employer rents or buys access to a carrier network, either through a fully insured health plan or with their TPA as part of a self-funded health plan.

This carrier network outlines a set rate of reimbursement for various services, tests, and procedures; it’s a list of prices or reimbursements that providers who are contracted with the network will receive.

Now remember, claims costs are a product of the Number of Claims multiplied by the Avgerage Cost of Claim.

So the employer’s cost of care or claims spend, whether directly paid as a self-funded plan or through their carrier, is highly dependent on the rates set forth in that network contract.

If we (an employer and us as the consultant) are going to reduce their claims spend, one surefire way is to pay lower rates for the same services, procedures, and tests.

What is Direct Contracting in Healthcare?

In our effort to reduce claims costs, how great would it be if an employer could cut out the middlemen (network and carrier costs) and work directly with the hospital or provider?

Without those middlemen, could you see the health system or medical group offering a reduced set of reimbursement rates?

This is true and exactly the case in Direct Contracting in healthcare.

Here’s an example: XYZ Manufacturing works with ABC Healthcare, a local health system, to create a contract that features prices 10 to 20 percent lower than the networks it has rented in prior years.

ABC Healthcare likes this deal because it knows that with lower prices, more employees will use its services and it can drive overall revenue at a greater margin because the network fees are gone.

XYZ Manufacturing enjoys the benefits of reduced healthcare costs and employees are rewarded financially for seeking out ABC Healthcare instead of other providers, possibly resulting in better employee health.

Direct Contracting can take the form of overall cost discounts for using a certain system for any service or specific discounts for services at top providers and facilities, commonly referred to as Centers of Excellence.

The employer has more control over pricing and insight into outcomes, while the provider increases its market penetration with commercially insured lives.

Examples of Direct Contracting: Boeing, Disney, and More

Boeing started a direct contract with MemorialCare Health System in Southern California, where it has nearly 40,000 employees.

Disney contracts directly with Orlando Health for its 70,000 employees in Orlando and Florida.

General Motors has a direct contract with Henry Ford Health System for its 24,000 employees and their dependents.

Walmart has direct contracts with providers in certain geographies, such as Geisinger Health in Pennsylvania and the Mayo Clinic in Arizona, Florida, and Minnesota.

Direct Contracting for Small and Mid-Sized Employers

The examples above all are corporate behemoths, with valuations in the billions.

How can a local 500, 100, even 50 employee team expect to benefit from directly contracting with a local health system?

By working with a TPA and consultant who are focused on attacking the rising cost of healthcare for employer groups, of course!

Some TPAs help employers rent national networks, others have gone through the painstaking work of developing proprietary networks that include Direct Contracting and its cousin Centers of Excellence.

Your benefits consultant can help you identify the proper relationships and vendors for your health plan and analyze their results over time. Working with a team focused on value and transparency, any group can attack the rising cost of healthcare and improve its employees quality of life.


Schedule a complimentary call to find out how you can benefit from a Direct Contract or Center of Excellence in your own health plan.  

Posted by in Business Strategies, Healthcare Innovation, Healthcare Spending, Self-Funding