Picking Your First Direct Contracting Market

The hardest part of direct contracting is not writing the contract.

It is choosing where to start.

Pick the wrong market or service line and you will spend a year fighting local politics, weak steerage, and noisy outliers. Pick the right one and you will have a clean proof point you can use with your board, your CFO, and your members.

You do not need a PhD in network strategy to make that call. You need a straightforward filter.

Start with three filters

There are three questions that narrow the universe of options quickly:

1. Is there a real cost problem here?
   • High spend
   • Clear variance versus benchmark
2. Is there a provider with leverage and motivation?
   • Clinical reputation
   • Market position
   • Direct relationship willingness
3. Can we actually steer members into this pathway?
   • Geographic concentration
   • Benefit design flexibility
   • Navigation capabilities

You want at least two of the three to be strong. If all three are weak, keep looking.

Use a simple claims view

Pull 12–24 months of claims and build a grid with four columns:

• Service line (e.g., joints, GI, imaging, maternity)
• Annual allowed amount
• Implied unit cost benchmark (vs. Medicare or internal best-in-class)
• Top 3 facilities and their share of spend

Then mark each row with:

• Cost signal: How much higher than benchmark is this slice?
• Concentration: Is spend fragmented or concentrated in a few providers?
• Member impact: How visible is this to employees (e.g., maternity vs. outpatient imaging)?

You are looking for areas with high spend, clear overpayment, and manageable politics.

Favor “boring but big” over “flashy but fringe”

It is tempting to chase exotic service lines or new platform models.

For a first direct contract, it is usually better to pick something that is:

• Clinically routine (hips, knees, imaging, some cardiac procedures).
• Operationally understood by TPAs and providers.
• Politically defensible if you succeed or fail.

The board does not need a moonshot. It needs a clear story that you took a big, boring cost problem and attacked it with a better contract.

Look for a provider who can actually move the needle

In each candidate market, ask:

• Is there a health system or specialty group that already sees a big share of your volume?
• Do they have a reputation for quality that members (and local physicians) trust?
• Are they open to faster payment, data sharing, and steerage in exchange for volume and better economics?

A small, clinically excellent group that no one has heard of may be a great partner—but if they only see 5% of your current volume, your first contract will not move much.

The ideal first partner is big enough to matter and motivated enough to experiment.

Stress-test steerage in the real world

Before you commit to a market, walk through a few member journeys.

For a typical candidate market:

• How many members live within 25–50 miles of the proposed direct contract provider?
• How many of them already use that provider today?
• What would it take to get them to switch if they currently go elsewhere?

Then test your hypotheses with:

• HR business partners in that region.
• Local physicians or referral patterns.
• Your navigation vendor or TPA.

If the only way to drive steerage is to cut out long-standing local providers entirely, your first contract may not be worth the political cost.

Define what “good” looks like before you sign

For each candidate market, sketch a simple scorecard:

• Expected annual savings at 40–60% steerage
• Number of affected members per year
• Implementation complexity (low / medium / high)
• Political risk (low / medium / high)

Then pick the market where savings per unit of political and operational pain is highest.

That may not be the most exciting story for a conference stage, but it is exactly the kind of move that builds internal credibility.

Start narrow, then earn the right to expand

Your first direct contract market is not a forever decision.

It is a test bed.

If you pick a slice of spend where the economics, provider partner, and steerage mechanics are all reasonably favorable, you dramatically increase the odds that your first story is:

“We tried this in one market, it worked, and now we are expanding on our terms.”

That is the moment when direct contracting stops being a buzzword and starts being part of your core benefits strategy.