A reader asked several excellent questions about when and under what circumstances direct contracting makes sense. That’s when an employer contracts directly with health care providers.
My take is an employer has to have at least 750 lives in one area – plant, school, city government, facility, etc. in order to have any buying power at all. And 750 may well be on the low end.
As to whether a partially self-insured employer, say one with a specific deductible of $50,000, should do this, I’d say yes. The vast majority of bills will come from members with total costs well under the $50,000 limit.
Lastly, direct contracting takes expertise and patience. Knowledge of provider payment mechanisms and expectations, an understanding of the related legal issues, an intimate understanding of the local provider community, and really good employee relations are the bare necessities. Without these, stick with a “regular” health plan.

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Payer-provider interactions are getting downright pugnacious. Perhaps a more accurate characterization is the big health plans and health care systems are raising pugnacity to new levels.
Denver is the scene of one highly public row featuring United Healthcare and HCA’s HealthOne, one of the largest health care systems in the Denver metro area. The ongoing contractual dispute has led to lots of nastiness:
– termination of the UHC-HealthOne contract,
– filing of a temporary restraining order on the part of UHC to force HealthOne to enable UHC members to access some HealthOne facilities, and
– efforts by HealthOne to tightly control UHC case managers’ access to their facilities after reports that case managers were tring to get UHC patients to transfer out of HealthOne facilities.
This is not an isolated issue. Recent disputes have arisen in Rhode Island, Tennessee, and western Florida. Notably, several of the more contentious battles are between UHC and HCA.
Hospital and facility costs are the largest single contributor to health care cost inflation, and hospitals’ negotiating power, and willingness to use same, has grown significantly in recent years. It’s likely that the recent announcement that HCA will be bought out by private investors will lead to an increase in the number and intensity of contractual battles.
What does this mean for you?
As United and others seek to constrain medical inflation, and hospitals work to maintain their margins in the face of increasing numbers of uninsured patients expect to see more of these battles hit the news around the country.

HMOs are cheaper than other forms of health insurance due to lower provider costs. At least that’s what an analysis of a 2004 study comparing HMOs to other forms of insurance discussed by Jason Shafrin in a post on Healthcare Economist says.
The difference amounted to 9.3%, with no measurable difference in utilization rates or risk selection between HMOs and other plans.
So, as an industry, HMOs are not more efficient because they are better at managing care or selecting risk, they are cheaper because they pay providers less. I would note that the analysis is based on data from the nineties, so perhaps a more accurate statement is that in the past HMOs were more efficient.
I don’t know if that’s the case today.

It’s happening. Actually, it has been happening for years, albeit not very often. Frustrated with increasing premiums and no real solutions from the health insurance industry, large employers are investing in direct contracts with health care providers to deliver health care services to their employees and their dependents.
The practice got its start before WWI, when lumber mills in Tacoma Washington contracted with the Western Clinic to provide health care services for their employees. Leland Kaiser built health care facilities and hired staff to provide services to workers on the Grand Coulee Dam in the nineteen-thirties, a project that was the beginning of today’s Kaiser Permanente.
While there are no statistics on the number of lives covered under direct-contract arrangements, the total number is probably tiny. Unless there is a “magic” combination of a large employer and a dominant health care provider group with extensive facilities in a relatively small geographical area, direct contracting will just be too complicated and difficult to pull off.
But when those conditions do exist, expect more employers to seriously consider the move. Employers that are likely to consider direct contracts include large municipalities, school boards, manufacturing concerns, transportation hubs and entertainment companies.
What does this mean for you?
A business opportunity for providers, another challenge for health plans, and another way to tackle the problem of access and cost.