Direct contracting: Cutting out the middleman

The appeal of direct contracting is fairly obvious. When employers contract directly with health systems and other providers, it gives the employer added control, and, presuming curation by quality, insured employees can go to blue-ribbon providers with confidence that their services will be covered. There are also, of course, dollars to be saved by bypassing insurers and popularity points to be won by hitching to the “we’re cutting out the middleman” narrative. Companies that broker and manage direct contracting arrangements, such as Dallas-based Lantern, which focuses on specialty care, are well known. Direct contracting? Not new, say those with experience and savvy about the insurance market.

However, for a whole set of reinforcing reasons, direct contracting is newly ascendant. The expense of healthcare coverage has made it increasingly attractive to a wide range of payers, particularly self-insured employers and unions. Health systems are leaning in. Powerhouse health systems, such as Northwell Health in New York state and Baylor Scott & White Health in Texas, have set up subsidiaries just to handle their direct contracting. So far, much of direct contracting has focused on relatively small slices of healthcare — a particular procedure, such as knee replacements, for example. But in December 2025, Northwell and the 32BJ Health Fund negotiated a direct contracting arrangement that is the largest of its kind

“It’s primary care. It’s specialty care. It’s inpatient. It’s outpatient. It’s labs and radiology,” says Cora Opsahl, MBA, director of the self-insured fund for the 200,000-member 32BJ, the New York City-headquartered local of the Service Employees International Union. “It’s the whole kit and caboodle, which is why it is such a unique partnership.”

Direct contracting will be a focus of the National Alliance of Healthcare Purchaser Coalitions’ upcoming leadership summit in June in St. Louis. Shawn Gremminger, M.P.P., president and CEO of the alliance and a member of the Managed Healthcare Executive editorial advisory board, said the notion of zeroing in on direct contracting occurred to him at the alliance’s November meeting. “There was just so much energy around direct contracting. I turned to my meeting staff and a couple of other folks and said, ‘We should just do a whole conference on direct contracting.’ And everybody said, ‘Yeah, I think that is the right move.’”

Results of the alliance’s annual Pulse of the Purchaser survey are more evidence of a direct contracting crescendo. In 2023, 18.7% of respondents indicated that they had had direct contracts, and 24.2% indicated that they were considering direct contracting in the next one to three years. In 2025, the proportion of respondents who said they had direct contracts had grown to 27.6%, and another 26.7% indicated they were considering them.

One of the alliance’s members, the Midwest Business Group on Health (MBGH) in Chicago, has put together an “action brief” on centers of excellence and other forms of direct contracting. It also held a webinar in February 2026 to publicize the action brief. Cheryl Larson, president and CEO of MBGH, says direct contracting has “been around forever, but we’re going to see a significant increase in it.”

Fiduciary responsibility

Forever is a mighty long time, but direct contracting does go back a ways. How far depends on where you draw the definitional boundaries of direct contracting. On- or near-site health clinics are often talked about as a form of direct contracting. Sidney R. Garfield and Henry J. Kaiser set up a medical clinic for workers constructing the Grand Coulee Dam in Washington state in the 1930s, although that clinic was company owned.

Shrinking the aperture, direct contracting was in the limelight in the mid- to late-2010s. General Motors and the Henry Ford Health system announced in 2018 that they had reached a direct contract deal for the company’s nonunion employees. A KFF report in 2019 based on the foundation’s oft-cited employer health benefits said 8% of large (200 employees or more) employers had direct contracting arrangements and that 16% of companies encouraged their employees to use centers for excellence, which are considered a form of direct contracting.

In an interview with Managed Healthcare Executive in January, Elizabeth Mitchell, president and CEO of the Purchaser Business Group on Health (PBGH), estimated that more than half of her organization’s members have direct contracting arrangements. PBGH’s members include many of the largest companies in the U.S., including Apple, Amazon and Boeing. “Many of our members are doing this very successfully,” Mitchell said. “I will tell you, each of them has reported lower total cost, better access and a better experience for employees. It is quite established within my membership that it is a very attractive approach.”

