Direct Contacted Medical Services for Self-Funded Employers

When a Walmart employee needs an organ transplant or spinal surgery, they don’t go to their local hospital. If they’re enrolled in the company’s benefits program, all Walmart associates can go to the Mayo Clinic for certain surgeries—with Walmart footing the bill. The company has a contract with the Mayo Clinic to provide services to its employees, and has similar contracts with other health systems throughout the country. 

Walmart is one of the most visible self-insured employers to use a direct-to-provider system of contracting medical services. It’s a revolutionary way for employers to negotiate directly with health care providers for services. Using direct contracted medical services is a variation on not just the traditional employer health insurance model, but also on the typical self-funded health plan model. The philosophy behind direct contracting is that cutting out the middleman (in this case, both traditional insurance companies and third-party administrators) can provide significant savings for employers that choose to self fund. 

Cutting Costs with Direct Contracted Medical Services 

For covered Walmart employees, the company’s use of direct contracted medical services can be a boon. It may be inconvenient for a worker located in California to travel to Minnesota to receive treatment at the Mayo Clinic, but their medical costs and travel expenses are covered—and they’re able to receive high-quality care at one of the most prestigious hospitals in the country. Walmart, for its part, can hopefully avoid paying for expensive complications down the line by contracting medical services with health care providers with excellent outcomes.  

Of course, Walmart’s model isn’t attainable for all businesses. It’s a multi-billion-dollar company with more than 2 million employees; and  Walmart has more bargaining power than some private insurance carriers. It’s also a global company with the resources to manage its direct-to-provider contracts. 

But some smaller businesses that self-fund their health plans will be able to use direct contracted medical services to cut costs. There are a few ways that direct-to-provider contracting can help employers save on health care spending for their employees. 

Health systems are highly motivated to increase revenue and outperform their competitors by bringing in new patients. Like any other service provider in a crowded market, health systems may have to offer competitive pricing and high-quality benefits to secure new business. That pressure can translate to significant savings for the employer. 

Sometimes, employers save money by using direct-to-provider contracting in combination with a “value-based care” model. With a value-based contract, the payments that health care providers receive are tied to the patient outcomes they deliver. The better the outcomes, the more they’re paid—creating real incentive for providers to give the highest-quality care to their patients. In theory at least, patients who receive high-quality medical care may be able to recover more quickly and need less ongoing medical intervention than patients who receive low-quality care. 

Is Direct Contracting Right For Your Business?

Keep in mind that direct contracting can look very different for different employers. There are many ways to structure this kind of arrangement. Sometimes an employer contracts with a provider for a single kind of service, like administering vaccinations to employees. In other cases, an employer might work with a health system to create an onsite clinic or telemedicine channel for its employees. 

Or, employers can follow the Walmart model by contracting with Centers of Excellence (such as the Mayo Clinic) that have specialized expertise in certain conditions. Say a patient needs a complicated heart surgery. With a CoE model their employer might have them go to a top cardiac program where the surgery is done all the time, instead of just going to the closest hospital. 

Direct contracting won’t work for a lot of employers. You may simply be too small to have negotiating power with health care providers. The smaller a company is and the fewer covered employees it has, the smaller the benefits for the health system. It’s generally not going to be worthwhile to negotiate a contract with an employer that only has 50 or 100 employees. 

There are geographic considerations too. The direct contract medical services model is more likely to be viable for businesses in places like Massachusetts, where we have a high concentration of top-rated hospitals. It’s easier for employees to get high-quality care when the right specialists are just a short drive away. The logistics can get more difficult for businesses located in healthcare deserts where hospitals are few and far between, or for businesses with remote workers who are spread out over different states. (Walmart can afford to fly its employees to other states for treatment, but not all businesses have the resources to do the same.) Decision makers should also consider employee reaction; some people may be thrilled to have access to high-quality care, but some may push back about their treatment options being restricted to a single health system or medical facility.

Like with all employer health plan options, this model will work well for some organizations and be the wrong fit for others. I urge any business considering self-funding and/or direct contracted medical services to explore the pros and cons of all the options. There are a lot of different ways to save money on employee health benefits without sacrificing quality, but it may take some homework to help you find the best one for your business. 

Stop Loss Insurance Brokers is your source for help with all things related to self funding and stop loss insurance. Contact me today with questions! 


Denise Doyle  Denise Doyle is the President of Stop Loss Insurance Brokers, Inc. She has over 30 years of experience in the industry and is a member of Self Insurance Institute of America.



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