June 25, 2024

Controlling Costs & Managing Care with Direct Contracting

Employers with self-funded health plans are faced with controlling escalating claims costs while prioritizing employee care.

Pattern Overlay

Employers with self-funded health plans are faced with controlling escalating claims costs while prioritizing employee care. 

Most health care networks are designed to offer a broad range of providers at discounted pricing, but they typically fail to standardize reimbursements for identical medical procedures within the same service area. This is especially true for larger, national networks. As a result, self-funded employers and their plan members experience inconsistent pricing and care quality.

Additionally, the opaque nature of network arrangements makes it difficult for self-funded health plans to understand and control claim costs. For example, network pricing for the same services can fluctuate dramatically based on where the member receives care. The cost disparity leads to increased plan cost and member out-of-pocket expenses.

Direct contracts are gaining momentum as a financial tool to help solve this challenge. 


In these arrangements, a self-funded employer, or a group of employers, work directly with providers to design an arrangement that meets the specific needs of its workforce and financial goals. 

These arrangements may apply to the entire spectrum of health care services, or they may be tailored to a specific subset of services, like joint replacements, cardiac procedures, or high-volume procedures such as high-tech imaging.


There are two primary ways self-funded employers can use direct contracting:

  1. The self-funded health plan pays the medical provider directly for services received by their members and bypasses traditional networks.
  2. A third-party administrator (TPA) facilitates the direct contract by receiving the medical claims, billing the self-funded health plans, and remitting payment to the provider. 

In both cases, the self-funded health plan and the provider have agreed on specific pricing, payment terms, and care expectations.

In addition, different contract types exist within direct contracting. Some examples include:

  • Fee for service
  • Risk-based (using capitation or other global payment methods)
  • Rebates or revenue sharing
  • Service level agreements 
  • Medical tourism (domestic and international)


Businesses of all sizes can potentially benefit from a direct contracting arrangement. 

Some of the primary benefits all stakeholders (self-funded employers, their plan members, and providers) experience include:

  • Lower, more consistent costs without compromising quality
  • Improved access to top-level care
  • Improved price transparency
  • Faster cash flow for providers
  • Eliminates complex “middleman” processes
  • An aligned and direct relationship between employers and providers

The concept alone opens an honest discussion about cost and quality with local providers that are not typically available through traditional channels. As a result, certain businesses that embrace these arrangements can experience significant savings and create key relationships with provider partners in their respective communities.


Direct contracts offer an opportunity for self-insured plan sponsors to work with healthcare providers to reduce costs and potentially create better quality of care. 

While beneficial for both self-funded employers, plan members, and providers, direct provider contracts can be complex. It requires the following:

  • Navigating and coordinating relationships between and among the employer, the provider, and the TPA
  • Making sure all parties involved have the administrative capacity and expertise necessary to provide such service
  • Carefully assessing network adequacy and capacity to ensure that employees have convenient, reasonably timely access to care
  • Ensuring everyone is in compliance with an array of legal issues

Healthgram is here to support self-funded employers find a way to use direct contracts to tackle high claims costs without jeopardizing member care. 

To learn more about how Healthgram evaluates direct contracting arrangements, reach out to a member of our team.