Direct Contracting and Centers of Excellence

Direct contracting is what it sounds like: a self-funded employer negotiates with a health system or physician group without the carrier as intermediary, then uses its administrator to process the resulting claims. It is the clearest expression of the employer acting as a purchaser rather than a plan buyer.

Why employers try it

The motivation follows directly from Module 1. A self-funded employer holds the financial risk but not the negotiation. Direct contracting takes the negotiation back. It also permits contract terms a standard network arrangement will not support, including bundled prices for defined procedures, quality guarantees with financial consequences, and data-sharing obligations.

Centers of excellence

The most common form is a center of excellence arrangement. The employer designates specific facilities for specific high-cost, high-variation procedures, typically joint replacement, spine surgery, cardiac procedures, bariatric surgery, and transplants. Members are offered strong incentives to use them, often waived cost sharing plus paid travel for the patient and a companion.

The design logic has three parts, and each is independently plausible:

• Bundled price. A single negotiated payment covering the episode, which shifts complication risk to the provider and removes the surprise of the add-on charge.
• Selection on quality. Facilities are chosen on procedure-specific complication and readmission performance rather than reputation, which the introductory course would recognize as an outcome measure rather than a structure measure.
• Appropriateness review. A second review of whether the operation should occur at all, which for elective procedures with wide practice variation may be the largest source of savings.

What the evidence supports

Here the honest answer is uncomfortable. The savings figures that circulate for these programs come overwhelmingly from vendor and consultant publications rather than from independent peer-reviewed evaluations, and a search of the published literature does not turn up a body of controlled studies comparable to what exists for the Alternative Quality Contract or for federal bundled payment models.

That is not evidence the programs fail. It is an absence of the kind of evidence that would let anyone say confidently that they succeed, or by how much.

Worth remembering: the evaluation course gave a specific test for savings claims, which is to ask what the counterfactual is and who constructed it. For a typical centers of excellence claim, the comparison is the employer’s own prior spending on similar procedures, with no comparison group and no adjustment for who selected into the program. Employees willing to fly to another state for surgery are not a random sample of employees needing surgery. Applied here, the standard tools of evaluation say the effect is probably real and almost certainly smaller than reported. Buy the program on its design logic and measure it yourself, rather than on the brochure.

Practical limits

Direct contracting requires geographic concentration of employees, enough volume for a system to care, internal capability to negotiate and administer, and an administrative services agreement that permits it. Those conditions describe large self-funded employers, which is why the practice has not spread far down the size distribution.

Key takeaways

• Direct contracting lets a self-funded employer negotiate terms its carrier network will not support.
• Centers of excellence combine bundled pricing, selection on procedure-specific outcomes, and appropriateness review.
• The design logic is sound; the independent published evidence base is thin.
• The practice concentrates among large employers with geographically clustered workforces.

Sources

• KFF, 2025 Employer Health Benefits Survey (opens in a new tab)
• KFF, The Regulation of Private Health Insurance (opens in a new tab)