The healthcare space is seeing a continued shift from the traditional breed of fee-for-service (FFS) payment toward alternative payment models that tie costs more directly to the quality and efficiency of care rather than simply the number of services provided.¹ A bundled payment, or a fixed price for a predetermined episode of care, is one important form of such a value-based payment.

By de-linking payment from the number of services provided—which, in the case of a surgical procedure, typically includes those of a hospital, surgeon, and anesthesiologist, among others—a bundled payment incentivizes providers to coordinate their efforts for a set of defined services to ensure more efficient, high-quality care. This paper builds on our primer on bundled payments² by exploring a specific type of bundled payment: direct-to-employer contracts between provider organizations and self-insured plan sponsors (also referred to as “employers”).

What is a direct-to-employer (DTE) contract?

In the context of healthcare, a direct-to-employer contract is an agreement between a provider organization, such as a hospital system, and a self-insured plan sponsor or employer to establish custom reimbursement terms for medical care beyond those already established by each party’s relationship with a third-party administrator (TPA). These terms may include additional services to be supplied by the provider organization, different payment rates, and/or financial accountability for cost and quality outcomes for the plan sponsor’s covered population. Such bundled payment arrangements are known in the industry as “direct-to-employer” (DTE) and “direct-to-provider” contracts.

What are the potential benefits and risks of direct-to-employer contracting?

DTE contracting is a provider-driven methodology that allows healthcare providers to serve an organization’s employees directly, rather than work through traditional health insurance. Though provider considerations are the focus of this paper, using direct contracts to establish bundled payments has the potential to create positive opportunities for providers, employers, and patients:

• Providers may see increased volume via employer-determined mechanisms intended to steer members (e.g., plan design, network composition, incentives), as well as redesigned care pathways that prioritize clinical outcomes through more efficiencies (i.e., eliminating waste or suboptimal care) and patient-centered approaches.
• Employers may lower their costs and improve member outcomes, which in turn could expedite the timeline for their employees to return to work. Because a bundled payment is a fixed price, a DTE bundle arrangement mitigates against the employer’s risk of paying for complications and additional utilization that may result from suboptimal care.
• Patients may see reduced (or eliminated) cost sharing, in addition to an enhanced clinical experience and improved outcomes.

While properly structured DTE arrangements promote the benefits listed above, there are risks to consider for each of the parties:

• Providers may underestimate the cost of delivering care due to a variety of factors, including but not limited to the following: patient risk was higher than expected, the ability to effect change (e.g., reduce leakage, eliminate waste, etc.) was overestimated, or there was incomplete reference data (i.e., the provider did not have a comprehensive source of data for estimating the expected utilization and types of services that would be delivered).
• Employers may face dissatisfaction from their employees if the provider does not have the capacity to take on more patients or if administration of the bundle is poor (e.g., the member receives a bill for each claim instead of the claims being bundled into a single bill).
• Patients may experience lower quality of care, the potential for fewer provider choices, and poor experience if the provider has not built adequate systems for care delivery and bundle administration.

What should providers consider before offering DTE contracts?

Initial planning

Preparing to implement a direct-to-employer bundled payment model requires careful definition of objectives, evaluation of whether objectives are achievable, understanding of risk and risk mitigation, and the will to make the changes necessary to support success.

Providers seeking to implement DTE contracting should start by asking some key questions:

• What are the key objectives and are these objectives achievable?
  The questions below may be useful in understanding whether objectives are achievable.
• Increase market share: Does the provider have available capacity should market share increase?
• Increase margins via better reimbursement: How do current reimbursement levels compare to the market?
• Increase margins via higher care efficiency How do current rates of potentially overused services (e.g., injections, MRIs) and preventable complications (e.g., readmissions and surgical revisions) compare to the market? Providers should also consider their ability to increase the quality of care via better care coordination.
• Is there a market appetite?
  The fact that an organization has an internal desire to implement a DTE bundled payment program does not always mean there is agreement, understanding, or adoption ability from the key stakeholders necessary for success. Before embarking on a direct contracting journey, it is important to develop relationships with plan sponsors and brokers in the local market to understand market demand and how the provider organization is regarded in the market.
  
  Provider organizations may also gather relevant information by following local news in the community to understand needs, barriers, and opportunities that may not be evident on the surface and consider joining groups that are addressing quality and access to care in their community.
• What model/methodology of bundle is desired?
  A prospective payment system is based on looking ahead and establishing an up-front payment for an episode of care, putting any costs above and beyond that payment as the responsibility of the provider.
  
  By contrast, a retrospective bundled payment methodology typically retains FFS payments, where the total payment is reconciled at the end of a performance period by looking back and comparing a target price to actual costs associated with the episode of care.
  
  Prospective models may offer a better opportunity to increase care coordination and quality of care, as the patient is assigned to the bundle early in the care process (e.g., upon determination that a surgery may be the desired course of treatment). This allows care coordination to start even before a surgery is delivered and facilitates communication and continuity of care as all providers in the organization are aware of the bundle status.
• Does the provider organization have experience with other bundled payment programs? Experience with the Comprehensive Care for Joint Replacement (CJR) Model, Bundled Payments for Care Improvement (BPCI), the Enhancing Oncology Model (EOM), or other bundled payment programs can provide a framework and foundation for future commercial direct contracting iterations. Such experiences may help providers administer core functions such as setting quality indicators and sharing payments across the various physicians and facilities delivering the services.

