General Electric Co. has contracted with Northwestern Memorial Hospital to be one of GE's four centers of excellence for total hip and knee replacement surgeries.

GE's other designated orthopedic centers are Hospital for Special Surgery in New York City, the Christ Hospital in Cincinnati and Carolinas Medical Center in Charlotte, North Carolina.

Over the past few years, large employers that pay their own medical claims have created these types of arrangements with provider systems in the hopes of saving on health care costs in the long term.

The center-of-excellence deals between companies and hospitals generally work like this: Companies reach out to providers that have high quality ratings and deep experience in a particular service line. The two sides agree to a fixed price for a certain procedure. Companies tell employees if they need that procedure done, they can go to one of the designated facilities with no or minimal out-of-pocket costs. In many instances, such as that between GE and Northwestern, the employer also covers travel costs for patients.

Last year, Wal-Mart Stores Inc. and Lowe's Cos. built similar programs for hip and knee surgeries with four hospitals. Wal-Mart and Lowe's also have heart and spine agreements with the Cleveland Clinic and Mayo Clinic. GE has other provider-based centers of excellence for organ transplant, bariatric surgery and some types of cancer care.

Large employers are increasingly viewing this strategy as a way to control the costs of health benefits, which generally have been rising at a pace above inflation. An August survey from the National Business Group on Health found that more than one-third of large employers viewed centers of excellence or narrow “premier networks” as one of the top three most effective ways to curtail benefits costs. One-quarter of large companies also said they were going to use or were considering direct contracting with providers for specific procedures.

“People are thinking this is a good way to control health care cost increases,” said Shari Davidson, a vice president at the National Business Group on Health.

The GE partnership is the first for Northwestern that involves a bundled payment, Dr. Hannah Alphs Jackson, program director of value-based delivery at Northwestern Memorial HealthCare, said in an interview. Many centers-of-excellence agreements involve standard fee-for-service reimbursement, but “asking those institutions to take on some risk by taking on a bundled case rate” is the next step for value-based care, she said.

Northwestern sees direct contracting with employers as an important business strategy going forward.

“It's definitely a way for academic medical centers to grow,” Dr. Alphs Jackson said. “We see this as an opportunity to partner with employers who are looking for high-quality and high-value services.”

Bob Herman writes for Modern Healthcare, a sister publication of Business Insurance.