What is “Direct Provider Contracting” and how do health plan sponsors implement?

Over the past 40 years, many provider payment schemes have spread throughout the country, ranging from PPO to EPO, and HMO to DPC.  Today, we now have a complicated network of contracts, discounts, and fee schedules between members, employers, insurers, networks, and providers, the latter three earning profit from the former two.

As a concept originating in 1980, the PPO (or Preferred Provider Organization), has now reached “critical mass” in that nearly all providers in a given region participate with the prevalent PPO or several PPOs.  Although this “participation by all” helps us seek care freely, the unfortunate side effect is higher fees.  At the bargaining table, PPOs attempt to show providers proof of patient steerage in return for discounted prices.  However, allowing any provider to participate makes it impossible to promise a patient will not choose a competing facility, ultimately allowing the care provider to begin naming their price.  Besides, it’s highly likely that the most significant insurance carrier in your region also owns the largest PPO network.  When this occurs, the motivation for premium growth begins to outweigh the difficult task of asking for price concessions from care providers who now have more leverage.  Fueled further by ACA’s 15% profit cap (as a % of claims), when your region’s largest insurer pays more, they can now make more profit.  So far, PPO’s have avoided [deserved] criticism for allowing hospitals to inflate their fee schedule by marketing “bigger discounts.”  However, if no one controls the top-line, discounts lose meaning.  Beginning in 2019, hospital administrators are mandated to publish their retail charges (or “chargemasters”).  The resulting data is nothing short of alarming with some services at 20x industry expected fees.

HMO insurance schemes are not far behind.  In the state of Michigan, there is now less than a 0.1% difference in participating providers between Blue Cross Blue Shield’s Simply Blue (PPO), and the Blue Care Network (HMO), our State’s largest networks.  Granted, the HMO is technically an exclusive provider network (EPO) with no out-of-network benefit, and care management must flow through a primary care gatekeeper, but the average discount is 37% PPO and 37.5% HMO.  So, both networks are rapidly losing negotiation power as nearly all competing providers are considered in-network.  The real question; 37% discount off of what?  Who’s controlling the top line fees?

If that wasn’t enough, the hospital sector, in response to additional pressure from Medicare’s value-based reimbursement schemes, mergers and acquisitions have steadily risen for ten consecutive years [by count] and 13.8% compounded annual growth rate in average deal size [90 deals in 2018 with an average $409,000,000 per transaction].  As hospitals get larger, competition subsides, resulting in unchecked fee schedules.  Adding more salt to the wound, in many metropolitan areas, the local hospital owns the local HMO insurance company, which owns the local HMO network, virtually eliminating net cost transparency.  So, in response, many plan sponsors are seeking relief from the resulting ten-year, 242% increase in health insurance premiums by investigating direct relationships with care providers, mirroring the strategy of mega-corporations like Walmart, Coca Cola, and GM. 

The following is a business leader’s 2019 guide of currently available provider payment methods.

Traditional PPO Network:

PPO[preferred provider organization] – Patients can seek care anywhere, but if the provider is not a participant, the patient has a higher cost.


  • PPO – [preferred provider organization] – The patient will get some level of reimbursement for all care provider bills for covered services.  In-network providers fees are pre-negotiated via “discount off chargemaster.”  Typically, non-participating providers are reimbursed at a lower amount with higher patient responsibility billed after that.
  • POS – same as PPO but requires the patient to have an in-network primary care physician (PCP).  However, referrals are not required to come from the PCP.  Point of Service (POS) plans allows insurance carriers to pay the “named PCPs” via capitative contract, or monthly subscription, and still have an out of network benefit tier.
  • Narrow Network PPO/POS – same as PPO/POS, but the list of in-network providers is dramatically smaller.  In many cases, this is a result of a previous PPO network trying to “reboot” negotiations because they’ve grown too large and lost steerage.  Other narrow networks have emerged from large local employers contracting with local care providers independently, and subsequently, the regional PPO creates a similar network for other smaller businesses to take advantage (and the network to save face).

Traditional EPO Network:

EPO [exclusive provider organization class] – Patients have a limited list of care providers that the insurance company is willing to reimburse, with no out-of-network.


  • HMO – [health maintenance organization] – (most prevalent) – In addition to having a limited list of care providers, the patient must first seek care from an in-network primary care physician who manages referrals and the path of care.
  • EPO – [exclusive provider organization] – (rare) or “Narrow Network,” like an HMO, yet a primary care gatekeeper is not required.  There is no out-of-network benefit, and the care providers are paid on a pre-determined fee for service, as compared to an HMO that pays primary care via capitation.
  • EPO/HMO – [exclusive provider health maintenance organization], or “Narrow Network HMO,” like an HMO, yet the list of care providers is dramatically limited, usually to one hospital system.  There is no out-of-network benefit, and the plan pays primary care providers via capitation or monthly subscription.  However, most EPO/HMOs are promoted and owned by the same hospital ecosystem, and therefore, these payments are typically not transparent.

