As employers look for new ways to control healthcare costs and provide innovative healthcare offerings to their employees, employers are starting to consider the “direct-to-provider” contracting model as a way to achieve these goals. Under the direct-to-provider model, employers enter into arrangements directly with healthcare providers to provide services to employees. Left out of this equation is the traditional health plan, which the employer no longer needs to either provide coverage to employees (under a fully insured model) or to enable access to the health plan’s network of participating providers (under a self-funded model). In essence, under the direct-to-provider model, the employer is creating its own network of providers – which may consist of only one or a limited number of providers -- and builds incentives into its benefit program to steer employees to that employer-created network.

The market is showing signs of significant uptake by employers of the direct-to-provider model. The National Business Group on Health found that between 2018 and 2019, the number of large employers engaged in direct-to-provider contracts rose from 3% to 11%. A Willis Towers Watson report similarly found that 22% of large businesses are considering direct-to-provider contracting to meet their employees’ healthcare needs.

These arrangements can achieve cost savings in a variety of ways, but the key mechanism is that providers can usually offer more deeply discounted rates to employers that intend to only contract with one or a small number of providers. Because the providers in that narrow “network” are assured strong steerage of patients from the employers, the providers can leverage economies of scale and reduce per unit rates. A well-publicized example of a large employer using its employee pool to drive down costs is Walmart, which contracted with several providers to operate as “Centers of Excellence” for all spinal surgeries needed by Walmart employees.

While having a large pool of employees is one of the key indicators of success for a direct-to-provider arrangement, it can also bring challenges. When large employers have employees in multiple geographies (or even countries), it is unlikely that a single provider is going to be able to provide all the services needed by the employees, since most providers are regionally-based. Large employers may need to contract with multiple providers to provide coverage in different geographies, or utilize the direct-to-provider model only in specific geographies. But employers and providers are working through these complexities to offer innovative products to their employees. For example, in the Walmart example above, Walmart solved the geography issue by covering travel costs for employees who needed spinal surgery but were distant from one of Walmart’s Centers of Excellence.

There are many issues for employers and providers to consider before entering into a direct-to-provider arrangement. Some of them are as follows:

• The most successful direct-to-provider arrangements have been with large healthcare systems that can provide the full range of services needed by employees across the continuum of care.

• Some state laws that govern state-regulated health plans are preempted by ERISA, so providers wanting to maintain those protections will need to build them into their agreements with employers.

• If a provider extends a deeply discounted rate to an employer based on anticipated steerage, but the employer later enters into agreements with other healthcare providers, the provider may not receive the volume it was anticipating. Full or partial exclusivity agreements can protect a provider from having the economic value of the direct-to-provider arrangement undercut by a competing provider.

• Risk-based arrangements between providers and employers can be subject to state law licensing requirements.

• A provider entering into a direct agreement with an employer could trigger relationship issues between the provider and its contracted health plans.

Taking into account these considerations, a direct-to-provider arrangement can be an innovative way to provide efficient and effective care to employees.