Using Direct Contracts for High-Cost Outliers Instead of the Whole Network

A lot of direct contracting debate gets stuck on all-or-nothing questions:

• “Are we ready to replace the network?”
• “Can we steer enough volume to matter?”

Those are important questions, but they are not the only ones.

There is a middle path that is often overlooked: focus on high-cost outliers instead of broad populations.

What counts as an outlier

In this context, an outlier is not just a big claim.

It is a repeatable pattern where a small slice of claims is:

• Dramatically more expensive than peers for the same service, and
• Concentrated in a handful of providers or settings, and
• Clinically standard enough that alternative pathways exist.

Examples:

• Joint replacements at a particular hospital that cost 2–3x your average elsewhere.
• Outpatient imaging done in hospital outpatient departments instead of freestanding centers.
• Routine surgeries consistently routed to the highest-cost site of service.

These are places where a narrow direct contract or steerage play can clip the tail without rewriting the whole benefit.

How to find them

Look for:

• Top 1–5% of claims by allowed amount within specific DRGs or CPT groupings.
• Facilities that dominate that outlier spend despite not being clear quality leaders.
• Patterns over time (same facility, same service, high variance vs. peers).

Then ask a simple question:

“If we rerouted just these outlier cases to a different provider under a direct contract, what would change?”

Often, the answer is quietly significant.

Designing a narrow outlier-focused contract

For these cases, a direct contract can be tighter and more surgical:

• Scope only the procedures and settings where the outlier pattern is clear.
• Set case rates or bundles anchored to your internal best-in-class or a Medicare multiple.
• Offer strong incentives for members and referring clinicians to use the preferred path.

You are not trying to fix the entire musculoskeletal book on day one.

You are trying to stop a very specific leak.

Advantages of an outlier-first approach

• Lower political temperature. You are not announcing a broad network shakeup.
• Clearer math. Savings are more obvious because baseline costs are so inflated.
• Faster experimentation. Smaller scope means simpler contracts and implementations.

It also gives you a cleaner story for internal stakeholders:

“We found a handful of facilities where we’re routinely paying way above peers for standard procedures. We’re putting a better path in place for just those cases.”

Risks and mitigations

Risks:

• You may not get providers’ full strategic attention if volume is small.
• You might create a perception of “tiered care” if communication is clumsy.

Mitigations:

• Be upfront with providers that this is a narrow, performance-based relationship—and a chance to earn more volume over time.
• Position the program to employees as a smart default, not a penalty for using other options.

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Direct contracting does not have to start with a big bang.

Sometimes the most responsible move is to go after the handful of claims that everyone quietly knows are indefensible—and build from there.