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Small and Midsize Employers Can Contract with Health Providers

Direct contracting and price negotiation are not just for big corporations

A nurse is talking to a group of people around a table.

Employers of all sizes can contract directly with hospitals and physician practices for reasonably priced health care. Doing so leads to more-predictable plan budgeting, better fiscal-risk management and improved employee health, according to speakers at the 2019 World Health Care Congress in Washington, D.C.

Direct contracting is the logical next step for self-insured employers, said Jim Knutson, risk manager and HR director at Aircraft Gear Corp., a family-owned manufacturing company in Rockford, Ill., with about 100 employees and some 300 health plan enrollees. The company, which moved to self-funded insurance in the early 1980s, negotiated its first provider contract around cardiac care in 1993.

When Aircraft Gear initially approached area hospitals, some turned the company down because of its size. "But we found a hospital system that said yes. One thing we were able to offer was a multiyear contract" to sweeten the deal.

"Hospitals may be looking for opportunities to contract in a different way, outside of a carrier environment," said Greg Everett, president and CEO of Payer Compass, a Dallas-based company that administers direct-contracting arrangements for employers such as Aircraft Gear.

Offer Employee Incentives

Aircraft Gear's health plan incentivizes plan participants to use providers with which the company has contracted. When employees do so for specialist care, for instance, they don't require prior authorizations or precertification, Knutson said. And the plan has no deductible when employees use contracted providers; they just pay a nominal co-payment for inpatient and outpatient services.

Negotiate Prices

In negotiating prices with providers, Everett typically uses reference-based pricing, in which payment is based on a percentage of Medicare, such as 120 percent of Medicare rates. There is no deductible, and so the plan pays hospitals and physicians on a first-dollar basis for their services, "as opposed to making them chase employees with high-deductible health plans to collect large, out-of-pocket expenses," Everett said. This "takes the health systems out of the collection game, which is a real source of irritation for them."

He called reference-based pricing "a mechanism to get to a price point providers accept," and he noted that in the contracts his firm administers, there are "100,000 physicians willing to accept a level price for their services."

[SHRM members-only toolkit: Managing Health Care Costs]

Be Selective for Quality

Contracting can also steer employees to high-quality doctors and facilities. "A hospital system has different specialties, and they may not be as good at OB/GYN as they are at cardiac care," Everett said.

Knutson added, "You can contract for specific doctors, those who are highly rated, and skip the poor performers.

"Hospitals may push back," he noted. If they have three highly rated doctors and three doctors with low ratings, for example, "they begin to say you have to buy all six. You need to punch through that a bit and stand your ground."

With physicians, "you can, through data, find those quality providers who are likely to accept a level price for their services on a basis that is fair" to both the employer and provider, Everett said.

Location Matters

While major metropolitan areas are dominated by big, consolidated hospital systems, in secondary markets, hospitals want people to be treated locally, and physician practices, which are less likely to be hospital affiliated in these markets, are usually more open to contracting with local employers, Everett said.

"Everything is local with hospitals," he noted. "When you're in the same community, there are opportunities to reach out across the aisle" and do deals with hospital systems and specialty physicians.

However, small employers have also negotiated successfully with large players such as LabCorp, a diagnostic testing firm with labs throughout the U.S., Everett said.

Moving Forward

Some businesses "are afraid to contract for health services, and that's a big barrier," Everett said. "You have to understand how to talk to a hospital or physician group, not just about price but about the quality of care you're looking for and how your benefit plan is designed to steer patients to them.

"If you can get direct primary care on a contracted base for your employees, you should," he said. "If you can move to negotiated prices for particular services, such as cardiac care or joint replacements, you should."

Related SHRM Articles:

Employers Cut Health Plan Costs with Reference-Based Pricing, SHRM Online, May 2019

HHS Secretary Azar Wants Employers to Help Control Health Care Costs, SHRM Online, April 2019

Direct Contracting with Health Providers Can Lower Costs, SHRM Online, October 2018

For 2019, Employers Adjust Health Benefits as Costs Near $15,000 per Employee, SHRM Online, August 2018

Self-Insurance Is Just the Start, Say Health Plan Innovators, SHRM Online, May 2018


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