By Michael Reagan, CBPA – September 28, 2026
Direct contracting is not a new idea. It is the original American hospital plan — and we have spent nearly a century burying it under intermediaries.
In late 1929, Baylor University Hospital in Dallas was running out of money. Occupancy was falling. Receipts per patient had collapsed. Unpaid bills stacked up. A large share of those unpaid bills belonged to Dallas public-school teachers.
Teachers had the opposite problem. A hospital stay was becoming unaffordable. The country was sliding into the Depression. A winter storm was about to hit Dallas. Nobody needed another layer of paperwork. They needed a simple deal.
Justin Ford Kimball, a former Dallas school superintendent newly installed as a Baylor vice president, made one. Teachers would prepay 50 cents a month — $6 a year — and receive up to 21 days of hospital care at Baylor, including operating room, anesthesia, and laboratory charges. By December, about 1,300 teachers, roughly three-quarters of the district, had enrolled. The first patient under the plan was teacher Alma Dickson, who slipped on ice and injured her ankle. The hospital got paid. The teacher was not ruined. Both sides got what they needed.
That arrangement had a name later: the Baylor Plan. It became the seed of Blue Cross. But strip away the later branding and look at the contract itself.
It was a direct contract between a defined purchaser group and a named provider, for a defined bundle of services, at a prepaid price.
No carrier sat between the school district and the hospital. No third-party administrator adjudicated the stay. No pharmacy benefit manager extracted spread on the drugs used in the operating room. Kimball used data he already had — teacher sick-benefit records and hospital ledgers — set a price that would keep the hospital solvent, and sold a product people could understand in one sentence.
That is the model employers are now rediscovering and marketing as innovation.
What 1929 actually was:
Call it what it was, not what the industry later built on top of it.
- A purchaser (Dallas schools / teachers) needed predictable protection against a catastrophic bill.
- A provider (Baylor Hospital) needed cash flow and occupied beds.
- The deal was prepaid, local, limited, and transparent.
- The hospital was paid for a defined unit of care, not for a maze of billed charges negotiated in secret and then “managed” after the fact.
Kimball did not invent insurance as we now practice it. He invented a group prepayment contract with a hospital. Railroad and lumber camps had used versions of prepaid care for workers. He adapted that logic to teachers and a city hospital. The American Hospital Association later standardized similar hospital plans, stamped a blue Geneva cross on them, and a movement was born. In 1944 the original Baylor Plan was folded into what became Blue Cross of Texas.
The tragedy is not that Blue Cross started. The tragedy is that the industry that grew out of a direct hospital contract eventually became the thing employers now have to contract around.
What “direct contracting” means in 2026:
Today’s language is different. The structure is not.
Self-insured employers, unions, and purchaser coalitions are again negotiating directly with health systems, specialty institutes, and primary-care groups — for primary care, bundles, centers of excellence, inpatient and outpatient services, labs, and imaging — often with no traditional health plan in the middle of the price. Purchaser data show uptake rising: one coalition reported direct contracts moving from about 19% in 2023 to about 28% in 2025, with more employers evaluating the model. Large examples now include health-system deals with union funds and multi-employer arrangements that advertise the absence of the usual carrier stack.
The pitch is familiar:
- Cut the middleman.
- Get a real price.
- Align volume with a provider who will actually take the case.
- Stop paying for utilization theater that does not lower the bill.
That is the Baylor Plan with better software and worse unit prices.
Direct primary care is the same idea at the clinic door: a flat monthly fee for a defined relationship. Bundled surgical contracts are the same idea for a procedure. A health system offering employers a network at a published multiple of Medicare is the same idea with a modern benchmark. Indiana even required nonprofit systems to put direct-to-employer arrangements on the table. The Association for Direct Care launched in 2026 to lobby for the model. None of this is conceptually new. It is a return to purchaser-to-provider contracting after decades of intermediation.
How the original idea got lost:
The Baylor Plan worked because it was small, specific, and honest about what it bought.
What followed was scale. Community-wide hospital plans. Then physician coverage under Blue Shield. Then commercial carriers competing for employer groups. Then wartime wage controls that locked health benefits onto the job. Then Medicare and Medicaid using private templates. Then managed care, carved-out pharmacy, prior authorization, spread pricing, affiliated clinics, and “networks” so broad they stopped meaning anything.
Each layer solved a real problem for someone. Collectively they created a new problem for the purchaser: you can no longer see the price of the thing you are buying, or the person you are buying it from.
Kimball’s 50-cent premium was an actuarial guess padded for safety. It was still a price attached to a hospital and a benefit. Today an employer can spend months “negotiating a plan” and still not know what a knee replacement, an infusion, or a 21-day stay will cost at the facility down the street. That is not sophistication. That is the opposite of the 1929 design.
The irony is sharp. Blue Cross began as a hospital prepayment plan so a school district and a hospital could deal with each other. A century later, sophisticated employers boast that their new direct contract has no Blue Cross, no Aetna, no Cigna, no United in the middle. They are not inventing the future. They are walking back to Dallas.
The fiduciary point:
If you sponsor a health plan, you are not required to romanticize 1929. You are required to buy care as if the money were your own.
