How to Read a Direct Contract: 7 Clauses That Actually Move Cost

Most direct contracts fail or disappoint for the same reason as any other complex commercial agreement:

The buyer spends more time on the boilerplate than the mechanics that actually move cost.

Lawyers need to care about indemnification, governing law, and dispute resolution. Finance and benefits teams need to care about a different set of clauses entirely.

This is a practical way to read a direct contract when you are the one funding the claims.

1. Who actually owns the risk

Start with the most basic question:

Who is on the hook when utilization is higher than expected?

In a typical ASO arrangement, the employer already owns the risk. The carrier is administering claims on a fee schedule the employer never really sees.

In a direct contract, risk can sit in a few places:

• Pure FFS — the employer still carries all risk, but rates and steerage improve
• Budget-based / shared savings — the employer and provider share upside and sometimes downside
• Full or partial capitation — a provider or platform is taking population-level risk for a defined cohort

The contract should make this explicit.

If you cannot quickly answer who eats the overage when things run hot, you do not understand the deal.

2. How prices are indexed

Every direct contract has a pricing logic hiding under the marketing language.

Common patterns:

• Percent of Medicare ("135% of MS-DRG for inpatient, 180% of OPPS for outpatient")
• Fixed fee schedules ("$X per CPT code, $Y per episode")
• Percent of charge ("70% of hospital charge master")
• Blended models (Medicare-based for some services, bespoke bundles or case rates for others)

Your finance brain should translate each of these to two questions:

1. What does this look like versus our current effective allowed amounts?
2. How does this scale if utilization shifts slightly up or down?

A contract that looks attractive at a headline "percent off charges" level can be structurally worse than your current PPO if it is indexed to a bloated charge master.

Medicare-based pricing, even if the percentage looks high, is usually easier to benchmark and model.

3. What counts as steerable volume

Direct contracts live or die on steerage.

The contract should spell out:

• Which members are in-scope (all employees, a specific geography, a defined plan option)
• Which services are intended to be steered (cardio, joints, maternity, imaging, etc.)
• What navigation or benefit design levers are being used (differential copays, waived cost share, cash incentives, travel benefits)

If the contract assumes a certain volume commitment but the benefit design does not actually push members into the network, you are paying for theoretical savings.

Ask for a simple table:

• Column 1: service line
• Column 2: expected annual cases
• Column 3: current unit cost
• Column 4: direct contract unit cost
• Column 5: steerage assumption ("% of cases landing in the direct network")

If you cannot see that math, you are guessing.

4. Out-of-scope services and carve-outs

The most expensive surprises show up in the exclusions.

Read carefully for:

• Service carve-outs (e.g., oncology, NICU, transplants handled under a separate program)
• Provider carve-outs (some sites or physician groups not included in the preferred rates)
• Third-party vendors layered on top (narrow-networks, COEs, or navigation partners with their own fee structures)

A contract that looks aggressive on paper can quietly exclude high-cost lines that matter most for your population.

Your goal is not to make every service direct-contracted on day one. Your goal is to know exactly what is not covered so you can decide whether the remaining scope is worth the operational lift.

5. Payment timing and interest

For providers, cash flow is often as important as nominal rate.

For employers, payment timing is a working-capital question and a relationship question.

Look for:

• Clean claim definition — when does the clock start?
• Payment timing — 15, 30, or 45 days from clean claim receipt?
• Interest or penalties for late payment

Faster, predictable payment can be a bargaining chip.

A modestly higher Medicare multiple with 15-day payment terms can be more attractive to a health system than a slightly lower rate with 60-day payment and constant disputes.

If you are willing to trade a bit of unit price for faster settlement, make sure it shows up explicitly in the payment clause, not just in the sales deck.

6. Data rights and reporting

Direct contracts are only as good as the visibility they provide.

You want the contract to lock in:

• Data feeds (eligibility, claims, utilization, quality metrics)
• Frequency (monthly, quarterly)
• Format (ideally something your analytics or TPA can ingest without heroics)
• Rights (your ability to use the data for benchmarking and decision support)

Watch for language that:

• Treats basic reporting as an add-on service or separate fee
• Limits your ability to use data outside the program
• Makes the provider or platform the sole interpreter of performance

If you cannot independently verify savings and quality, you have a marketing story, not a control mechanism.

7. Exit ramps and re-pricing

No matter how strong the relationship, you need clean ways out.

Key elements:

• Term length and renewal — 1, 3, or 5 years, and what auto-renew looks like
• Re-pricing triggers — what happens if Medicare changes materially or utilization mixes shift
• Performance-based outs — the ability to revisit or exit if certain quality or access metrics are not met

You are not looking for easy excuses to leave. You are looking for:

• Enough flexibility to adjust when underlying assumptions break
• Enough clarity that both sides know what happens if the program wildly over- or under-performs

A direct contract should feel like a living commercial instrument, not a static artifact you regret three years later.

A simple reading order for CFOs and benefits leaders

When you get the next draft in your inbox, do not start with the definitions section.

Read it in this order instead:

1. Risk ownership
2. Pricing index (Medicare, fee schedule, or percent of charge)
3. Steerable volume assumptions
4. Scope and carve-outs
5. Payment timing
6. Data rights
7. Exit and re-pricing

Then sit with one question:

Does this agreement give us more real control over unit cost, steerage, and information than what we have today?

If the answer is not an honest yes, you may have a prettier version of the same old arrangement — not a direct contract in the sense that actually matters.