It sounds straightforward and beneficial in theory. You build direct relationships with hospitals and providers, eliminate inefficiencies, and secure better pricing than what’s available through the large national carriers. In the right circumstances, direct contracting can be highly effective.
But employers can focus too much on the concept itself rather than the realities behind it. And the reality is, a direct contract is not automatically a better contract, and does not automatically create savings.
Before making the leap, employers should carefully evaluate whether the promised value is substantial enough to justify the tradeoffs. Here are four key questions to explore as you decide whether or not direct contracts and narrow networks are right for you.
The primary reason to pursue a direct contract? Better pricing. If a hospital or provider system is unwilling to offer rates that are more competitive than what they provide to the major national carriers, there is little reason to narrow access and increase complexity.
Many providers may also like the idea of direct employer relationships because it allows them to strengthen ties with local businesses and potentially reduce their dependence on large carriers. Those goals can benefit both parties. However, if the contract pricing is not significantly better than existing carrier arrangements, the value proposition becomes much harder to justify.
At the same time, many health systems and providers are reluctant to offer employers dramatically better pricing. They understand that once superior discounts are offered directly to employers, those rates can become leverage points in future negotiations with national carriers.
The key question to ask is: Does the proposed direct-contract arrangement provide a significant financial advantage?
Nearly every direct-contracting strategy involves limiting provider access and/or minimizing medical management, like precertification. Otherwise, the provider has no compelling reason to offer more competitive pricing terms.
So instead of providing employees access to a broad national network with established medical management protocols, the employer is effectively selecting a smaller subset of providers and agreeing to less oversight of potentially unnecessary care.
That decision comes with consequences:
In rare situations, these tradeoffs might be worthwhile because the financial benefits and clinical outcomes could be justified. In others, the disruption and additional cost creates more frustration than value.
The key question to ask is: Do the expected savings and outcomes justify the member impact?
The most successful direct-contracting arrangements tend to have one thing in common: a concentrated employee population. When most employees live in a specific geographic area and already receive care from the contracted health system, direct contracts can create meaningful savings with limited disruption.
However, the model becomes more difficult when populations are geographically dispersed. If employees live elsewhere or require specialty care not available within the narrow network, they will naturally seek care outside the contracted system. This can significantly reduce or eliminate any projected savings.
Most employers address out-of-area care through:
The key question to ask is: Do the solutions designed to expand access outside the direct agreement dilute the savings that justified the arrangement in the first place?
Some employers attempt to balance flexibility and savings by offering two plan options:
In theory, this practice sounds appealing because employees who value provider choice can pay more for broad access, while employees willing to use the narrow network can choose a lower-cost option. However, the math often becomes less impressive when viewed across the entire population.
Consider a narrow-network arrangement that produces pricing 10% better than the best national PPO option. If only 50% of employees enroll in that plan, the maximum theoretical impact is approximately 5% of total medical spend.
And that’s before considering wrap-network leakage, added administrative costs, and ongoing operational oversight. In reality, the net impact may ultimately be only a few percentage points, or costs could increase.
The key question to ask: Does the level of savings justify the additional complexity and administrative burden associated with maintaining multiple networks?
Direct contracting tends to work best in markets where provider systems have embraced these arrangements for years. These markets often feature:
On the other hand, when one provider organization controls the majority of healthcare access, it generally holds most of the negotiating leverage. In those situations, employers may struggle to obtain pricing advantages large enough to justify a move away from traditional network arrangements.
Employers should also be careful when evaluating examples of hospital systems that successfully administer narrow-network plans for their own employees. Just because a model works for a hospital’s workforce does not mean it will work for local industry. Hospitals control their own pricing, have unique influence over utilization patterns, and can often combine a direct-contract arrangement with a highly competitive national network solution for care outside their system. Those advantages are substantial and generally unavailable to most employers, making it difficult to directly compare a hospital-sponsored employee plan to a commercial employer health plan.
Direct contracting can be an effective solution in the right market, with the right provider partner and the right population. However, it requires a TPA partner that understands provider contracting, network dynamics, and member utilization trends.
When considering a direct-contracting opportunity, employers need to look beyond the headline discount and ask questions like:
If the answers to those questions are unclear, the projected savings probably are, too.
At Healthgram, we’ve believed in direct provider relationships from the beginning and continue to support successful direct-contracting models today. But experience has taught us that direct contracts should be pursued because the economics are compelling, not because they are an intriguing concept.
The key is knowing when it truly creates value and when a well-managed national network strategy may be the better answer.
Considering a direct contract or narrow-network strategy? Healthgram can help you evaluate the full picture. Reach out to learn more.
Since 1977, Healthgram has helped self-funded employers simplify healthcare through plan administration, wellness programs, and clinical care. All built to lower employer-sponsored healthcare costs without cutting corners. The Healthgram Insights blog covers trends and insights in employer-sponsored healthcare.
