Health insurance in the United States is largely provided by employers. In a traditional healthcare model, employers (or purchasers) will pay for insurance and then insurers will negotiate rates with providers, which employees will then pay. In the late 1990s, as healthcare plans became less competitive and rates rose, employers began experimenting with bypassing insurers to negotiate directly with providers. This became known as the direct contracting model.

The direct contracting model’s first success came under the Buyers Health Care Action Group (BHCAG), which was an association of around 25 employers in the Midwest that banded together to contract directly with providers. While the approach generated significant excitement at the time, BHCAG ultimately failed to gain traction and was purchased by a large insurance group in the early 2000s [2]. Direct contracting fell out of popularity shortly thereafter with few attempts to revive the model.

In 2019, the Trump administration began piloting a direct contracting program for Medicare as part of a broader goal of uncoupling payments from fee-for-service. Under the Direct Contracting plan, Medicare would negotiate with providers through non-provider-controlled Direct Contracting Entities (DCEs). These interlocutors can be controlled by any owner and there is no requirement that DCE owners have any experience in healthcare. The goal of this approach was to use market-driven strategies to control healthcare costs [3].

Detractors claim that Medicare’s Direct Contracting plan is equivalent to privatizing the government-run service and that it will divert taxpayer funds into the pockets of investors. Indeed, DCEs only spend around 60% of their funds on patient care, leaving the other 40% for profit and other overhead costs [4]. Supporters say that the approach will help reduce costs by removing incentives to up-code and provide unnecessary services.

For providers that sign up with DCEs, this means that they will be required to keep costs under a certain financial benchmark. Some studies have suggested that this may lead providers to avoid treating higher-risk patients, or to avoid high-risk procedures or groups entirely [5]. Indeed, a study of early enrollees in Medicare’s flagship program found that physicians in areas with large populations of poor or minority residents were less likely to participate. In the long term, this can lead to greater disparities in access to care [6].

While the origins of the direct contracting model were based on an attempt to cut out middlemen and negotiate directly with providers, the Medicare approach institutes a new middleman — DCEs — in place of insurers. This approach may reduce costs by decoupling payment from fee-for-service but can also lead to reduced quality of care and money earmarked for patient care being funneled into the pockets of DCE owners. While the Biden administration blocked a larger roll-out of the DCE program, it allowed the pilot to continue, and data from this pilot may provide a more definitive answer about the model’s efficacy.

References 

[1] Bond, William E. “Direct Contracting.” Journal of Managed Care Pharmacy 2.1 (1996): 11-16. 

[2] Schultz, Jennifer Sue. Selection of health care provider systems in a direct contracting model. University of Minnesota, 2001. 

[3] McCONNELL, K. JOHN. “Investing in Primary Care and Dismantling Fee‐for‐Service.” The Milbank Quarterly, vol. 97, no. 3, 2019, pp. 636–640., https://doi.org/10.1111/1468-0009.12399. [4] Gilfillan, Richard, and Donald M Berwick. “Medicare Advantage, Direct Contracting, And The Medicare ‘Money Machine,’ Part 2: Building On The ACO Model.” Health Affairs, 30 Sept. 2021, https://doi.org/10.1377/hblog20210928.795755.  

[5] Liao, Joshua M., and Amol S. Navathe. “Direct Contracting in Medicare.” Annals of Surgery, vol. 271, no. 4, 2020, pp. 632–634., https://doi.org/10.1097/sla.0000000000003620.  

[6] Yasaitis, Laura C., et al. “Physicians’ Participation in Acos Is Lower in Places with Vulnerable Populations than in More Affluent Communities.” Health Affairs, vol. 35, no. 8, 2016, pp. 1382–1390., https://doi.org/10.1377/hlthaff.2015.1635.