So direct contracting has a history and a nice running start. Gremminger and Larson say the interest and appetite for it are cresting now for several reasons. They both mention employers feeling burdened by their healthcare line items. “It’s just increasing costs and frustration from employers that I have to do something. I’ve got to try something new,” says Gremminger.

“Nobody is allowing employers to fix the system,” says Larson. “We’re paying the bill. We’re the real payer. Not the carrier, not the PBM [pharmacy benefit manager], none of those players. Yet we have no control over the cost of things. So, this is a way that employers can have a say.”

Layered on top of the budget-buckling cost burden of healthcare are employers’ legal responsibilities to prudently manage healthcare (and other) benefits. Fiduciary responsibility, as it is called, is hardly new for employers. Self-insured employers are fiduciaries under the Employee Retirement Income Security Act (ERISA) of 1974 that governs the self-insured part of the commercial insurance market. But the Consolidated Appropriations Act of 2021 broadened the scope of employer responsibility, and employees have brought lawsuits recently alleging that their employers were not living up to their fiduciary responsibilities in how they managed healthcare and pharmacy benefits.

“I think that the fiduciary responsibility aspect is meaningful, because in a direct contracting relationship, or quasi-direct one, at least, theoretically, you've got a much better sense of outcomes, because that's probably built into your contract, and certainly you've got a better sense of flow of funds,” says Gremminger. “You know how much you're spending. You know who's taking what.”

Direct contracting is getting busy with vendors pitching their services to employers, and Gremminger says they are using fiduciary responsibility as part of their sales pitches. “That’s new in the last four or five years compared to just the cost argument,” he notes.

Larson says she continually coaches employers about their fiduciary responsibility. “Every time I talk about something that’s important, I’m bringing that role up — that they have to get the best price and the best products and services and contract with the best people and know what things actually cost, or they could be at risk.” At the same time, Larson says she thinks there are other motivations behind the current heightened interest in direct contracting. “I don’t think fiduciary is driving it, and I feel bad saying that, because I think most employers are not paying attention to that,” she says, adding the caveat that her members, which include some sophisticated buyers of healthcare, may be more attentive to the fiduciary responsibility issues. “It’s all cost,” says Larson about the interest in direct contracting. “In the end, everything is about cost.”

Success stories but reticence

Interest in direct contracting is climbing partly because there is enough experience with it for earlier adopters to share success stories, explains Larson, who has put together an MBGH employer advisory board on direct contracting. A representative of one employer in her group says she is saving 40% on certain procedures through a centers-of-excellence arrangement. A regional healthcare system in her system was “just getting slammed by a lot of Blue Cross increases,” Larson says, and moved to create a center of excellence. “The pricing differential, $500 for an MRI versus $5,500 for an MRI, has saved them a lot of money.”

Mitchell of PBGH said in her interview with MHE that a pricing and cost data demonstration project that PBGH ran showed one of her member companies that its “direct contract was giving them much higher value than anything they were getting from UnitedHealthcare.”

Both Larson and Mitchell say one of the problems they face is that employers are reluctant to share information about their healthcare strategies. Their reticence can make the commercial market something of a black box relative to government payers, such as Medicare and Medicaid, which have all kinds of reporting and assessment requirements baked into them. Mitchell said employers banding together to negotiate direct contracts using common metrics is a promising strategy. Boeing, eBay and a third employer have done so in the Seattle area, but the third employer refuses to be named so far. “These are massive corporations that are conservative by nature, and this isn’t their core day job,” Mitchell said. “I think once evidence grows, they may be more public, but this is just sort of a consistent challenge.”

Employers don’t want to talk about what they are doing, Larson says, and their legal departments tend to advise them to steer clear of any media interviews. “They don’t talk a lot about what they are doing,” says Larson of employers, “which is the value of an [employer] coalition where we make them talk about what they are doing. We’re constantly at them, having an employer advisory board, having employer-only activities so that they can learn from each other.”