Direct contracting is not automatically cheaper. A bad direct deal with a consolidated system can lock in high prices with a prettier story. A good carrier or TPA can still earn its keep on network access, stop-loss, and administration. The lesson from Baylor is narrower and more useful than “fire the insurer.”
The lesson is this:
- Name the provider. Coverage that cannot be mapped to a hospital, clinic, or surgeon is not a contract. It is a hope.
- Name the unit. Twenty-one hospital days. A primary-care month. A surgical bundle. A cash price for a drug. If you cannot say what you bought, you did not buy it.
- Pay in a way the provider will honor. Prepaid or case-rated beats a billed-charge fight after discharge.
- Keep the risk pool honest. Kimball priced from teacher utilization he had already seen. He did not pretend a brochure created value.
- Do not confuse administration with care. Claims shops, PBMs, and utilization vendors are tools. They are not the product.
Employers who treat direct contracting as a slogan will repeat the second half of the Blue Cross story: a clean idea that accretes middlemen until nobody remembers the original bargain. Employers who treat it as Kimball did — a defined group, a defined facility, a defined price — will recognize that “disruption” is often just memory.
History does not repeat. Intermediaries do.
Dallas teachers in 1929 did not ask for a national insurance industry. They asked not to be bankrupted by a broken ankle. Baylor did not ask for a multi-state brand. It asked to get paid.
We built an enormous machine on top of that handshake. Some of that machine is necessary. Much of it is habit. When consultants, health systems, and “innovative” vendors announce that employers can now contract directly with providers, they are describing the starting point, not the breakthrough.
The question for benefits leaders is not whether direct contracting is new. It is whether they will keep the 1929 discipline — price, provider, product — or let the same complexity grow back under a new logo.
Fifty cents a month will not buy 21 days in a modern hospital. The architecture still will. A purchaser and a provider, looking at the same ledger, agreeing on what care costs before anyone falls on the ice.
That was the Baylor Plan. That is direct contracting. Everything else is commentary.
Sources:
1. David Minor, “Kimball, Justin Ford,” Handbook of Texas Online, Texas State Historical Association (originally published 1976; revised March 1, 1995), https://www.tshaonline.org/handbook/entries/kimball-justin-ford. States that the plan was adapted from lumber and railroad prepayment plans; 50 cents a month or $6 a year for 21 days of semiprivate care at Baylor; benefit effective after the first week, then $5 a day; 75 percent of Dallas teachers enrolled by December 1929; Dallas Morning News and WFAA employees joined within two years; Kimball’s paper was presented to the American Hospital Association.
2. Ronald C. Jones, “History of the Department of Surgery at Baylor University Medical Center,” Baylor University Medical Center Proceedings 17, no. 2 (2004): 130–167, https://pmc.ncbi.nlm.nih.gov/articles/PMC1200650/. Reports the December 1929 discussion between Kimball and hospital superintendent Bryce Twitty, enrollment of 1,356, Alma Dickson as the first beneficiary, American College of Surgeons approval, and the Truett Hospital plaque naming Baylor “the birthplace of the Blue Cross Program of prepaid hospital insurance.”
3. Jordan Friedman, “How Health Insurance Got Its Start in America,” HISTORY, January 15, 2025 (updated November 20, 2025), https://www.history.com/articles/health-insurance-baylor-plan. Summarizes the plan as more than 1,300 Dallas teachers at 50 cents a month for 21 days of hospital care, and recounts Alma Dickson’s ankle injury from Schaal’s history of Blue Cross and Blue Shield of Texas.
4. Betty N. Momanyi, “Blue Cross and Blue Shield of Texas,” Handbook of Texas Online, Texas State Historical Association, https://www.tshaonline.org/handbook/entries/blue-cross-and-blue-shield-of-texas. Covers the 1933 blue-cross poster by E. A. van Steenwyk, the 1939 charter of Group Hospital Services, American Hospital Association approval of the Texas plan in 1942, and dissolution of the Baylor Plan in 1944 with members transferred to Group Hospital Service.
5. Sidney Haitoff, Joseph Puthumana, Addison Dama, Yang Wang, and Ge Bai, “Employer-Provider Direct Contracting: Practice and Policy,” Health Affairs Forefront, April 1, 2025, https://www.healthaffairs.org/do/10.1377/forefront.20250328.172807/.
6. KFF, 2025 Employer Health Benefits Survey, Summary of Findings, October 2025, https://files.kff.org/attachment/Employer-Health-Benefits-Survey-2025-Annual-Survey-Summary-of-Findings.pdf. Self-funding: 67 percent of covered workers, 80 percent at larger firms. Direct primary-care contracts: 7 percent of firms with 50 or more workers that offer health benefits.
7. Matthew Rae, KFF, in “How Employers Are Navigating Rising Health Care Costs,” Health Affairs podcast, November 11, 2025, https://www.healthaffairs.org/do/10.1377/hp20251105.93958. On the still-small share of employers contracting directly with hospitals and the constraint of provider consolidation.
A note on the fine print. Later popular accounts, including Schaal as quoted by HISTORY and by The Christian Century (December 16, 2020), describe the benefit as 21 days including laboratory, operating room, and anesthesia, and sometimes omit the first-week exclusion. The Handbook of Texas is more specific: 21 days of semiprivate care, effective after the first week, at $5 a day for that first week.