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Employer direct contracts with doctors, hospitals and health systems a growing trend

By Lola Butcher

At one time, direct contracts between employers and health care providers were rare, but no longer. Disney, Intel, General Motors, Whole Foods, Qualcomm and Boeing have jumped on this emerging trend in recent years, and Walmart’s enthusiasm for direct contracting may be the tipping point for this to become a mainstream strategy.

Direct employer-to-provider contracts are an example of health care payment reform. The pioneers have been large employers trying to buy better health outcomes for their workers at a lower cost than they’ve been getting through health plans. In their pursuit of lower costs and higher quality care for their workers, employers now call these arrangements, “value-based direct contracts.”

The novel coronavirus has disrupted just about every aspect of the health care system in the United States, and direct contracting is no exception. But the pandemic also has given employers new urgency in their direct-contracting relationships with providers, said Michael Thompson, president and CEO of the National Alliance of Healthcare Purchaser Coalitions. The alliance represents the interests of employer purchasing coalitions nationwide.

“As we work to bring the health care system back to a ‘new normal,’ the value-based direct contracting strategies that employers have with hospitals and health systems will become more prevalent,” he says. “This will be particularly pertinent as (the) medical trend is expected to take off as we come out of the current lull in routine utilization.”

Catalyst for Payment Reform describes direct contracting as a “contracting strategy between self-insured employers or other health care purchasers and a provider organization (i.e., a large health system), in which both parties directly negotiate how the provider will deliver specified services to the employer’s covered lives. This arrangement bypasses the health plan or insurer.”

Within that general framework, there are many different kinds of arrangements. So every reporter writing on this topic must start with, “What kind of direct contract is this?” and “How does the contract work?”

This 2019 Society of Actuaries presentation identifies the four most common types of direct-contract arrangements:

  • Accountable Care Organization (ACO): An employer’s payments are directly tied to quality and financial outcomes. These are market-specific arrangements, such as the Emory Accountable Care Plan, in which Walmart contracted with Emory Health Network to provide care for employees at Walmart and Sam’s Club outlets in the Atlanta area.  

  • Reference-based pricing: An employer sets a limit on the amount it will pay for a specific health service. Pacific Steel & Recycling, based in Great Falls, Mont., negotiated contracts with providers and hospitals to create more than 4,200 direct contracts.

  • Bundled payments: An employer contracts to pay a single price for all elements of care — say, pre-op physician visits, surgery, drugs, anesthesia and rehabilitation services — associated with a given procedure. General Electric was an early adopter of this idea, contracting with four health systems to pay a bundled-payment rate for hip and knee replacement surgeries.

  • Center of Excellence contracts: An employer contracts with a health system for a specific procedure and incentivizes its employees to travel, sometimes across the country, to use that provider organization. The Pacific Business Group on Health, a nonprofit organization representing public and employer health care purchasers, has organized many COE contracts on behalf of Lowe’s, Walmart and other companies.

Photo: Rachel via Flickr

The terminology around this concept is nuanced. Most ACOs contract with health insurers or with Medicare, rather than work directly with employers. Medicare and many of the nation’s health insurers sponsor most bundled-payment programs, and, so, technically, these programs are not direct contracts. At the same time, most employer-to-provider center-of-excellence (COE) contracts include bundled-payment, but not all direct bundled-payment arrangements are with a COE. What’s more, many hospitals designated as COEs for a given diagnosis or procedure have no direct contracts with employers. 

While these details may seem challenging, the basic idea behind direct contracts is simple enough so that all three parties (employers, workers, and providers) in these contracts benefit. Phil Galewitz described one such arrangement in an excellent 2019 article for Kaiser Health News: A Mexican hospital, an American surgeon, and a $5,000 check (yes, a check).

Tip: If a health system or employer in your market announces a direct contract, a good way to approach the story is to report on how the contract affects workers. By definition, employer-to-provider contracts are narrow network arrangements, so employees may find their options are severely limited. On the other hand, employees may get financial incentives, such as no deductible or cost-sharing if they receive care within the network.

Theoretically, better outcomes are an important reason that employers want direct contracts, so ask how the quality of care will be measured and monitored. 

Tip: The direct-contract phenomenon might be a gold mine even if there are no such contracts in your area. How does the quality of care provided in your community compare with that of a COE health system? The big employers that contract directly with COEs are reporting some eyebrow-raising information. Writing in Harvard Business Review about its direct-contract experience, Pacific Business Group on Health says: 

  • Only 62 percent of the 450 spine patients who had been recommended for surgery by providers in their home markets were found to be suitable candidates for surgery by the COE they visited.

  • Just 16 percent of patients recommended for total joint replacement by a local physician were recommended not to have surgery by the center for excellence.  

Meanwhile, Walmart reports these results from its direct contracts:

  • Readmissions for complications after joint-replacement surgery were 70 percent less at centers of excellence than the average of local hospitals that Walmart’s employees used.

  • Roughly one-third of Walmart associates diagnosed with cancer go to a COE for care, and more than half of them received a “new or adjusted” treatment plan, and 10 percent got a new diagnosis entirely. 


  • The American Medical Association (AMA) produced a good overview of direct-contracting arrangements. Written for physicians, the report outlines basic approaches that apply to hospitals as well.

  • A good case study of the Henry Ford Hospital/General Motors direct contract is in this AMA piece. Journalists writing for physician audiences will find helpful details about contracting language here as well.

  • The Business Group on Health, an influential organization of major employers (known as National Business Group on Health until earlier this year), has been tracking employers’ interest in the direct-contracting trend for several years. The 2020 Large Employers Health Care Strategy and Plan Design Survey report is available only to member organizations, but reporters can request a copy.

Lola Butcher (@lolabutcher) is an award-winning independent journalist who writes about health care for a variety of publications including Undark, Knowable, CQ Researcher, Neurology Today, Next Avenue, and Physician Leadership Journal.