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Guidance for Employers on Direct Contracting With Health Care Providers

December 18, 2018

By: Jason Brocks

This article highlights some key considerations for attorneys representing employer sponsors of group health plans that are considering contracting directly with health care providers. As the idea of direct contracting arrangements between plan sponsors and health care providers becomes more mainstream, clients will want not only legal advice on these arrangements but also counsel on the potential benefits and costs associated with dealing directly with health care providers in the employee health benefit plan context.

Benefits and Drawbacks of Existing Provider Arrangements

Employer-based health benefits are a cornerstone of the U.S. health care system. Employers establish (i.e., sponsor) health plans, which in turn provide health benefits to employees. 1

Employers offer health benefits to their employees at considerable cost to themselves and their employees. In fact, while it varies somewhat based on factors such as the type of health plans offered (HMO, PPO, high-deductible, etc.), the overall cost of providing health benefits has continued to climb. 2 Although employers recognize the value of offering health benefits to recruit and retain employees, they nevertheless are looking for ways to limit the expenses associated with providing such benefits.

Typically, plan sponsors look to insurance carriers (for fully insured plans) and third-party administrators (TPAs) (for self-funded plans) to design and maintain health benefit plans, including managing a network of health care providers sufficient to meet the needs of employees and their dependents. 3 This arrangement has benefited plan sponsors, which typically lack the in-house expertise both to design and administer an employee health benefit plan in accord with applicable laws such as the Affordable Care Act, ERISA, and state insurance rules, as well as to manage a health benefit plan as a going concern in a financially viable manner.

The administrative benefits of contracting with insurance carriers and TPAs to design and maintain health care provider networks—instead of contracting directly with the providers themselves—come at a price to employers, however. In doing so, employers cede much of their ability to control costs to those insurance carriers and TPAs.

As a result, your plan sponsor clients are actively looking for ways to control the cost of their health benefit plans. Among other things, they are taking a second look at their current arrangements with insurance carriers and TPAs. Some even question the value that those entities provide.

Characteristics of Recent High-Profile Direct Contracting Arrangements

Two high-profile announcements over the last year have driven much of the current discussion among plan sponsors around direct contracting arrangements.

First, in early 2018, Amazon, Berkshire Hathaway, and JPMorgan Chase announced a joint venture to develop a new company for providing health benefits to their employees at a reduced cost. 4

Other than an announcement about the new company venture and its CEO (Atul Gawande, M.D.) and COO (Jack Stoddard), few details about the joint venture have emerged. 5 However, speculation—fueled in part by the CEO’s statements—is that the new venture may seek to sidestep health insurers and pharmacy benefit managers through direct contracts with providers. 6

Second, in August 2018, General Motors (GM) announced that it entered into a multi-year direct contract with the six-hospital, integrated Henry Ford Health System. Under that arrangement, GM employees will be able to access Henry Ford’s health provider network. 7

Significantly, the direct contract will make Henry Ford’s own disease management programs part of GM’s employee health benefit program and Henry Ford will be financially at risk if it does not meet certain quality, cost, and utilization of services metrics. 8

Tellingly, for reasons discussed more fully below, the arrangement includes Blue Cross Blue Shield of Michigan as a TPA to provide claims processing, payment, and auditing services for the GM-Henry Ford arrangement.

The contract is the first for both GM and Henry Ford, which makes the arrangement something of an experiment for the parties themselves, but also for other plan sponsors thinking about jumping into the direct contracting world.

While there are fierce advocates of direct contracting (including Amazon, Berkshire Hathaway, JPMorgan, GM, and Henry Ford Health System), the future for direct contracting with health care providers is not entirely clear because the experience with it has been relatively brief. But that has not stopped many employers from exploring it and looking for guidance from their attorneys about how such arrangements would look.

Further, if the volume of new materials on the topic available online is any indication, many law firms and professional organizations have flagged direct contracting as a trend worth following from a business development perspective. 9

Guiding Your Client Through the Trend

Below are some points to consider when you are approached by a client looking for guidance on direct contracting with health care providers.

First and foremost, define the problem that your client wants to solve through the direct contracting process. This information will frame the agreements that you will draft.

For example, is your client interested in addressing health care cost, quality, or access, or a combination of the three? Does your client want a direct contract to cover all health care provider services that its employees might need? Or, does your client want a direct contract to cover only certain specialized services? In other words, is this arrangement intended to account for all of the health care provider needs of your client’s employees or just some of them?

Bringing non-legal professionals (consultants, financial and tax advisors, underwriting experts, etc.) into the discussion early will also make it more likely that the terms of the agreement are practically oriented and can be implemented in a cost-effective and efficient way. This could be particularly important if your client’s prior strategy for the day-to-day administration of its employee health benefit plans has been to rely on insurance carriers or TPAs to contract with providers on the plan’s behalf.

Additionally, it will help to position you and your firm as a one- stop shop for the client’s direct contracting needs.

Once the problem has been defined, you can outline the underlying service agreement. At a high level, the arrangement will likely include elements of an administrative services agreement with an insurance carrier or TPA and a network provider agreement between an insurance carrier or TPA and its participating providers.