Many flavors

Part of the problem with creating an easy-to-follow narrative about direct contracting is variation in what counts as direct contracting. Larson and many others are focused on centers of excellence, which carve out certain services — often surgical — to be delivered by certain providers that have strong quality and cost track records. It is, by design, a piecemeal approach that rides on top of or alongside the health plan’s network and the rest of the medical services. Larson says that, understandably, most employers don’t want the disruption of walking away from their entire network and all the services it provides, so they work selectively. The center-of-excellence arrangement often entails price and quality guarantees from the provider, and payments may be bundled for episodes of care, rather than for individual services. If the price and quality metrics aren’t met, the provider may face financial penalties. Employees may not know about the direct contract, but they may have an incentive to use the services of the center-of-excellence providers in the form of lower copayments and coinsurance. Also, although centers of excellence may conjure up notions of freestanding centers or a physical place, in reality, these centers of excellence are existing groups of providers at one or a number of health systems.

Another definitional wrinkle is that employers and providers often now work through vendors that have identified direct contracting opportunities. Gremminger says it makes sense that vendors stepped in to facilitate more ready-made deals. For an employer to go out and negotiate prices, payment periods, prior authorization and all the other terms associated with delivering medical care with, say, a local ambulatory surgical center, was daunting, he says. “It’s really hard, and very few employers wanted to do it,” he says. Moreover, with the exception of true company towns, even large employers don’t have enough employees in a healthcare market to effectively bargain with health systems, Gremminger notes.

Gremminger says his organization is also grouping on-site or “near-site” clinics under the direct contracting rubric that the employer owns or has a contract with. Among her members, Larson says Sargento Foods, the cheesemaking company, has established onsite health and wellness centers staffed with nurse practitioners, physical therapists and other professionals. At the 2025 Pharmacy Benefit Management Institute’s Annual National Conference, Kenneth Aldridge, M.S., director of health services for RosenCare, the novel healthcare plan for the employees of the Rosen Hotels & Resorts chain in Orlando, Florida, described RosenCare’s on-site medical services. Such clinics have been around for a while, says Gremminger, “but there’s some movement in that direction. Again, it’s all about taking out the middleman.”

Larson notes that The Alliance, a healthcare purchasers’ coalition in southcentral Wisconsin, has developed a leading example of another form of direct contracting in which the coalition contracts with a network of hospitals and physicians. “As a coalition, they have developed their own high-performing network,” she says.

32BJ-Northwell

It is safe to say that 32BJ’s direct contract with Northwell is the most significant addition to the direct contracting menagerie in years. “It’s a true direct contract,” says Opsahl, as no vendor, such as Lantern, brokered the deal. Opsahl says there is a big difference between working with Lantern, which curates doctors based on quality and cost, and sitting across the table from executives at Northwell Direct, the health system’s direct contracting unit. “With this Northwell contract, I have a lot more visibility into their doctors. I am going to have the ability to help our members make appointments. It becomes more of an integrated relationship versus something I send my members to,” she says.

The scale is also in a whole different category, with the arrangement likely to affect the 140,000 of 32BJ’s 200,000 members who live in New York City and the surrounding area. The three-year contract includes the entirety of the giant Northwell Health system, which, after its merger with Nuvance Health last year, encompasses 28 hospitals, approximately 13,500 providers and more than 1,000 ambulatory care centers. Opsahl says the 32BJ is getting a 20% price cut from Northwell, which should work out to annual savings of approximately $46 million, and perhaps more if more 32BJ members become Northwell patients. That is a relatively small fraction — just 3% — of the $1.5 billion that 32BJ spends on healthcare each year, Opsahl acknowledges, but she says the $30 million that the union is saving each year after it dropped the NewYork-Presbyterian system from its system in 2022 has translated into the largest wage increases in the union’s history, improved pensions and lower health insurance premiums. “That’s what I did with $30 million a year. Now we have an opportunity to give that $46 million-plus back to the union and the trustees,” she says.

Opsahl says that 32BJ is going to keep its center-of-excellence contracts, negotiated through Lantern, for joint, bariatric and spine surgery. That means 32BJ members can’t go to Northwell surgeons for those surgeries, but she didn’t rule out revisiting those contracts and perhaps getting Northwell surgeons included. The union is also keeping its contract with Anthem, she says, partly because 32BJ has members in other parts of the country and partly because she wants members to have access to care or specialists who Northwell might not have. “I’m going to always need a wraparound network,” Opsahl says.