Defining the services included in the episode of care covered by the bundle

DTE bundle payments generally cover procedures, and any related care provided before or after the procedure, or services related to a medical condition—both of which can be defined as an episode of care. Once a provider organization has made the decision to implement a bundled payment program, they must determine which procedure(s) or medical condition(s) to focus on for an episode. The organization can perform analysis on their historical experience, market data, and physician and facility capacity to answer the following questions:

• What procedures align with available provider and facility capacity?
• What procedures or medical conditions offer strong opportunities to yield savings versus the market by reducing low-value services as well as complications, revisions, and readmissions?

After an organization has decided what procedure(s) or medical condition(s) they want to create a bundle for, it must use a combination of clinical expertise and analytics to determine what services are related and should be included in the episode definition, as well as the time period for when to include applicable services.

As discussed in the earlier primer on bundled payments,³ organizations must be aware of the trade-offs inherent in this process: Episodes that are narrowly defined provide more stability and predictability for providers, but are limited when it comes to financial opportunities related to improving the efficiency of services. On the other hand, more broadly defined episodes may provide greater financial opportunities, but are more likely to result in greater financial risk for services that are not tightly linked to the episode focus.

Bundled payment administration

Paying close attention to the needs and desires of the market can help navigate the who, what, where, when, why, and how of implementing a DTE bundle. When it comes to administering the contract once it is implemented, there are important considerations and questions a provider must answer.

• How will the bundled payment (e.g., revenue) be distributed among medical facilities and providers?
  Regardless of whether the methodology is prospective or retrospective, it is critical to communicate how the payments will be shared across the provider organization to ensure there are no surprises. When the provider organization is receiving a single lump sum payment, it assumes responsibility for distributing that payment to the hospital facilities and various specialties. The bundled payment arrangement may impact some specialties more than others. Some specialties may continue to be reimbursed on a fee-for-service payment basis, but at a lower unit reimbursement level than they are currently receiving, while other specialties may be paid based on the number of bundles or a fixed percentage of the bundle revenue. Often, the revenue-sharing methodology will include criteria for how to share revenue when bundle performance reaches various volume and efficiency targets.
• Will the provider organization be able to administer the payments internally or are external resources needed?
  Several hurdles exist when attempting to execute this type of change in payment, such as determining how to suppress traditional FFS payments, grouping claims together in an episode for easy identification, and appropriately billing, receiving payment, and tracking financials. If an organization’s existing systems cannot accommodate these requirements, then finding a third-party organization that can process claims can help to solve these administrative challenges.
• What reference data will be used to support building the definition of quality metrics and pricing?
  Creating and building episode definitions can be challenging. It is crucial to align the correct resources to help guide the discussion and implement the course of action. It is also important to understand that a bundle may include services that are not typically delivered by the health system or are delivered in different volumes by the health system. For example, physical therapy may be more likely to be delivered by providers that are not affiliated with the health system, but employers may expect physical therapy services to be included in the bundle.

Marketing the bundle

Provider organizations should address and answer an array of questions in their marketing materials, including:

• What is the financial benefit to the employer?
  Answers to this question could include reduced variability and risk, reduced spending and time lost from work related to complications from a healthcare condition or procedure, and potential price reductions for increased volume. Employers will want to understand their savings through the bundle as a percentage of their total plan spending, and offering performance guarantees (e.g., lower surgery revision rate) may help demonstrate commitment to lower-cost, higher-value care.
• How will members benefit?
  Benefits to highlight for plan members (employees and their dependents) may include easier identification of and access to high-quality providers, a reduction in the number of medical bills they receive, and a more integrated experience overall.
• Will bundles make it harder for an organization’s Human Resources (HR) department to administer the health insurance benefit plan?
  An effective marketing effort will outline how the provider will coordinate with the employers’ regular TPA to avoid increasing administrative burden for the employers or their employees. For example, under a prospective model, employees should not receive individual medical bills for services that are supposed to be part of the bundled payment as this would likely create confusion for employees and calls to the employer’s HR department.
• What is the role of brokers for employers considering a DTE arrangement?
  Many employers will use a broker/consultant (broker) to assist them with benefit plan decisions and thus health systems should consider developing relationships with brokers in their market to understand demand for DTE arrangements and facilitate discussions with plan sponsors.

Conclusion

As employers seek to boost the value and reduce the cost of their healthcare purchases, an option to consider is bundled payments, and direct-to-employer contracting in particular, as an alternative payment method. Despite their growing popularity, implementing DTE bundled payments can be a complex and unfamiliar process for many providers, particularly those who do not have prior experience with bundled payments. Providers evaluating whether to offer a DTE program need a combination of robust data from both within and outside their organization and expert analysis to understand the opportunity and fit of direct contracting for their organization.

¹ Health Care Payment Learning and Action Network. APM Measurement Effort. Retrieved January 17, 2025, from https://hcp-lan.org/apm-measurement-effort/2022-apm/2022-infographic/#:~:text=payments%20accounted%20for%3A-,TRENDS%20OVER%20TIME,-Since%20its%20inception.

² Bazell, C., Alston, M., Pelizzari, P., & Sweatman, B. (March 27, 2023). What Are Bundled Payments and How Can They Be Used by Healthcare Organizations? Milliman. Retrieved January 17, 2025, from https://www.milliman.com/en/insight/what-are-bundled-payments-and-how-can-they-be-used-by-healthcare-organizations.

³ Ibid.