Healthcare's growing divide: how payer-provider tensions signal opportunity for direct contracting

A comprehensive analysis by Healthcare Dive reveals an industry in turmoil, where escalating tensions between healthcare payers and providers are creating unprecedented opportunities for employers and level-funded health plans to pursue direct contracting arrangements. The research, supported by extensive industry data and expert interviews, paints a picture of a healthcare system where traditional intermediaries are increasingly at odds—opening pathways for innovative financing models.

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Claims denials surge as trust erodes

Healthcare providers report alarming increases in claims denials, with nearly three-quarters of providers surveyed by Experian Health stating that denials shot up between 2022 and 2024. This represents a dramatic shift from two years prior, when less than half reported rising denials. The financial impact is severe: nearly 40% of providers now see their claims denied at least 10% of the time, while 11% face denial rates exceeding 15%.

"We had hoped to see a decrease in claim denials from our previous survey, but it's clear these significant challenges are continuing, adding immense pressure on providers," said Clarissa Riggins, chief product officer at Experian Health. The deteriorating situation has left 77% of providers moderately to extremely concerned that payers won't ultimately fulfill their payment obligations.

Prior authorizations and missing or inaccurate data emerged as leading causes of denials, but the underlying issue appears systemic. Healthcare Dive's reporting reveals that frequent changes to payer policies create ongoing reimbursement challenges, while providers struggle with incomplete documentation, coding errors, and staffing shortages.

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Technology arms race intensifies conflict

The healthcare industry is witnessing what experts describe as an "AI arms race" between payers and providers. Major insurers including UnitedHealth, Humana, and Cigna have deployed algorithmic decision tools for claims review, leading to what providers characterize as systematic denial of legitimate claims.

Providence CFO Greg Hoffman documented the real-world impact, telling Healthcare Dive that his health system noticed underpayments or initial denials increased by more than 50% over two years as payers adopted AI tools. This surge forced Providence to increase human intervention per claim by over 50%, as physicians had to submit additional documentation to combat algorithmic rejections.

A Senate subcommittee report revealed that three of the nation's largest Medicare Advantage insurers use predictive technology to systematically deny patients access to post-acute care. UnitedHealth showed the most dramatic shift, increasing its post-acute services denial rate from 8.7% in 2019 to 22.7% in 2022 alongside deployment of its nH Predict tool.

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Financial pressures drive market consolidation

The financial strain extends beyond claims processing. Research from the Rand Corporation found that employers and private insurers paid hospitals an average of 254% of what Medicare would have reimbursed for identical services in 2022—up from 224% two years earlier. This pricing differential varies dramatically by geography, with hospitals in Florida and Georgia negotiating rates exceeding 300% of Medicare levels.

Hospital market concentration drives these disparities. The study found that a hospital's market share, rather than its population of Medicare or Medicaid patients, more accurately predicted pricing power. Larger health systems consistently charged higher commercial rates, suggesting that consolidation enables pricing leverage over traditional payers.

Meanwhile, providers face their own consolidation pressures. Medicare reimbursement for physician services has declined 29% from 2001 to 2024 when adjusted for inflation, according to the American Medical Association. This deterioration stems from Medicare's physician fee schedule lacking inflation adjustments while requiring budget neutrality—making meaningful reimbursement increases structurally impossible.

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Regulatory enforcement reveals systematic issues

Federal oversight efforts have exposed concerning patterns in payer behavior. The CMS's first audit under the No Surprises Act found that CVS-owned Aetna was both overestimating and underestimating qualifying payment amounts for air ambulance services due to incorrect calculation methodologies. More troubling, Aetna failed to provide required disclosures to providers, including information about arbitration windows and payment calculations.

Jeffrey Davis, health policy director at McDermott Will & Emery, characterized these findings as significant because Aetna "did not follow some major requirements that are essential to ensuring that the IDR process runs smoothly." Such compliance failures can delay an already backlogged dispute process, further straining provider finances.

Americans for Fair Health Care, representing physician practices, documented additional payer compliance failures. Their survey of over 30,000 physicians found that 22% of independent dispute resolution awards went unpaid by insurers in 2023, while 35% of payments arrived beyond the required 30-day deadline. These systematic delays force providers to essentially provide interest-free loans to insurance companies.

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Success stories point toward alternative models

Despite industry-wide tensions, successful collaborations demonstrate the potential for alignment. Medicare's Shared Savings Program achieved record results in 2023, with accountable care organizations generating $2.1 billion in government savings while earning $3.1 billion in performance payments. This represented the seventh consecutive year of program savings.

Citrus ACO in Central West Florida achieved the highest savings rate at 19.44%, while Providence's Health Connect Partners generated the largest absolute savings at $137 million. These successes occurred through direct risk-sharing arrangements that aligned provider incentives with cost containment and quality outcomes.

The program's structure eliminates traditional insurance intermediaries for much of the financial risk, creating direct accountability between providers and the ultimate payer—Medicare. Primary care-led ACOs consistently outperformed hospital-owned arrangements, suggesting that physician-driven models may be more effective at controlling costs.

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State-level innovation challenges federal framework

California and Oregon are pursuing radical alternatives through proposed universal coverage systems that would effectively eliminate traditional insurance intermediaries. Both states passed legislation setting deadlines for developing publicly financed, universal healthcare systems similar to Medicare for All.

Opposition from major insurers and hospital systems has been intense. The California Association of Health Plans criticized projected cost savings as unrealistic, while Kaiser Permanente's internal communications described single-payer proposals as "costly, disruptive and detrimental." However, supporters argue that administrative cost reductions from eliminating insurance profit margins and overhead could fund expanded coverage while reducing total spending.

These initiatives require federal waivers that would be "unprecedented and politically charged," according to legal analysis for California's commission. Yet they represent growing frustration with traditional payer-provider arrangements and increasing interest in direct government-provider relationships.

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Direct contracting emerges as strategic alternative

For employers and level-funded health plans, the evidence strongly supports direct contracting as a strategic response to payer-provider dysfunction. By establishing direct relationships with high-performing providers, employers can eliminate insurance company profit margins, administrative overhead, and the adversarial dynamics that drive up costs.

The Providence health system's decision to outsource revenue cycle management to R1 illustrates how even large providers recognize they cannot effectively compete against payer AI systems. As Providence's CFO noted, building equivalent technology would require "two to three years" while payer advantages continue growing.

Level-funded plans particularly benefit from direct contracting because they maintain cost predictability while gaining transparency into actual healthcare spending. Rather than paying insurance companies to manage provider relationships, employers can reward providers directly for demonstrated outcomes in chronic disease management, preventive care, and cost containment.

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The path forward

Healthcare Dive's comprehensive reporting reveals an industry where traditional payer-provider relationships are increasingly dysfunctional. Rising claims denials, technological arms races, and systematic compliance failures suggest that insurance intermediaries may be adding cost rather than value to healthcare transactions.

For employers seeking cost containment and improved patient outcomes, direct provider contracting offers a proven alternative. The success of Medicare's accountable care programs demonstrates that when providers share financial responsibility for patient outcomes, they become natural partners in controlling costs while improving care quality.

As healthcare costs continue their trajectory toward consuming 20% of the U.S. economy, employers and level-funded health plans that bypass traditional insurance models through direct contracting arrangements position themselves to achieve better outcomes at lower costs. The evidence suggests that cutting out the intermediary isn't just financially beneficial—it may be strategically essential.

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