Necessary ingredients

From Gremminger’s perspective, the move toward direct contracting is a symptom of the shortcomings of health insurance carriers. “If they were doing a better job and they were more transparent and better partners to their client, we wouldn’t need this,” he says. Opsahl says she doesn’t think “any of those insurance carriers are going to wither on the vine” as a result of direct contracting, but she recognizes that the Northwell megadeal does “lop off a piece” of Anthem’s network. For all the variety and in-and-outs of the various direct contracting arrangements, Gremminger says there is a common element. “I think the feature that runs through all of them is there’s no health plan. Blue Cross, Blue Shield, Aetna, Cigna, United — they are not involved,” he says.

The independence also extends to the third-party administrators (TPA) that self-insured employers hire to pay claims and handle other aspects of their healthcare benefits. Opsahl says 32BJ uses WebTPA as it is a TPA. The company is owned by GuideWell, the parent company of Florida Blue, the state’s Blue Cross and Blue Shield, but it operates independently. “One of the reasons we went to Web is to have the flexibility to do this [direct contract with Northwell],” says Opsahl. ”Had we continued to use Anthem as our administrative services provider, it becomes much more sticky. Because anything I do over here, I can't have Anthem adjudicate, because then it becomes proprietary, confidential. It becomes sticky.”

Large numbers are certainly an advantage with direct contracting. Opsahl had leverage through a 32BJ membership that is the size of the population of a small city. Michael Costello, a direct contracting expert for NextEra Energy, talks about “having enough belly buttons” to negotiate effectively. Costello says he has had success negotiating direct contracting arrangements for his company with Florida hospitals because Florida Power and Light is a subsidiary, so most of its 16,000 employees live and work there. Opsahl says, though, it is not a pure numbers game anymore because of federal rules requiring health plans to disclose their negotiated prices that went into effect in 2022 and price transparency rules for hospitals that went into effect in 2021. “I think for a long time, healthcare has been a quiet thing that employers struggled with but didn’t want to talk about,” she says. Although there have been some problems with the price transparency information, Opsahl says it has opened up the conversation about healthcare prices and costs and empowered employers. “One of the reasons I think direct contracting is working now in a way that didn’t work before is that the employers that might perceive themselves as less influential, who don’t have 200,000 lives, now have the data to be more influential.”

Costello says the “must-haves” of direct contracting include clear language, ensuring full data rights, and strong ERISA attorneys who can catch any language that might lead to data blocking and other obstacles to transparency into price and quality.

Possible drawbacks

As with any development in healthcare, direct contracting has some possible drawbacks and unintended consequences. Sure, it leaves conventional insurers out of the loop, but vendors are swarming in, looking to get a piece of direct contracting action. There are still going to be intermediaries. The sheer variety of direct contracting arrangements is impressive — and boggling. “Every model is little bit different. The benefits are different — the pros and cons. There are different ways that they’re structuring payments. Some are capitated. Some are bundled,” says Larson. The mix may be a healthy sign of varying needs being met, but it also adds complexity to a system choking on complexity. Some also see a danger in large contracts, such as the one between 32BJ and Northwell, buttressing and perhaps accelerating the trend toward larger and larger health systems.

But Gremminger says that at least for employers, direct contracting sheds fresh light on quality and pricing information that tends to get obfuscated in traditional employer-insurer relationships. Anxiety about complexity is not what they are experiencing. “What I hear from most of the employers that I talk to is that it feels very different because it’s simpler and more transparent, and I know what my costs are and are going to be,” he says.

Opsahl pushes back against the idea that links direct contracting to health system consolidation, which results in hospital pricing power and higher costs. Direct contracting “is really great for healthcare, because it is the disintermediation of what we have today,” she says — and that helps with affordability. “Right now, I have a three-year contract that’s going to save me probably $50 million-plus, $46 million-plus a year, and they [Northwell] will now be the most affordable academic medical center in New York.”