Drug Costs and Direct Contracting in Healthcare

How Direct Contracting in Healthcare Can Help Curb Your Drug Spend

It’s no surprise that the United States spends more on healthcare than any other developed nation, and costs are expected to continue to climb. And, as we aren’t yet free from Covid’s grips, it’s still unknown to what degree the global pandemic will affect medical and prescription costs.

As reported by the Peter J. Peterson Foundation, in 2018, the U.S. spent approximately “3.6 trillion on healthcare, which averages to about $11,000 per person.” If that’s not shocking enough, healthcare costs rose from 5 percent of the U.S.’s gross domestic product (GDP) in 1960 to 18 percent in 2018. 

What is Causing the Rise in Healthcare Costs?

One of the most significant contributors to increased healthcare costs?  Prescription drugs. According to a 2020 study by GoodRx, “drug prices have increased by 33% [from 2014 until 2020], outpacing price increases for any other medical commodity or service.” In first two months of 2020, 693 drugs increased their prices by an average of 6 percent, 619 brand drugs increased pricing by an average of 5.2 percent, and 20 generic drugs increased pricing by an average of 29.4%. 

According to the Centers for Medicare and Medicaid Services, “[n]ational health spending is projected to grow at an average annual rate of 5.4 percent for 2019-28 and to reach $6.2 trillion by 2028,” making up almost 20 percent of the U.S.’s GDP by 2028. And these projections don’t consider COVID and its continuing (and future) financial impact on healthcare.

These rising costs impact numerous stakeholders in the healthcare industry, including payers, third-party administrators, pharmacy benefit managers (PBMs), employers, and employees (and their families). As employers continue to meet these rising healthcare prices, organizations regularly search for solutions that control costs. 

One solution that has been gaining in popularity is direct contracting. In this article, we will explore how direct contracting in healthcare can help curb your drug spend.

What is Direct Contracting in Healthcare?

Direct contracting allows employers to negotiate prices and services directly with the healthcare provider or ancillary services instead of through an intermediary, such as an employer-provided group health plan or pharmacy benefits manager. The result is simple.  Drive value-based, high-quality care while reducing costs and increasing efficiencies. 

Instead of paying group insurance plan premiums for care that employers can’t always tailor or negotiate the prices, organizations can directly contract with specific providers outside of the plan.  For example, a large, self-funded employer may directly engage with a provider for a particular service, such as cardiology or joint replacement. Alternatively, the employer may directly contract with a facility or physician group for comprehensive care.

Direct contracting in healthcare works not only for medical and preventative services but prescriptions as well. For example, employers can directly contract with pharmacies through transparent PBMs. In this arrangement, the employer reduces drug costs, and the pharmacies retain more income since multiple stakeholders aren’t depleting the pharmacy’s cash flow through administrative costs and fees. The PBM is essential to this arrangement as it can negotiate drug benefits nationally. 

By contracting with these “direct contracting entities” – for medical or drug coverage — employers can better control costs while providing high-quality care to their employees and their families. 

What are the Benefits of Direct Contracting?

The primary benefit of direct contracting in healthcare is controlling medical and pharmacy costs while supplying quality services. For employers, direct contracting allows for increased price transparency and enhanced employee satisfaction and productivity by providing custom-tailored services specific to the needs of their employee populations. BenefitsPro agrees, stating:  

[D]irect contracting removes the inefficiencies and high costs associated with fragmented care and redundant care, helping employers achieve their goals of lower costs and better outcomes. And the savings for employer groups can be significant. Employers can expect annual savings of between 10% and 20% on average over a fragmented PPO health plan.

Let’s look more specifically at the benefits of direct contracting in pharmacy benefit management. With pharmacy benefits as one of the top cost-drivers in healthcare, understanding your drug spend is imperative to helping you control costs—both now and in the future–while providing high-quality healthcare. 

