Follow the Money: A Health Plan Insider’s Guide to Payer–Provider Contracting

Meaningful healthcare reform requires a deep understanding of the financial and operational dynamics that drive the system. Every stakeholder — physicians, insurers, employers, providers, and patients — operates within a complex “circle of money” with incentives and constraints that must be acknowledged to create effective solutions. Healthcare professionals should focus on collaboration, data-driven decision-making, and innovative approaches to reduce inefficiencies, improve outcomes, and make healthcare more accessible and affordable for all.

This transcript of the discussion has been edited for clarity and length.

Mike Sacopulos: You had a full surgical career before moving to the health plan side. How did that transition come about?

Jacob Asher, MD: It’s a bit of an unusual story. When I was a staff head and neck surgeon at Kaiser Permanente in Northern California, I was elected to the Medical Group’s Board of Directors — the governing body for roughly 3000 physicians in the Northern California Permanente Group. That experience turned on a light bulb. I was suddenly exposed to the business of healthcare: physician compensation, benefits, insurance dynamics, external market forces. It was a wonderful three-year education.

A few years later, I was no longer enjoying my clinical life. I had started taking courses through AAPL’s predecessor organization, the ACPE, which was excellent preparation for what came next. My move to the commercial health plan side wasn’t part of any grand strategic plan — it was more that I found places where I could add value, and I genuinely came to love that second career.

Sacopulos: How would you describe what a commercial market medical director actually does?

Asher: The simplest way to put it: I was the external-facing, business-enabled medical director for the markets I served. I wasn’t reviewing cases and issuing approvals and denials all day. My role was to partner with business leaders — supporting sales, improving employer retention, promoting quality of care, and advancing the clinical value proposition a health plan tries to make to the employers who fund it and the communities it serves.

Sacopulos: How do payer–provider contracts actually work?

Asher: In the commercial insurance market, multiple independent providers are delivering services to a population the insurance company has agreed to cover. Money has to move, and the insurer sits in the middle as the financial intermediary between employers and providers. The way the insurer manages that responsibility is through contracts that assign every service — every CPT code — a fixed price. That fixed pricing is what allows the actuaries inside the health plan to estimate what care will cost over the course of a year and plan their financials accordingly.

Sacopulos: Do physicians actually have meaningful freedom of contract in that environment?

Asher: It depends heavily on the market. Where providers are highly consolidated — large hospital systems, physician groups controlling most of the primary care — individual practitioners don’t have much negotiating leverage. On the other hand, if a group is the only provider in a particular community, or brings something genuinely unique to the market, the balance shifts. Local competition, exclusivity, and market power on both sides all factor in.

Smaller practices aren’t necessarily powerless, either. A three-person shop with low overhead and strong outcomes data for chronically ill patients can make a compelling case: here’s our value, here’s our price, here’s the clinical data to support it. But it requires being prepared to make that argument explicitly.

Sacopulos: What are the three major provider categories that health plans contract with?

Asher: At the highest level, there are three buckets. First, medical providers — hospitals, physicians, outpatient labs, nursing homes, rehabilitation facilities, and the full range of clinical services for treating medical conditions. Second, behavioral health providers — mental health clinicians, drug and alcohol rehabilitation facilities, inpatient psychiatric units, and individual therapists. Behavioral services are typically carved out as a separate benefit, which creates its own silo. Third, pharmacy — the drug benefit and the pharmacy benefit manager relationships, where the insurer is ensuring adequate drug coverage as part of the overall package.

Sacopulos: Behavioral health has historically been treated as separate from medical care. Why?

Asher: The full history of how that separation developed is something I can’t fully reconstruct. What I can say is that today, at least in California, mental health parity laws now mandate that coverage for behavioral health conditions be on par with coverage for medical conditions. In theory, that legislative remedy has addressed the historical imbalance. The ongoing challenge is provider availability — child psychiatrists, for example, are genuinely difficult to find in many markets, regardless of what the benefit structure says.

Sacopulos: There’s a widespread perception that insurance companies control the price of healthcare. Is that accurate?

Asher: It reflects a significant misunderstanding of how the negotiation actually works. In many markets — California in particular — providers are highly consolidated and carry enormous market power. They know that if they’re out of network with a major insurer, employers won’t buy that plan. When a marquee health system — a Stanford, a Mayo Clinic, a dominant regional brand — sits down to negotiate, the insurance company can’t simply walk away. If an employer asks whether their employees can access that institution and the answer is no, that’s often a deal-breaker.

The insurance company is absolutely trying to get the best price. But the dynamic is far more complicated than the public tends to understand.

Sacopulos: Walk us through the major reimbursement models.

Jacob Asher: The foundation of our system is fee-for-service — each service has a code and a fee, and the more services rendered, the more revenue flows to the provider. Health economists have pointed out for decades that the incentives this creates run backward: there is no financial reward for prevention or for managing total cost of care. The system rewards treating illness, not maintaining health.

The main alternative is capitation, pioneered by Kaiser Permanente. Under capitation, a provider — typically a medical group — accepts a fixed per-member payment and takes on responsibility for the total cost of care within that amount. The incentive structure reverses: the financial driver is now delivering care efficiently and avoiding unnecessary cost. That creates its own oversight imperative — you need rigorous regulation to ensure that avoiding cost doesn’t slide into avoiding needed care.

On the hospital side, the two primary reimbursement structures are per diem — where payment accrues for each day of hospitalization — and diagnosis-related groups, or DRGs, which bundle a fixed payment around a specific diagnosis to incentivize efficiency while protecting hospitals against catastrophic cases.