Open Network / No Network

Reference Based Reimbursement (RBR) – a payment scheme that mirrors Medicare’s provider reimbursement as a “reference.”  Typically, RBR reimbursements range from 150 to 200% of Medicare’s allowed amount for each procedure (CPT code) billed, which is far less than that “negotiated” by private insurance networks.  However, there is no contract between the care provider or the payor (typically self-insured plan sponsors).  The payments are made via third party administrator (TPA) on behalf of the member, using plan sponsor funds.  Basically, the member is asking the provider to accept less after a procedure, without a contract.  Therefore, an inherent risk of balance billing exists for every single billed service.  Depending on your state’s insurance department, hospital lobbying, and prior case law, your members have varying degrees of legal protection.


  • RBR only, patient responsible for balance billing – (rare, avoid) Plan Sponsor’s TPA pays % of Medicare, and the patient is responsible for plan deductibles/coinsurance, and any balance billing from care providers unwilling to accept the amount of reimbursement.
  • RBR with layered balance billing responsibility – (trending in mid-market, 1000+ EEs) –TPA pays a % of Medicare, and the patient pays deductible/coinsurance as per plan design.  If the provider does not accept the payment amount, the plan’s TPA negotiates an acceptable reimbursement, which could be +/- 300% of Medicare.  The plan sponsor pays the balance, and it becomes the responsibility of the plan sponsor to collect from the member, or not.  If the plan sponsor chooses not to bill the member, it could lead to future allegations of discrimination.
  • RBR with financed patient responsibility – (rare, avoid) –TPA pays a % of Medicare, and the patient is billed deductible/coinsurance as per plan design, yet the patient pays the TPA rather than the provider in this arrangement.  If the provider does not accept the original payment amount, the plan’s TPA negotiates an acceptable (higher) reimbursement and wraps the excess balance into the patient responsibility along with deductible and coinsurance.  The total balance becomes debt with the patient as a guarantor, and the plan sponsor as the cosigner.

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Bundled Episodic Care

For non-emergent, well-established procedures, the cost of care can be determined before the procedure, rather than billing (per CPT code) post-op.  Providers create a “bundle of care” for the episode, including; facility, surgeon’s team, anesthesia, implants, imaging, and pathology fees.  This upfront pricing strategy is just like any other service industry that bids and performs work.   

Bundled care can have a dramatic impact on a plan sponsor’s overall cost of care, as these procedures range from $5,000 to $90,000 at a hospital, yet cost 41% less at specialized independent facilities. In a non-hospital setting, these events represent minimal risk of infection or readmittance.  Therefore, ambulatory surgical centers (ASCs) can perform at high volume, high quality, with significantly lower cost.  Bundled care has gained popularity through media attention at surgical centers like the Surgical Center of Oklahoma, and Surgeon’s Choice (Michigan).


  • Patient Cash Payment:  Although not a formal payment scheme, patients who have no insurance, or high deductibles, can seek care without presenting an insurance card, resulting in an upfront “what’s this going to cost me?” conversation.  Pre-negotiation works for procedures like ear tubes or diagnostic imaging, where the cash price is <$1,000, yet insurance will reimburse at 3-4x that amount.  Patients are beginning to avoid insurance as deductibles increase (and are ultimately the patient’s responsibility).  Plan sponsors should take note of this practice if they are considering higher deductibles.  With fiduciary responsibility laws placing more burden on plan sponsors, a patient who finds care at a lower cost (for cash) could have a strong basis for complaint.
  • Employer Direct-Contracted Bundled Care:  For large-market employers (5000+ EEs), contracting directly with an ASC group for a specific type of care (ex. orthopedic outpatient procedures) can be quite effective at reducing cost.  However, the group must be large enough to present predictable utilization.  Currently, only large plan sponsors that can predict 100+ episodes/year can consider direct contracting with their local ASC.  Otherwise, the plan sponsor’s administrative and legal costs are too high, and the surgical center will not provide deep enough discounts. Harvard Business Review detailed this in a 5-part series. Well worth signing up for a 30-day trial!
  • Single-Case Bundled Agreements:  For any self-funded employer, negotiating a lower cost before a procedure results in a dollar for dollar savings, with zero balance bill risk (assuming the member has not met specific/aggregate limits).  Therefore, third-party “care navigators” have become more prevalent as a service to plan sponsors and their members.  A typical engagement starts at precertification with the patient’s current provider, who is likely contracted with the plan sponsor’s existing network.  The care navigator is alerted by the TPA, or the patient is required/incented to shop with the care navigator before authorization.  If successful, the care navigator takes 20-40% of the discount as a service fee.  If contracted, the provider typically assumes the risk of re-admittance due to complications, and the cost of all post-op appointments. Sympl Benefits provides single-case negotiation in Michigan and operates the state’s largest bundled care marketplace.
  • Bundled Care Marketplaces:  Similar to single-case bundled care, but without a specific patient in mind at the time of negotiation, and with multiple care providers who prefer transparent fees.  The marketplace acts as a “storefront” or marketing tool, typically online.  Care marketplace providers are highly skilled at particular procedures (ex. total knee replacements).  With this skill and high volume comes efficiency, reduced overhead, and a predictable cost for that procedure.  It is the care provider’s option to submit bundled pricing for just one or several procedures.  Each provider presents procedure costs in an open marketplace for patient consideration.  Members are educated and incented by their plan sponsor to seek non-emergent care within the market.  Typically, patients who engage in a bundled care marketplace receive a full waiver of patient responsibility.  The provider’s contract involves no patient collections, yet assumes the risk of readmittance and the cost of all post-op appointments.  Sympl Care is Michigan’s leading bundled care marketplace.   Access HealthNet is the leading national marketplace.