Defining Your Client’s Role

Paradoxically, jumping into the direct contracting business puts your client in a position of deciding whether to take back responsibilities that it had previously delegated to others, often for good administrative and financial reasons. Your client, by directly contracting with providers, may be putting itself in the role that had previously been played by an insurance carrier or a TPA.

Unlike an insurance carrier or TPA, however, your client may not necessarily be well versed in understanding network management and underwriting, among other things. Unfortunately, such an understanding is crucial to negotiating a fair, reasonable, and financially advantageous financial payment arrangement on your client’s behalf.

While bringing some of those responsibilities in-house could save money for your client, it could also cost more. Developing a direct contracting function could require, among other things, building out internal expertise in health care delivery and the health care financial/underwriting process and other legal and compliance functions that were previously unnecessary when the plan sponsor relied on insurance carriers or TPAs to develop and manage provider networks.

An alternative to building out internal expertise in network development and management, underwriting, compliance, and the like would be for the sponsor to hire outside entities, with the high costs that such expertise carries with it. For example, the sponsor can contract with the providers themselves—for example, a health system like Henry Ford—to assume those obligations, if the providers have the expertise. Or, the plan sponsor can turn back to insurance carriers or TPAs.

A plan sponsor that hires a health care provider, insurance carrier, or TPA to provide expertise in network management and cost prediction and claims processing could be taking a step back to where it started. In other words, the middlemen would be brought back into the picture. Nevertheless, it may very well be the right decision for your client.

Whatever the ultimate decision, the agreement should clearly enumerate the responsibilities among the parties.

The agreement should also reflect your client’s legal and compliance risk tolerance, which could vary depending on the extent to which it will be directly involved in managing the health benefit plan, including the provider network.

Selected Questions to Ask

  • ✔ Determine what your client means by direct contracting. Is the idea to contract for the entire provider network or to carve out specialists or supplement a network provided by an insurance carrier or TPA?
  • ✔ Does the provider have sufficient coverage in the geographic areas where the covered employees live?
  • ✔ Are there state laws or regulations (or federal) that govern the provider network, such as setting forth certain accessibility standards?
  • ✔ Which administrative responsibilities are being retained by your client or delegated to the provider, insurance carriers, or TPAs?
  • ✔ Will the provider be expected to obtain outside accreditation?
  • ✔ To what extent (if any) does your client become subject to insurance carrier, TPA, utilization review/management, provider network, and other state licensing and registration requirements?
  • ✔ To what extent (if any) does your client’s assumption of direct oversight of providers affect the sponsor’s fiduciary or other obligations under ERISA?

Recent news about companies like Amazon and GM have contributed to increasing interest among employers in general to direct contracting with health care providers as a cost- and quality-control measure. However, such arrangements also present challenges, especially for employers who have not been actively engaged in managing their health benefit programs in the past.

Attorneys and law firms representing employers in direct contracting negotiations should stay informed about the latest developments in this rapidly developing area to help their clients make the choices that fit their unique needs.

Jason Brocks is a Content Manager for Lexis Practice Advisor, focusing on life sciences and health care. Prior to joining LexisNexis, Jason was senior corporate counsel for a family of companies including a pharmacy benefits manager and a vision benefits administrator.

To find this article in Lexis Practice Advisor, follow this research path:

RESEARCH PATH: Employee Benefits & Executive Compensation > Health and Welfare Plans > Plan Administration > Articles

For guidance for employer sponsors of group health plans and their advisors on compliance under the Patient Protection and Affordable Care Act, see


> Employee Benefits & Executive Compensation > Health and Welfare Plans > Health Plans and Affordable Care Act > Practice Notes

For information on the duties and obligations of fiduciaries of employee benefit plans under the Employee Retirement Income Security Act (ERISA), see


> Employee Benefits & Executive Compensation > Health and Welfare Plans > ERISA and Fiduciary Compliance > Practice Notes

For a description of the principal rules under Title I of ERISA, see


> Employee Benefits & Executive Compensation > Health and Welfare Plans > ERISA and Fiduciary Compliance > Practice Notes

1. See 1 Employee Benefits Guide § 2.01 (2018). 2.2018 Employer Health Benefits Survey, Kaiser Family Foundation, 3.See 1 Employee Benefits Guide § 11.09A (2018). 4.Amazon,Berkshire Hathaway and JPMorgan Chase & Co. to Partner on U.S. Employee Healthcare, Business Wire, 5.Atul Gawande Picks Jack Stoddard as COO of Amazon’s New Healthcare Company, Healthcare Finance, 6.Bezos and Buffet Appoint Gawande to Run New Healthcare Unit, Financial Times, 7.Henry Ford Health System Launches “Direct to Employer” Healthcare Contract with General Motors, PR Newswire, 8.In a first for Michigan, Henry Ford Health Signs Direct Contract with GM, Crain’s Detroit Business, 9. E.g., White Paper: Direct Contracting 101: Collaborations Between Employers and Health Care Providers, Jones Day,; Stephen Miller, Direct Contracting with Health Providers Can Lower Costs, SHRM,