What Is Direct Contracting & Is It Right for Your Practice?

This is the third installment in our new series focused on medical practice survival tactics and opportunities. “Beyond Survive & Advance” covers a range of ideas for practice leaders to consider in today’s evolving healthcare landscape. From going out of network to getting the most out of your payor contracts, we’re here to help you stop simply surviving and start growing and thriving.

You’ve likely heard the term “direct contracting” before but may not have yet considered implementing a direct contracting model. In this article, I share the top reasons why it’s generally a great option and help you determine if it’s right for your practice.

What Is Direct Contracting?

First, let’s cover the basics: What does direct contracting mean? Direct contracting refers to an arrangement in which medical practices, typically primary care providers (but not limited to), contract directly with employers, health plans, or other entities to deliver healthcare services to a defined group of patients—bypassing traditional insurance companies/intermediaries.

There are several payment methodologies associated with direct contracting, including reduced fee-for-service (FFS), per-member-per-month (PMPM), or even bundled payment for comprehensive care.

The goal is to incentivize preventive care, care coordination, and cost efficiency while maintaining or improving quality of service.

3 Key Features of Direct Contracting

A direct relationship between the provider and payor can help eliminate cost, unnecessary oversight, and general inefficiency in the healthcare system. How? Through the following essential elements.

Predictable Payment Structure: Practices receive predictable payments (e.g., PMPM) for managing patient care, often covering primary care services and sometimes specialty referrals.

Focus on Value-Based and Patient-Centered Care: This model emphasizes outcomes, patient satisfaction, and cost savings over volume of services. It encourages stronger patient-provider relationships through expedited access (special appointment slots, same-day appointments) and proactive health management.

Reduced Administrative Burden: By breaking away from insurance companies, practices typically deal with less billing complexity and prior authorization requirements.

What Are the Benefits of Direct Contracting? Is It Good for Medical Practices?

The short answer: Yes. Depending on the size of your practice and specialty, the exact benefits will vary. But as a rule of thumb, it is generally a very good option for medical practices to pursue. Here are the top five most common benefits of direct contracting in healthcare:

1. A Revenue Stream Independent of Insurance Carrier Discounts: Payments provide financial predictability, reducing reliance on variable fee-for-service income.
2. Lower Administrative Costs: Fewer insurance-related tasks (e.g., claims processing) can reduce overhead, meaning there’s the potential to see a significant drop in administrative-related spending.
3. Improved Patient Relationships: Practices can focus on preventive care and chronic disease management, fostering trust and better outcomes.
4. Autonomy and Flexibility: Providers often have more control over care delivery, free from insurer-driven protocols.
5. Alignment with Value-Based Care: Direct contracting aligns with trends toward accountable care, potentially positioning practices favorably in evolving healthcare markets.

What Are the Potential Challenges of Direct Contracting?

Of course, even with these benefits, there are a few things to consider before making the shift.

• Limited Patient Pool: Contracts are often tied to specific employers or groups, which may restrict patient volume or diversity.
• Upfront Investment: Transitioning to direct contracting may require new infrastructure (e.g., telehealth, data analytics) or staff training as well as legal fees, for contract language and contract fulfillment requirements as examples.
• Regulatory Compliance: Practices must navigate federal and state regulations, such as anti-kickback laws or ERISA requirements for employer plans.
• Widespread Acceptance: As this is an atypical way of thinking, many employers may be resistant to engaging in the opportunity until other employers/groups find success.
• Marketing: In addition to an upfront investment, there will potentially be marketing costs to get the word out about direct contracting to employer groups and others.

Is This Model Suitable for Your Practice?

Good Fit For: Practices with strong care coordination, efficient operations, and a patient-centered focus are usually candidates for a successful direct contracting healthcare program. Smaller or independent practices may benefit from reduced insurance dependency, while larger groups can leverage economies of scale.

Less Ideal For: Practices with high overhead, limited experience in risk-based models, or those heavily reliant on fee-for-service revenue may not be as successful—at least initially.

Real-World Application

Direct contracting is more than an idea. It is in use daily in many medical practices.

For example, direct contracting has gained traction through models like CMS’s Direct Contracting Entity (DCE) program (now transitioned to ACO REACH), where practices partner with entities to manage Medicare populations. A 2023 report indicated that DCEs reduced Medicare spending by 2-4% while maintaining quality metrics.

Employer-driven direct contracting is also growing, with companies like Walmart and Boeing contracting with local practices to lower employee healthcare costs.

Overall Recommendations

Direct contracting can be advantageous for practices willing to embrace value-based care and capable of managing financial risk. To succeed, I advise you and your practice to:

• Before committing to a program, assess your operational readiness (e.g., cost management, data analytics). Develop an understanding of the local business community and potential pool of groups who could fit into this approach. Then, begin constructing a financial model based on risk tolerance, financial goals, and your organization’s ability to manage this kind of process.
• Start with smaller contracts to test the model.
• Partner with experienced entities (e.g., ACOs or management organizations) to share risk and resources.
• Ensure robust patient engagement strategies to maximize outcomes.

Ready to explore a direct contracting model? Curi Advisory’s Practice Consulting group can help. Contact me at jeff.hollis@curi.com.

The opinions and views expressed in blog posts on Curi’s site belong to and are solely those of the individual author, and do not necessarily reflect those of Curi Advisory or Curi Advisory’s parent or affiliated companies or their members, insureds, clients, customers, or partners. This post is for informational purposes only and it should not be construed or relied upon as medical advice.  If medical care is needed, please consult a qualified professional.

The content contained herein was generated by Curi with the assistance of an AI-based system to augment the effort.

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