The financial case for direct contracting partnerships: Why health systems can’t afford to wait

Hospital operating margins have recovered from a low of 1.1% in 2023 to 4.9% in early 2024, but the outlook remains fragile. Nearly two months of revenue sits in accounts receivable, one-third of spending disappears into administration, and forecasts suggest margins may slip again in 2025. Optimizing a flawed system will not solve these pressures.

Rethinking the revenue source

Hospitals often view carriers as their primary commercial partners, but most revenue ultimately comes from employers. A full 63% of commercially insured Americans are covered through employer-sponsored plans, and nearly two-thirds of those employers are self-funded. In these arrangements, employers provide the funding, physicians and other providers deliver the care, and intermediaries sit in the middle capturing margin.

This matters because health systems already treat these employees, yet carriers and administrators control the financial relationship. Direct contracting restores alignment: Employers pay for care, providers deliver it, and both sides benefit from eliminating unnecessary layers that erode value.

The financial impact of direct contracting

Direct contracting delivers financial advantages traditional revenue models cannot match:

• Faster cash flow: Days in accounts receivable can fall from 55-plus days to less than a week.
• Lower overhead: Administrative costs decline 15% to 20%, reducing the 34% of spending consumed by nonclinical processes.
• Bad debt relief:The average 3.3% patient responsibility write-off disappears. Many direct contracts include $0 member responsibility at the point of care, protecting providers from collections risk while removing a major barrier for patients.
• Denial prevention: Denials, which affect 9% to 11% of claims and cost $25 to $118 each to rework, become rare.

The clinical impact is equally important. Removing financial and operational barriers helps patients seek care earlier and more consistently, which improves outcomes, satisfaction and efficiency.

A RAND Corporation study published in Health Affairs found employers saved an average of 10.7% overall and more than 45% per surgical procedure through direct contracting with Centers of Excellence compared with traditional preferred provider organization networks. These employers don’t trade quality for cost. They eliminate waste that benefits neither providers nor patients.

Busting the myths

Despite clear advantages, misconceptions still prevent many health systems from pursuing direct contracts.

• Cannibalization concerns: Converting existing patients to direct contracts strengthens margins by reducing collection costs, eliminating delays and creating predictable revenue streams.
• Payer relationship fears: Health systems that dedicate even 10% to 15% of commercial volume to direct contracts often gain leverage in carrier negotiations.
• Implementation worries: Modern approaches integrate with existing revenue cycle systems and can be administered through third-party administrators. The operational lift is lighter than many executives expect.

More than transactions

Direct contracting is both a financial tool and a strategic shift. Instead of negotiating with carriers, health systems partner with employers who want better access, outcomes and experiences for their workforce. Zero-dollar cost at the point of care, a feature of many direct contract arrangements, makes care more affordable for patients while ensuring providers are paid in full. That alignment strengthens community health, reduces medical debt and builds lasting trust.

Direct contracts are also sticky. Once employers configure benefits and employees experience the value, these arrangements become difficult to unwind. That creates long-term competitive advantage, particularly for early adopters.

A call for forward-thinking leadership

For decades, health care finance has focused on denial management, resubmission and collections. These skills remain necessary, but they do not solve the structural flaws draining margins.

Success now depends on recognizing when a model has reached its limits and having the courage to adopt a better one. Direct contracting offers a simpler, more aligned revenue model that delivers faster cash flow, reduced administrative burden, higher per-patient profitability and stronger community relationships.

The opportunity is real and the window is closing. Health systems that move to direct contracting secure the most valuable employer relationships. Waiting isn’t prudent. It’s risky.

The future belongs to health systems that see beyond the limits of today’s revenue cycle and choose to build partnerships that work for providers, employers and patients alike.

Jack Hill is senior vice president of provider engagement at Nomi Health.