Direct Primary Care

For routine care and population health management, a relationship with a primary care physician is essential.  You can pay for primary care in many ways, but most prevalent today is either “capitation” or “fee for service.”  Alternatively, Direct Primary Care (DPC) is payment for your PCP’s service as a monthly subscription, without fees or copays at the time of a visit.  The cost can be paid by an individual or on behalf of a member, by a plan sponsor.  Direct primary care has proven to reduce hospital admissions by 62%, reduce days in the hospital by 30%, and reduce specialty referrals by 63%.  These cost savings are made possible by reducing the number of patients per doctor and increasing the time spent with each patient.  A DPC typically limits their panel to 600 patients, as compared to a traditional hospital-employed PCP who manages over 2x that.  Source: Imagine MD

Therefore, studies have shown a reduction in wait times and improved access to care through 24/7 phone, virtual, and home visits.  Members benefit from increased time spent with their physician (to 30 minutes on average per visit, compared to a traditional 8 minute PCP visit).

As a fixed cost, direct primary care typically costs 20% more than the standard insurance model of capitation or fee for service.  However, as a plan sponsor, your cost of primary care is typically 2-4% of your total medical/Rx spend.  The reduction in high-cost medical care usually outweighs the cost of DPC by a 10-20x margin.  The challenge is finding a DPC provider.


  • On-Site Clinics:  If your employee population works within a single building or campus, an on-site clinic can be effective at improving member’s access to care, and time spent with the primary care doctor.  Typically, the plan sponsor manages the onsite clinic, including financing, and grants exclusive access to its employees.  The members of the plan gain walk-in access to a clinic located within their workplace.
  • Near-Site Clinics:  For large employers who potentially dominate a geographic area, a near-site clinic operates similarly to an on-site clinic, yet may be located within 10-20 miles of the plan sponsor’s physical address.

Types of DPC Financing:

  • Plan Sponsor-Owned (as above):  plan sponsor owns the clinic, and members have exclusive access.
  • Shared:  Multiple employers fund a near-site clinic, and members of either employer have exclusive access to the clinic.  Fully-managed and maintained in trust, or joint venture.
  • Independent DPC practices are currently the most common type of direct primary care.  Mainly serving the individually insured, or uninsured populous, these practices grow their patient panels through traditional marketing approaches and word-of-mouth.  Some independent DPCs are offering a portion of their patient panels for local employer partnerships. However, the inherent risk of an employer leaving the practice at an annual benefits renewal is a significant consideration, potentially resolved by long-term partnership contracts, but yet to be accomplished as of today.  Examples of independent DPCs include Nova DPC, Paradox Health,
  • Third-Party Managed & Owned DPCs:  Clinics are owned and operated by third-party DPC firm, who contracts with several plan sponsors to fill the patient panel.  Once the patient count reaches 600 members per physician, the management firm opens a new clinic or hires additional DPC physicians.
  • Third-Party Managed Affiliate Network:  Independently owned clinics seek the support of a third-party DPC contract negotiator, who fills patient panels with members from local employers.  Each independent clinic determines the number of patients they will accept from the affiliate program.  The management firm can integrate both owned and affiliate clinics to satisfy a geographical need.  Salta Direct both owns clinics and manages an affiliate network. 

Whether you employ a few or thousands, as a medical plan sponsor, your duty to provide a benefit that facilitates quality care and attracts and retains talent is up to you. As we forge forward into the Healthcare 3.0 landscape, take time to understand how your member’s care is negotiated. Work with your advisor to clearly understand these contracts. If you find a lack of transparency, find another advisor. Above all other factors, the actual NET COST of care is the leading driver of your healthcare spend.

Author, Wes Spencer.