Direct Contracting for Self-Funded Health Plans: A Primer

Interest in direct contracting by self-funded health plans has accelerated as employers seek predictable costs, measurable quality, and better member experience. Direct contracting allows employers to partner directly with health systems to provide access to care for their employees, bypassing traditional insurance networks. This post outlines the reasons employers pursue direct contracts with providers (vs. traditional network arrangements), common models, and key legal and operational considerations, and includes a Q&A with Paul Richmond, a national expert in specialty network strategy.

Why Employers Are Moving to Direct Contracting

Employers have started moving to direct contracting for reasons relating to both financial management and member experience. Among the key considerations are these:

• Cost control and predictability: Bundled rates, case rates, and similar models reduce unit-price volatility and shift risk. Benefits leaders at self-funded (employer) group health plans are highly focused on managing rising costs and demonstrating that they’re meeting fiduciary obligations.  

• Quality and outcomes: Centers of Excellence (COEs) and tiered networks with documented outcomes can reduce complications and readmissions, leading to better member experience, lower costs, and reduced absenteeism.

• Data and transparency: Direct access to claims and clinical data supports coordinated navigation, benefit design, and vendor accountability.

• Experience and access: Dedicated navigation, shorter wait times, and integrated virtual/primary care can improve retention and productivity.

Common Models

Direct contracting can take several forms, and selecting the right model depends on employer objectives, market dynamics, and available provider capabilities. The most common models include these:

• Centers of Excellence: COEs (i) are characterized by a narrow panel for defined procedures (e.g., joint replacement, bariatric, orthopedic); (ii) work well for shoppable, high-cost episodes with measurable outcomes; and (iii) often are combined with travel benefits and waived cost-sharing (to the extent permitted by law). Reimbursement is typically via a bundle or case rate (i.e., a fixed per-procedure price), in some cases including a quality warranty. This model requires special considerations such as robust episode definitions and pricing benchmarks, stop-loss alignment, and post-acute coordination.

• Direct Primary Care (DPC)/Advanced Primary Care (APC): This model provides for per-member-per-month arrangements with extended access and care management, and often is paired with preferred specialty/referral networks.

• Narrow/Tiered Networks: This model, which includes local or regional specialists/hospitals at favorable rates with incentives aligned to utilization, is effective in markets with provider competition and employer density.

• Virtual-First Integrated Models: This is a telehealth-led primary care model with curated specialty/referral pathways, and is particularly useful for geographically dispersed populations.

• ACO-Like Shared Savings: Under this model, provider entities assume partial risk against a total cost-of-care benchmark and, as such, this model requires well-established baseline data and risk adjustment and may require providers to obtain risk-bearing licenses.

Key Legal and Operational Considerations

Establishing a compliant and durable direct contracting program requires careful alignment with core federal requirements and consideration of additional legal frameworks that may be relevant based on the contracting structure.

• Primary Legal Frameworks: Key legal frameworks shaping the operating model and contract structure include, for example, ERISA plan status (necessitating clear plan documents, alignment on fiduciary functions, and taxation considerations); identification of the claims fiduciary, appeal rights, and external review processes when carving out services; compliance plans that align with the requirements of the Consolidated Appropriations Act (e.g., Transparency in Coverage and the gag clause prohibition), Mental Health Parity (MHPAEA), and the ACA; HIPAA and data sharing; and the No Surprises Act.

• Additional Legal Frameworks
  • ERISA preemption: This protects self-funded plans from state insurance regulation, but not from generally applicable laws. Thus, third-party administrator (TPA) licensure or registration requirements, and provider risk-bearing entity, prompt-pay, and dispute resolution laws and regulations may still apply.
  • Risk-bearing and provider capitation: In some states, accepting downside risk may trigger licensure or financial solvency standards.
  • Corporate practice of medicine/fee-splitting: Management fees and performance payments must be structured to avoid prohibited control over clinical practice or improper remuneration.
  • Direct Primary Care (DPC) statutes: That DPC agreements are not regulated as insurance under state law must be determined/confirmed.
  • Federal AKS/Stark: Although these laws typically do not apply to purely commercial arrangements, the parties need to watch for mixed patient populations, federal program crossover, or state analogues, and avoid tying remuneration to referrals of federal program business.
  • Antitrust: The parties need to avoid most-favored-nation clauses that foreclose competition, unlawful exclusivity, or price information exchanges among competitors and, if forming buyer coalitions, implement clean-team protocols and counsel oversight.
  • Stop-loss and risk alignment: The parties should coordinate attachment points and any applicable lasers with the direct-contracted model; ensure plan documents are updated and stop-loss policies do not exclude coverage for claims arising under direct contracts; and ensure that claims definitions, accumulation periods, and large-claim reporting align with your payment model and any warranties.

