Most health plans rely on large carrier networks that advertise steep “discounts” off billed hospital charges.
But billed charges are not real prices.
They are inflated list prices that can vary dramatically from hospital to hospital — sometimes by thousands of dollars for the same service.
Direct contracting solves this problem by replacing inflated list prices with real, predictable prices agreed to directly between the health plan and the health system.
For members, this means simpler care.
For employers, this means controlled spending.
For brokers, this means a plan that performs the way it was designed to.
How Traditional PPO Network Discounts Work
A typical PPO network negotiates a “discount” off hospital and provider charges.
It sounds attractive, but there are structural issues.
1. Billed charges are not real prices
Hospitals set their own charge masters.
A “40% discount” on a $10,000 outpatient MRI is still $6,000 — even when the actual cost to deliver the MRI may be a fraction of that.
2. Discounts vary widely by system
Two hospitals in the same city can have wildly different starting prices.
A high discount at an expensive hospital can still cost more than a low discount at an efficient hospital.
3. Members face unpredictable costs
Deductibles, coinsurance, facility fees, and out-of-network drift can push bills higher.
Members rarely know what a service will actually cost until the bill arrives.
4. Employers have no true cost control
The discount model rewards higher list prices.
If the hospital increases charges, a 40% discount applies to a bigger number — and employer costs rise.
Analogy:
A retailer marking up a product 200% and then offering a “40% discount” is still making more money than selling at a fair price.
How Direct Contracting Works
Direct contracting starts with a real negotiated price, not a discount off an inflated list price.
The plan and the health system agree on the actual allowed amounts the plan will pay.
1. Prices are predictable and stable
The price for an MRI, a knee surgery, or an inpatient stay is defined in advance.
No surprises.
No games with charge masters.
2. Members get simpler, easier care
At Tier 1, members can receive all covered services at $0 — including inpatient care — because pricing is stable and predictable.
There is no need for copays, coinsurance, or deductibles inside the contracted system.
3. Employers gain true cost control
The plan pays the contracted price, not whatever the hospital chooses to charge.
This eliminates the inflation baked into the traditional network model.
4. Health systems get aligned incentives
Direct relationships encourage:
Better coordination Better member routing More appropriate care Long-term partnerships
This creates a healthier ecosystem for everyone involved.
Analogy:
Instead of paying a restaurant after the meal with no menu or pricing, direct contracting is like agreeing on the menu and the price before ordering.
Direct Contracting vs. Network Discounts (At a Glance)
| Feature | Traditional PPO Discount Model | Direct Contracting (Level Health Local) |
|---|---|---|
| Pricing basis | Discount off inflated charges | Real, negotiated prices |
| Predictability | Low | High |
| Member cost | Deductibles, copays, coinsurance | $0 for all covered Tier 1 services |
| Employer cost control | Limited | Strong |
| Provider relationship | Transactional | Collaborative |
| Service quality | Varies | High accountability |
Why This Matters to Members
You know where to go. You know what it will cost. You get care at $0 when staying in Tier 1. You avoid the stress of unexpected bills.
Why This Matters to Employers
Claims become more predictable. High-cost events are controlled at the source. Plan design integrity improves. Renewal volatility decreases.
Direct contracting replaces the illusion of savings with real savings.
Key Takeaways
Traditional network discounts are built on inflated list prices. Direct contracting replaces discounts with real, negotiated costs. Members get $0 care through Tier 1 because pricing is stable and predictable. Employers and brokers gain cost control, transparency, and consistency. Direct contracting aligns hospitals, members, and employers toward better outcomes.