What Is Direct Contracting?
In practice, this often means an employer with a self‑funded health plan works directly—or through a structured partner—with a health system, specialty provider, ambulatory surgery center, or Center of Excellence for a defined set of services.
These arrangements may include: Bundled payments covering a full episode of care, or Value‑based agreements tied to quality, outcomes, and experience. The Centers for Medicare & Medicaid Services (CMS) defines bundled payments as a model designed to improve care quality and the patient experience across an episode of care, rather than paying separately for each service.
Direct contracting creates a situation where an employer purchases care more intentionally, rather than relying solely on a broad carrier network and negotiated discounts.
Where Direct Contracting Can Create Value
1. Better Price Visibility
Instead of paying whatever the network allows, employers can negotiate a defined price for a full episode of care—creating predictability and accountability.
2. Stronger Alignment Around Quality
Direct contracts often include quality metrics, warranty periods, and performance expectations that align cost with outcomes.
3. Improved Member Experience for High‑Cost Care
Programs often pair steerage with support: simplified access, second opinions, and reduced or waived cost sharing. In some cases, employers cover designated procedures at 100% when members use selected providers.
4. More Intentional Purchasing
Direct contracting allows employers to focus on the areas where traditional models have been least effective.
Looking Beyond Unit Price: Why Total Cost of Care Matters
When evaluating healthcare costs, it is easy to focus on unit price—such as what an MRI costs at one facility versus another. But that lens can lead to incomplete, and sometimes misleading, decisions.
A more effective approach is to evaluate the total cost of an episode of care.
In the traditional system, pricing is often driven by fee‑for‑service models, where more services can lead to higher overall costs without improving outcomes.
By contrast, employers implementing direct contracting strategies increasingly leverage:
- Bundled pricing
- Transparent, upfront costs
- High‑quality, cost‑efficient provider selection
For common services such as advanced imaging, gastrointestinal procedures, and surgeries, the difference can be meaningful:
- A procedure performed within the traditional system may result in a total episode cost of approximately $1,000
- The same episode, when directed to a high‑quality, cost‑efficient provider, may be delivered for closer to $750 total cost
In some cases, employers also reduce or eliminate employee out‑of‑pocket costs as part of the strategy. The difference is not just in price—it is in structure. These models reduce fragmentation, improve coordination, and align incentives around value instead of volume.
What Direct Contracting Can Look Like in Practice
To understand how direct contracting changes the cost dynamic, it helps to compare traditional, in‑system pricing with direct, episode‑based arrangements for common services. The examples below are drawn from the experience of an M3 client that implemented a direct contracting strategy focused on bundled pricing, transparent costs, and preferred providers.
Illustrative Cost Comparisons by Service Type
These examples illustrate how direct contracting can significantly reduce the total cost of an episode of care, while improving predictability and simplifying the employee experience. Savings achieved through these arrangements are often reinvested into the benefit program—helping stabilize premiums, reduce employee cost sharing, or fund additional health and wellbeing initiatives.
Examples reflect outcomes achieved by an M3 client using direct contracting strategies. Actual results vary by market, provider availability, and contract design.
What Makes Direct Contracting Work in Practice
Direct contracting is not just about selecting the right providers. Execution matters. Three factors often determine whether these strategies deliver real value or fall flat: the right TPA partnership, thoughtful benefit design, and clear employee education.
Your TPA Partner Matters
Because direct contracts often sit outside traditional carrier networks, employers need a TPA that can support custom pricing, clean claims processing, and accurate reporting—and integrate bundled payments and Centers of Excellence into the broader plan.
Benefit Design Shapes Behavior
Direct contracting works best when incentives reinforce the desired behavior through reduced cost sharing, enhanced benefits, and clear financial differentials for preferred providers.
Employee Education Is Essential
Even the best‑designed program will underperform if employees do not understand how or why to use it. Education turns direct contracting from a plan feature into a true benefit.
Compliance and Governance Still Matter
Direct contracting will have compliance considerations. Private employers who directly contract outside of their self-funded health plan are creating separate ERISA welfare benefit plans that will be subject to all ERISA requirements, including documentation and reporting such as SPDs and 5500s. Even if the direct contract is integrated into to the self-funded health plan, documentation of the benefit will still be required.
In addition, ERISA fiduciary duty requirements apply. ERISA fiduciaries (plan sponsors) must act prudently and in the best interest of plan participants. The U.S. Department of Labor (DOL), the agency that enforces ERISA, emphasizes the importance of documenting decisions, evaluating fees, and monitoring outcomes to fulfill fiduciary duty obligations.
Key Takeaway
Direct contracting is not a silver bullet—but it offers a meaningful path forward for employers seeking greater control, transparency, and value. If your organization is exploring new ways to manage medical spend, direct contracting may be worth a closer look. Start with the data: identify your highest‑cost, highest‑variation episodes, compare them against market benchmarks, and evaluate where a more intentional purchasing strategy could make the biggest difference.
Contact your M3 Client Executive about how to get started today.
Sources
- Kaiser Family Foundation – Employer Health Benefits Survey
https://www.kff.org/health-costs/report/2024-employer-health-benefits-survey/ - RAND Corporation – Hospital Price Transparency Study
https://www.rand.org/pubs/research_reports/RRA1144-1.html - Centers for Medicare & Medicaid Services – Bundled Payments
https://www.cms.gov/priorities/innovation/innovation-models/bundled-payments - Health Affairs – Employer Direct Payment Study
https://www.healthaffairs.org/doi/10.1377/hlthaff.2021.00456 - Midwest Business Group on Health (MBGH)
https://www.mbgh.org - Purchaser Business Group on Health (PBGH)
https://www.pbgh.org - U.S. Department of Labor – ERISA Fiduciary Guidance
https://www.dol.gov/agencies/ebsa