Sacopulos: Why hasn’t capitation replaced fee-for-service, given its theoretical advantages?

Asher: Despite decades of discussion, it really hasn’t spread. Kaiser remains the model, but it’s been predominantly a West Coast phenomenon. Part of the reason is that managing capitation risk is genuinely complex. You need population scale to absorb financial volatility — a single set of premature triplets can generate a $15 million bill. Medical groups that jumped into capitation in the 1990s without adequate scale found out quickly that the risk is very real. The short answer is that fee-for-service remains dominant across the vast majority of the country, with regional variation.

Sacopulos: Employers rarely get much attention in this conversation. How significant is their role?

Asher: They are the client. In commercial insurance, everything flows from the employer relationship. Their primary concern — after ensuring their employees are receiving promised benefits with minimal friction — is cost. For most employers, health benefits are their second-largest overhead expense after salaries.

What has changed over time is that rather than absorbing rising costs themselves, many employers have increasingly shifted those costs to employees through higher deductibles and greater out-of-pocket exposure. We now have situations where a family might pay $30,000 a year in premiums and still face a $20,000 deductible. At some point, you have to ask: what exactly is being insured? That is a serious failure of the system’s value proposition for middle-class Americans. Employers probably receive far less scrutiny for that dynamic than they deserve — in part because the relationship between paycheck deductions and healthcare decision-making is so opaque to most workers.

Sacopulos: The killing of the UnitedHealthcare CEO last year provoked a significant outpouring of public sympathy for the perpetrator. How do you account for that level of hostility toward the insurance industry?

Asher: It’s a problem the industry hasn’t solved. The financial architecture I’ve been describing — the contracting, the actuarial modeling, the managed care machinery — doesn’t translate to patients who are simply trying to get their treatment approved. The systems built for prior authorization and claims review are not consumer-friendly, and they’re not particularly physician-friendly, either. There is a great deal of friction built into the process, and that friction produces real harm — delays, denials, exhausting back-and-forth between busy clinicians and reviewers.

I managed one of those clinical review teams. The people doing that work were diligent and genuinely trying to do the right thing. Done ethically, efficiently, and quickly, that process can work. But it is very hard to manage at scale, and when mistakes happen in the context of a cancer diagnosis or a life-threatening condition, the consequences are devastating. The industry needs to do far more to address that.

Sacopulos: You note that insurers absorb a disproportionate share of public anger. Is that fair?

Asher: Partially. The insurance company is the most visible actor in a system with multiple participants — employers, providers, pharmaceutical manufacturers, regulators — each with their own interests and their own margin to protect. Employers have shifted costs to employees for years without much accountability. Pharmaceutical companies operate under patent protection that gives them an entirely different and far more profitable pricing model than the insurance business. The insurer sits in the middle and takes the heat.

Some of the larger self-funded employers — those who bear their own risk and pay their cost of care directly — have become quite sophisticated and have driven genuine innovation, including direct contracting with providers that bypasses the insurer entirely. But broadly, the employer community has not developed an effective response to healthcare cost inflation, and the result is that the intermediary absorbs the frustration that probably should be more distributed across the whole system.

Sacopulos: You’re now mentoring students in Stanford’s Master in Medical Informatics Program. What draws you to that work?

Asher: Health insurance companies are, at their core, gigantic data management enterprises. The scale is hard to convey: thousands of contracts, thousands of procedure codes, millions of members, millions of transactions processed continuously. Their data infrastructure is central to everything they do. These students — some clinicians, some from business backgrounds — are learning to work fluently in that world. I make myself available as a resource on health plan data: what data sets matter, how they’re used, what questions are worth asking. I enjoy working with people early in their careers.

Sacopulos: What’s your assessment of AI’s potential impact on healthcare?

Asher: I’m not pessimistic. My particular interest is in what AI might do for primary care physicians, who carry enormous responsibility in our system, are chronically underpaid, and are burdened by administrative demands that have driven real professional dissatisfaction. If AI tools can reduce that burden — documentation, note-taking, administrative workflow — that alone would be significant.

On the clinical side, the potential I find most compelling is AI functioning as a real-time decision support tool inside the electronic health record: a physician documents an impression, and the system surfaces relevant literature, flags alternative diagnoses, or identifies risk factors the clinician might not have immediately considered. As long as the physician remains the decision-maker, that seems not only possible but likely to arrive sooner than most expect.

On the insurance side, the application I’d most like to see is AI reducing the friction in prior authorization and managed care review — making that process faster, less expensive, and less adversarial for everyone involved.

Sacopulos: You’ve described what you call “the circle of money” in healthcare. What do you mean by that?

Asher: The idea is straightforward: every actor in the healthcare system — physicians, hospitals, insurance companies, employers, pharmaceutical manufacturers — has a margin to protect. No one operates without that financial reality. Understanding the circle means understanding everyone’s role, everyone’s constraints, and everyone’s incentives before proposing solutions. You cannot design better alternatives to the current system if you’re starting from the assumption that one party is purely villainous and another is purely virtuous. The financial architecture is what it is — partly by design, partly by historical accident — and it has to be the honest starting point for anyone serious about reform.

Sacopulos: What’s next for you?

Asher: I’d like to be a resource for physicians considering the health plan side as a career path. Medical director roles at commercial insurers are rarely discussed in the context of physician leadership development, and there are real opportunities — and real tradeoffs — that physicians should understand. More broadly, I want to keep contributing to a clearer public understanding of how this system actually operates. Healthcare is the largest industry in America, and we still have not achieved the outcomes we deserve at a price people consider reasonable. There is a great deal of work left to do.

Listen to this episode of SoundPractice.