Employer direct contracting and provider net revenue

Tracey Coyne, Preston Kelly, Eric Proctor
| 12/21/2023
Kodiak Solutions

Employer direct contracting net revenue opportunities are knocking on providers’ doors. Is your organization ready to answer?

Direct contracting between employers and healthcare providers has been around for years but mostly as a one-off net revenue generator for hospitals, health systems, and medical practices. Like loose change that people threw in a drawer and took to the bank at the end of the year, it didn’t take a lot of effort to manage it, count it up, and make a deposit.

While that still might be true for loose change, it’s not true today for the net revenue potential from employer direct contracting by hospitals, health systems, and medical practices. The net revenue potential is in the millions of dollars for healthcare organizations across the country, and it’s a cash business. The challenge is how to manage it, count it up, compare it to your other contracts, and be efficient in your processes as you deposit all that money in the bank.

A recent study1 in the American Journal of Managed Care found that 24% of provider organizations that had Medicare accountable care organization contracts in 2022 also had direct contracts with employers that year. Adding to the complexity of managing those direct contracts, 19% were full risk, meaning the participating providers assumed the full financial risk of caring for those covered lives.

Managing net revenue from direct contracting was the subject of “The Future of Healthcare for Employers and Providers,” a one-hour webinar hosted by Kodiak Solutions (formerly Crowe healthcare consulting) on Nov. 21, 2023. The webinar, moderated by Kodiak, featured two leaders from Banner Health based in Phoenix: Adrienne Moore, vice president of revenue cycle, and Holly Barrett, chief financial officer of ambulatory and pharmacy services. They shared their insights on direct contracting drivers, benefits and risks, implementation challenges, and opportunities for administrative efficiencies.

Drivers of direct contracting

Employers, not providers, are driving the increased demand for direct contracting arrangements, though the trend clearly has financial benefits for participating providers, according to Moore and Barrett.

High-quality care is a given requirement for employers, but they want that high-quality care at a more reasonable cost for both them and their employees. Rather than continuing to pay higher premiums for health coverage each year for their workers, and workers facing higher out-of-pocket copayments and deductibles each year, employers want to take the margin away from commercial health plans and use that money to give them and their employees what they want – immediate access to better care with less hassle at a competitive price.

We have a variety of agreements, and we have more in the pipeline. More than half of the employers in our markets have expressed interest in a direct-to-employer contracting model. So, we have to start some of those up very quickly.

– Adrienne Moore

Another factor driving employer demand for direct contracting is market perception. In an increasingly competitive labor market, employers want to demonstrate the value of their health benefit packages to current and prospective employees. Immediate access to better care with less hassle at a competitive price is a strong selling point when retaining and recruiting the best talent.

For providers, who historically have been passive participants in this market dynamic, direct contracting can be a market advantage for those that can meet employers’ demands for high-quality care in accessible, low-cost settings with fewer administrative hassles. It’s a cash business with built-in margins that can add to a provider’s net revenue.

Benefits and risks of direct contracting

The benefits of direct contracting are clear: more cash, better cash flow, higher margins, and improved net revenue performance. But to enjoy those benefits, providers will need to avoid the risks that come with venturing into uncharted direct contracting waters, according to Moore and Barrett.

At the top of that risk list is cost. As part of running a cash business, a provider must know the true cost of a service that it’s selling directly to an employer. It can get complicated on both sides of that equation.

A provider must know the cost of everything that goes into providing the service – the facility cost, the professional fee, the ancillary service costs, the administrative cost. What might seem simple on the surface actually is quite complicated, and underestimating the total cost before adding a modest margin will eat up that modest margin and do so more quickly.

An employer, on the other hand, needs to know exactly what it wants from a provider. Common services sought by employers include occupational health, physical therapy, orthopedic care, outpatient surgical procedures, and executive health and wellness services. Each service line, in turn, can range from basic to comprehensive. In turn, a provider must know exactly what an employer wants in order to price the service line package correctly.

What we have learned is there are lots of health systems that provide wonderful care, and we’re one of them. But if the back-office work is sloppy, the employers have made it clear: They’ll move on to the next health system because what they’re trying to do is not only get that great care for their employees but reduce cost, reduce the hassle, and create a seamless patient experience.

