6 min read

Are Direct-to-Employer Contracts the Future of Healthcare?

Are Direct-to-Employer Contracts the Future of Healthcare?
Photo by Hannah Busing / Unsplash

You ever have one of those moments where you come across an idea that makes you pause and think, this could actually work? That’s how I felt reading an article recently about direct-to-employer healthcare contract strategy where hospitals and health systems cut out traditional insurance middlemen and contract directly with employers to provide healthcare benefits. I've been intrigued by these types of contracts ever since I started analyzing total cost of care episodes in claims.

The article, Direct-to-employer benefit design: A providers’ starter guide, dives into how Vanderbilt University Medical Center (VUMC) has built this kind of model.

Direct-to-employer benefit design: A providers’ starter guide
Partnering directly with employers on value-based benefits can be an effective strategic response to soaring healthcare costs.

It’s an interesting read, and on the surface, it makes a ton of sense. Employers want to control their healthcare costs. Health systems want stable revenue and better patient outcomes. Why not work together?

But as I went deeper, I started wondering ”does this model actually fix what’s broken in healthcare, or is it just shifting the problems around?

That's why I thought we'd dig in on what the article is saying. I’ll break down what the article says, what’s great about it, where it falls short, and most importantly, what payviders (the health systems trying to function as both payers and providers) can learn from it.

What VUMC Is Doing

VUMC spent the last decade experimenting with value-based care, the idea that healthcare should be paid for based on outcomes, not just the volume of services delivered. Now, they’re using that experience to contract directly with employers, cutting out traditional insurance plans.

Their model is built on three big ideas:

Successful direct-to-employer healthcare models require a fundamental redesign of care delivery based on evidence and real-world needs not just financial restructuring

Before offering employers a health benefit plan, VUMC studied their market, talked to clinicians, and mapped out how to deliver the best possible care. They focused on designing evidence-based care pathways that actually work, rather than just rearranging how the money flows.

VUMC aligns financial incentives with healthcare outcomes by tying payments to performance rather than volume, creating a risk-sharing model that holds providers accountable for quality.

Now, I can argue that this isn’t really that big of an idea at this point in time, but regardless. Instead of getting paid per procedure, VUMC ties payments to clinical outcomes. For example, in their MyMaternityHealth program, they set a target cesarean-section rate and if they miss it, they take a financial hit. That kind of risk-sharing is rare in traditional employer-sponsored health insurance.

VUMC’s model is built for continuous improvement by incorporating real-time feedback loops, allowing for ongoing adjustments, unlike traditional insurance models that are slow to adapt and often reinforce ineffective incentives.

One of the best things about this model is that it doesn’t just get set and forgotten. VUMC built real-time feedback loops with employers, patients, and providers so they can adjust the program as they go. That’s a huge improvement over traditional insurance, where bad incentives often get baked in for years before anyone fixes them.

On paper, this all sounds pretty great. Employers get cost predictability. Employees get care built around outcomes. Providers get financial incentives that actually match good medicine.

But does it really work? And is it scalable?

Where This Model Shines

It Solves a Real Problem for Employers. If you’ve ever talked to HR leaders, you know they’re pulling their hair out over healthcare costs. Premiums keep going up, but employees aren’t seeing better care they’re just stuck with higher deductibles. As the purchasers of care, direct-to-employer contracting gives companies a way to take back control and (hopefully) get a better deal.

It Ties Payment to Outcomes, Not Just Services. This is one of the biggest shifts healthcare needs. Right now, the system makes more money when care goes wrong more surgeries, more hospitalizations, more procedures. VUMC flips that by saying, we’ll take financial risk for hitting quality targets. That’s real skin in the game. We've found in study after study that outcomes are best when there is real financial risk for providers.

Clinicians Are Involved from the Start. Too often, these kinds of initiatives get designed in boardrooms without input from the people actually delivering care. VUMC avoids that mistake by making sure doctors help design the model from day one. That’s critical because if clinicians don’t buy in, this kind of thing dies on the vine. I loved how they started with what is the ideal patient pathway and then fit the finances around it. That's starting from first principles.

There’s Built-In Feedback & Adjustment. A lot of value-based care models launch with great fanfare, but then never evolve. VUMC’s approach is different. They actively collect feedback from employers, patients, and providers and actually use it to tweak the model in real time. That’s how you build something that lasts.

So far, so good, right?

But here’s where things start to get murky.

The Big Gaps in the Model

The article makes direct-to-employer contracting sound like a smooth ride, but anyone who’s worked in healthcare knows that’s not how this goes. There are some big roadblocks they don’t really address, like:

  • Regulatory headaches: ERISA rules make it tricky for multi-state employers to work with a single health system.
  • Negotiation complexity: Employers have different needs, and health systems aren’t built to function like insurers.
  • Scalability problems: This might work in Nashville, but what about a rural market where employers are smaller and more spread out?

The article talks about aligning financial incentives, but it doesn’t actually show the numbers. We don’t know:

  • Are employers actually saving money with this model?
  • Is VUMC making or losing money on these contracts?
  • How does this compare to a traditional insurance plan over 3-5 years?

Without real financial data, it’s hard to tell if this is a long-term success or just a short-term experiment.

Lastly, VUMC is obviously excited about this model, but where are the employers in this conversation? Do they actually like it? Are their employees seeing better care? How does this compare to their traditional insurance experience?

For a model like this to spread, employers have to become champions of it. That part of the story is missing.

What Payviders Can Learn From This

So, where does this leave payviders and integrated delivery systems that are blending provider and payer functions to take full responsibility for care costs?

Employer Engagement Has to Be Front & Center

Payviders can take VUMC’s model further by building even stronger partnerships with employers working with them from the start to co-design benefit plans that actually fit their workforce.

Action Step: Set up an employer advisory council and get HR leaders involved early in plan design.

Move Beyond One-Size-Fits-All Risk Models

VUMC ties payment to a single metric (like C-section rates), but payviders can take on broader risk for things like chronic disease management, ER visits, and medication adherence.

Action Step: Design condition-specific risk-sharing contracts that focus on long-term health improvement.

Use Data to Proactively Manage Workforce Health

Payviders have more integrated data than hospitals do alone. They should be using that to predict problems before they become expensive claims.

Action Step: Build real-time dashboards for employers, showing workforce health trends and cost drivers.

A Step in the Right Direction, But Not the Destination

The VUMC model is a smart move in the right direction but it’s not a silver bullet. It shows that employers are hungry for better healthcare solutions, but true transformation will take more than just direct contracts.

For payviders, this is an opportunity to take the best parts of this model and build something even better.

So, what do you think? Are direct-to-employer contracts the future, or just another passing trend? Let me know your thoughts I’d love to hear where you stand on this.