Introduction

In January 2026, I noted that affordability is likely to be an even more significant issue for healthcare in the near future. One of the ways employers and providers are attempting to counteract the rising healthcare costs many are experiencing is through a model called direct contracting. In this blog, I explore direct contracting between large self-insured employers and provider health plans. I discuss the pros and cons and the importance of watching the impacts of this healthcare financing innovation in the future.

Background on Sources of Insurance Coverage

Most people in the United States obtain health insurance coverage either through their employer or from public insurance programs—such as Medicaid and Medicare. Of the approximately 92 percent of Americans with insurance, the estimates are that 53.7 percent have employer-based insurance, 18.9 percent have Medicaid, and 18.9 percent have Medicare. A smaller amount—about 10 percent—directly purchase coverage on the individual insurance market. Most of that insurance coverage, whether public or private, is administered by health insurance plans. “Health insurance plans” include a contract between an individual and an insurance company designed to protect against high medical costs. They can include Health Maintenance Organizations—which provide a network of services focused on primary care and prevention, and do not cover services received out of network unless they are emergency care or Point of Services Plans, which require a person to choose a primary care doctor to authorize services, but allow them to access doctors out of network for a higher cost, among others. Health plans are a broader term for a comprehensive approach to managing care and may include health insurance, but also services or benefits that are broader and emphasize care coordination or chronic disease management.

A Look at Direct Contracting

Large companies have long sought to limit the financial impact of health insurance, including through “self-insurance,” where employers directly pay employee claims rather than paying premiums to a health insurance company that then pays out claims. In recent years, more employers who buy commercial insurance have sought to reduce the cost of providing healthcare by eliminating third-party administrators (TPAs)—entities that do not coordinate care but instead focus on processing administrative paperwork. Employers have eliminated TPAs by directly purchasing services. A “direct contracting” arrangement allows employers (typically those that are self-insured and have the internal resources to manage paying providers directly for services and other administrative tasks) to negotiate care directly with providers, therefore bypassing TPAs. The type of direct contracting that is the focus of this blog is employer-provider direct contracting on the commercial market, which not only eliminates the need for a TPA but also allows employers to customize what they provide to employees since they are not purchasing services from a predetermined set of services offered by an insurance plan. In addition, most insurance plans manage a network to which employer purchasers have access. But with direct contracting, the employer is working directly with a provider-based health system to purchase what that system offers. In doing so, direct purchasing can provide more transparency in pricing for health services since the employer is not going through a third party or an insurance company and is paying bills on behalf of employees directly.

A “direct contracting” arrangement allows employers… to negotiate care directly with providers, therefore bypassing TPAs.

The concept of direct contracting has emerged in the last decade. Henry Ford Health in Detroit, for example, has been direct contracting since 2018. Direct contracting can be done for a subset of defined services, such as primary care, or for more extensive or specialty services. In 2023, one of the biggest deals in direct contracting for employers happened when Transcarent, a national independent healthcare provider, signed on 10 large health systems, including Advocate Health, Intermountain, Mass General Brigham, and Hackensack Meridian, among others, that are now part of a broader network that allows providers to directly contract with employers. Transcarent directly contracts for rates with providers upfront on behalf of self-insured employers.

So far, it appears that self-insured employers and unions may be more likely entities to access this type of direct contracting. This is because self-insured entities tend to be larger and unions tend to have bargaining power, therefore making it easier to negotiate directly with a provider system. Self-insured plans are regulated at the federal level under what is called the Employee Retirement Income Security Act (ERISA). Such plans have minimum requirements as to what services must be covered and when employees are responsible for cost sharing.

Is Direct Contracting Happening in New York State?

For those who work in the healthcare sector in New York State, the biggest and most timely direct contracting agreements in recent months include arrangements between a large union (32BJ SEIU), which generally represents building workers, security officers, and food and service workers primarily in the New York City area, and two large health systems—Northwell Health and Mt. Sinai. These arrangements allow the union’s employees to access health services directly without using a traditional insurance company. At the end of 2025, when Northwell and 32BJ SEIU closed their deal, it was considered one of the largest direct contracting arrangements of its kind in the country. This was no accident. In 2020, Northwell created a for-profit subsidiary known as “Northwell Direct,” allowing for direct-to-employer provision of healthcare. This was meant to disrupt traditional healthcare arrangements and lower costs. A few months later, in early 2026, 32BJ SEIU and Mt. Sinai agreed to a deal to allow the union to access the Mt. Sinai network directly.

In 2020, Northwell created a for-profit subsidiary known as “Northwell Direct,” allowing for direct-to-employer provision of healthcare. This was meant to disrupt traditional healthcare arrangements and lower costs.

Questions for Policymakers

As direct contracting arrangements of this type continue to expand and bypass the need for traditional insurance companies or TPAs, some questions for policymakers to consider include:

1. What are the benefits of direct contracting? The goal of direct contracting has primarily been to lower costs by reducing administration and creating more transparency around those costs for employers. The evidence around cost reduction from direct contracting is positive. In addition, there is also evidence that shows that direct contracting helps improve quality because it drives more competition and allows one system to manage an individual’s care. Given the potential benefits, policymakers may want to develop ways to monitor these benefits more closely in the future and determine if there are ways to broaden access to direct-contracting to smaller employers or within public insurance programs.
2. Are there potential downsides to direct contracting? As noted earlier, although direct contracting is effective for lowering costs for self-insured entities, there is a possibility that it creates market segmentation. That is because direct contracting is largely used by self-insured entities—creating potential inequities in the cost of healthcare between those who work for self-insured employers versus those who do not. In addition, in a market where there is a large provider system engaging in direct contracting, there is a possibility that their outsized leverage could limit competition and choice for employers and healthcare consumers. Just as happens with regular health insurance plans, direct employer-provider contracts have a specific network. If a consumer wants to use a provider outside that network, they may have to pay more. Policymakers may want to track whether such market segmentation is occurring and to what degree market dominance impacts cost, access, quality, and choice for consumers.
3. Should government employers and payers consider direct contracting? Given the interest of both employers and governments to reduce costs, and the proven record of direct contracting in lowering costs, governments may benefit from expanding their use of direct contracting in the future. Before doing so, policymakers may want to consider monitoring what impact their use of direct contracting has on access, cost, and quality of care. They also may want to determine the overall impact such actions would have on the healthcare marketplace and the sustainability of providers in a given region. Although state employees may be concentrated in state capitals, they are also geographically dispersed, so states would additionally have to consider whether contracting with a provider health system in a given region would limit access for employees not physically located in that region.

Conclusion

Given the pressure on employers (including public employers) to reduce healthcare costs without sacrificing quality or access, direct contracting may continue to grow. As direct contracting grows, it will be important for policymakers to understand the impacts of direct contracting on things such as cost, quality, access, and equity so they can facilitate arrangements that make sense, adjust models or arrangements that may not demonstrate the intended positive impacts, and consider whether direct contracting may also be an option for them as employers.

ABOUT THE AUTHOR(S)

Courtney Burke is a senior fellow for health policy at the Rockefeller Institute of Government.