To help determine potential savings in your pharmacy spend with direct contracting, you can compare the costs of your current drug spend with the prices available to you through direct contracting.  However, knowing your current drug spend depends on your health plan can be complicated as these costs are often bundled with other healthcare expenses. 

Accessing actionable data helps you untangle those bundled costs, providing insight into your pharmacy spend in real-time.

And, while you’re comparing your current spend to direct contracting costs, don’t forget to look at value-added services, such as immunizations or clinical programs, according to the Thriving Pharmacist. Doing so helps you to tailor prescription and other medical programs specifically for your employee population, helping your “staff stay healthy, have fewer sick days, and lower overall health costs.”

Optimizing your health care plan or PBM contracts with direct contracting not only serves as a cost management tool but allows benefit managers and employers to better predict future drug spend. 

What are the Challenges Related to Direct Contracting?

Although direct contracting in healthcare offers numerous benefits, there are also challenges. First, although somewhat simple in concept, legal contracts can be complex and convoluted. Therefore, before entering a direct contracting arrangement, it’s essential to understand the contract itself, paying close attention to responsibilities, representations, and potential liability.

For direct contracting to achieve its primary benefits, employers, for example, must ensure that gaps of care don’t exist between the group health plan and the services provided under the direct contracting arrangement. Further, as with all employee benefits, employers must ensure that administration and legal compliance are up to snuff – at all times.

Additionally, for many healthcare stakeholders, direct contracting is still seemingly new. Because of this, direct contracting may fall outside of many stakeholders’ comfort zones, potentially preventing them from entering a more favorable arrangement. 

Many of these challenges will be overcome with time as direct contracting in healthcare becomes more mainstream. But, until then, continued education on the benefits of direct contracting will be needed – as with any new industry offering.

As healthcare solutions continue to focus on value rather than volume, direct contracting should remain in the mix as a way to offer high-quality healthcare while trimming the fat and removing unnecessary intermediaries. 

To make direct contracting a success, PBMs, employers, and other healthcare stakeholders need to access understandable and actionable data, allowing these entities to “harness the data toward meaningfully lowering costs or improving quality.” Also, make sure you’re using data specifically applicable to the services you’re monitoring, such as your drug spend. 

Through advanced pharmacy claims analysis, Xevant can help you manage direct contracted programs, helping you to optimize client performance by converting data into immediate savings opportunities. Whether you’re a PBM, TPA, or benefits manager, Xevant provides the data you need before you need it. 


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Gerrit Lemmen

VP, Rebates

Gerrit is an experienced leader in the PBM, Specialty and Formulary rebate markets. As VP of Rebates at Xevant, Gerrit is responsible for managing drug rebates through Xevant’s revolutionary pharmacy benefits platform. In his previous roles at Magellan Rx Management, Gerrit led highly respected commercial rebate operations teams and focused on increasing efficiency that enabled scalability and growth.

Mike Simmons

VP, Product Management

Mike is a true product champion & ambassador with 18+ years of experience in critical product launch, strategic branding, and delivering profitable campaigns that capture market share and create growth. His vision and skills for implementing integrated, high-impact, go-to-market strategies have proven to drive increased sales and an overall improvement of marketing programs. Mike’s ability to leverage business savvy in order to align management, data intelligence, and content management generate more informed business decisions resulting in enhanced revenue for progressive, enterprise organizations.

Laura Phillipson

VP, Client Experience

Laura Phillipson is a client management expert with experience managing client services teams. Her past roles include Sr. Client Services Executive for Navitus and over a decade of experience as a Certified Pharmacy Technician. Laura’s career in client relations spans nearly two decades. An avid sports fan, Laura excels in helping clients create a strong strategy with a competitive edge. Laura’s extensive background in both customer service and the medical field provides an ideal blend to lead client management for Xevant.

Download our Drug Trend Report

Discover how key drivers of drug costs are impacting overall change. This report analyzes Drug Inflation, Drug Mix, PBM Discounts, Utilizer Changes,  and Quantity Changes.