– Holly Barrett

Another item at the top of the risk list is administrative performance – or, simply put, billing. Employers engage in direct contracting to eliminate the claim hassles that typically come with commercial health plans. Employers want to receive an invoice and pay an invoice. Any steps more than that will sour them on a provider’s direct contracting capabilities.

Challenges of implementing direct contracting

Moore and Barrett indicated that hospitals, health systems, and medical practices can describe the challenges of direct contracting in one word: variation. Variation in people. Variation in process. Variation in technology.


The people are the employers. Every employer might want an executive health package, but that package of services can have myriad variations to meet unique employee needs. Annual physicals? Biometric screenings? Preventive screenings? Healthy behaviors education? Creating a standard service package within one service line is impossible. The solution is knowing what services are available, what they cost, and exactly what employers want. As a provider sells more packages, standardization will be a natural and welcome byproduct.


The process is how the employees of the company and of the provider do their work. At registration, company employees might not know if a direct contracting agreement covers what they need as they’re trained to show their health insurance card and identification. The responsibility for determining coverage falls to employees at registration. That process – rife with human error – repeats itself during any episode of care that has a separate revenue cycle system. More variation happens as the roster of employees covered by a direct contracting agreement changes. Executives come and go. Staffs expand and contract. The solution is provider staff training and education. At each point of contact, staff members need up-to-date information to determine if a patient is part of a direct contracting agreement.

Nothing in our legacy revenue cycle work is designed for employer direct contracting. You’re sending out an invoice to an employer versus running each unique activity through the revenue cycle. It really goes against everything that we have worked so hard on as an industry to build from a revenue cycle perspective.

– Holly Barrett


The technology is, well, there isn’t much of any, and that’s what creates costly and time-consuming variation. Vendors build patient registration systems, patient accounting systems, revenue cycle management systems, net revenue management systems, and electronic health record systems to generate claims for people with health insurance and manage every process that goes along with that. Direct contracting is cash accounting, not accrual accounting. The best solution, at the moment, is finding low-cost workarounds that don’t create undue paperwork for employers.

Opportunities for administrative efficiencies

To convert a time-consuming yet booming cottage industry into a fast, efficient, and growing revenue stream, providers need technology to automate every step in the employer direct contracting process, according to Moore and Barrett.

That starts with technology to help set up an employer direct contracting program quickly as the demand from local employers explodes. If a provider isn’t ready when an employer is, that employer will turn to another provider in the market.

Technology can help automate the creation of service-line packages or scenarios and customize them to meet the exact needs of an individual employer. That process should be like picking the customized features of a new car, and providers shouldn’t start from scratch with each contract.

Providers need technology to automatically know their cost of providing the services within each service line package in order to price those packages competitively in their market and earn a modest margin.

They need technology to automate the identification and registration of employees covered under employer direct contracting agreements. Providers also should be able to update those rosters automatically. Flipping through outdated pages on a clipboard won’t cut it in the future.

Right now, there’s a lot of personal back-and-forth, a lot of manual queries, a lot of writing, and a lot of spreadsheets. The bigger direct contracting gets, the harder it will be to manage with manual spreadsheets. And human error is an opportunity [to make mistakes] in all of that manual work.

– Adrienne Moore

Providers need technology to automatically and seamlessly generate and send accurate and timely invoices to an employer under an employer direct contracting agreement. Less hassle for the provider. Less hassle for the employer.

Finally, providers need technology to automate how all of the above integrates into the organization’s existing financial management systems and appropriately track and report profitability in comparison to other contracts.

The market is there for providers to take advantage of the direct contracting interest from employers – and for technology companies like Kodiak to provide solutions to simplify complex business processes that direct contracting opportunities present to hospitals, health systems, and medical practices.

1 Robert E. Mechanic, “All-Payer Value-Based Contracting in Organizations With Medicare ACOs,” American Journal of Managed Care, Nov. 8, 2023.

Contact us

Tracey Coyne
Tracey Coyne
Vice President, Finance and Reimbursement, Kodiak Solutions
Preston Kelly
Kodiak Solutions
Eric Proctor
Kodiak Solutions