• Member Engagement: In addition to the above legal considerations, member engagement is key where utilization factors into success. A multi-pronged approach is critical.
  • Incentives: Consideration should be given to $0 cost-sharing, travel/lodging, paid time off, and cash incentives for use of COEs or preferred providers.
  • Member communications: Members should receive an updated Summary of Benefits and Coverage (SBC), Summary Plan Description (SPD), Evidence of Coverage (EOC), as applicable, and targeted outreach.
  • Out-of-network strategy: The model should provide for reference-based pricing fallback with robust member protection and advocacy, or curated wrap networks.

Expert Q&A

We spoke with Paul Richmond, the Chief Commercial Officer of Wellnecity and a national expert in specialty network strategy, to get his insight and tips on direct contracting.

Q:    What are contracting “must haves”? I’m talking beyond the basics (e.g., effective date, term, indemnification provisions, etc.)?

A:     Most importantly, you have to have a reason for parties to come to the table—to be invested enough to spend the time contracting. Plans will look for better member experience and cost reductions over time; health systems will look for consideration for volume and the opportunity to earn more for better outcomes. These goals need to be aligned, and this is possible in value-based care arrangements with high-quality providers where we see massive reductions in complications (saving dollars on health care spend and absenteeism in the work place). In terms of key contract terms, topping my list are:

• Scope and covered services, meaning inclusions and exclusions and definitions for bundles, total cost of care models, or other value-based arrangements.

• A mechanism to handle complications and necessary care that falls outside of the scope of the direct arrangement (e.g., care to be rendered by a different provider).

• Identification of the provider’s responsibilities from a quality and member experience perspective (e.g., appointment timeliness, geographic access standards, risk adjustment).

• Reimbursement terms to be applied in the event of an outlier or adverse event, stop-loss coordination, and reconciliation timelines.

• Any eligibility or qualification considerations (e.g., medical necessity or other prior authorization protocols, site-of-care rules).

• Medical record and data-sharing terms.

Q:    What types of employers should consider direct contracting? And who should not?

A:     The types of employers who should do direct contracting are employers that have teams that will be actively involved in managing the plan, work with members to understand the options available to them, and who have enough density in a market to make participation meaningful for providers. If you’re small, passive, or too busy to manage a program, there is no reason to do direct contracting.

Q:    What is enough density of population to launch?

A:     This varies with plan and provider considerations but, for context, it’s important to understand prevalence across programs and populations. On average, for a 1,000-member population, you’ll see 8-15 elective orthopedic procedures per year across, for example, total joint and spine. The upside to both the plan and the provider will be fairly limited for a population of this size. In cardiac, we expect 3-6 procedures per 1,000.

To make a program like this worthwhile for both parties, you might consider a travel program. This will be particularly compelling for employers that do not have local access to high quality providers. This model has been successful, for example, with large national retailers who are focused on driving value—lowering costs and improving outcomes. The value to health systems can be direct (through the addition of commercial volume from outside the local market) and indirect (via internal process improvements leading to increased efficiency and quality across the board).

Q:    Putting yourself in the plan sponsor’s shoes, what are the key decision points in moving forward with this model to facilitate success?

A:     Traditionally people think about network disruption. But before you start with that, you have to start with the culture. Honestly evaluate how your population will receive a direct contract program. This will be heavily influence by trust, positioning, and member experience to date. Assuming you move forward:

• Think about what this will mean from a practical perspective for your population. Can you stay relatively local and have a program that’s attractive to members and providers?

• What are your quality requirements?

• How are you going to operationalize it? Will you hire a TPA or other third party or handle internally?

• How will you handle member engagement and communications, plan design decisions, and other aspects of implementation and execution?

• How will you access and evaluate data, particularly to measure outcomes?

Q:    Where do you see the greatest possibility to improve health care?

A:     The greatest opportunity to improve healthcare is to bring plans and providers together directly. Plans will be most successful when they have control of network provider selection and arrangements, and providers will be most successful when incentives are aligned. Providers should be paid for doing the right thing—not merely for performing surgeries but for avoiding unnecessary surgeries.

Looking Ahead

Direct contracting is no longer a niche experiment; it is a tested, practical path to cost predictability, measurable quality, and a better member experience when designed with clear objectives and sound governance. For employers ready to act, the imperative is to move deliberately: start with a candid assessment of culture and member receptivity; select a model that matches your objectives and market dynamics; align stop-loss and plan documents; and build a data, quality, and communications framework that can withstand regulatory scrutiny and deliver a better member journey. If you are considering direct contracting—or retooling an existing program—or on the provider side of the equation, please reach out. Our full-service team can help you pressure-test options, navigate the legal and operational requirements, and develop a pragmatic playbook tailored to your population, markets, and risk appetite.