What Is an Alternative Contract?

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  • Written By: Marlene Garcia
  • Edited By: Daniel Lindley
  • Last Modified Date: 15 January 2020
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An alternative contract gives one or more options to fulfill terms of the pact in non-traditional ways. It permits the service provider, or the person needing services, flexibility to get the job done. Alternative contracts are used by utility companies, on construction projects, and in the healthcare industry. A placement alternative contract might be implemented in social service agencies, depending on region.

Alternative quality contracts between health insurance companies and medical care providers aim to keep insurance costs down. These agreements pay doctors and medical centers a fixed annual fee for providing services to patients over a defined period of time. Healthcare providers are eligible for bonuses if they meet quality and efficiency goals each year.

This alternative contract differs from the previous method of paying insurance claims. In the past, healthcare providers billed fees for services delivered to individual patients. Insurance companies found some doctors performed non-essential care to earn more money, while physicians who kept costs down were penalized. The alternative contract offers an incentive to focus on quality instead of quantity, according to insurance companies using alternative contracts.

The annual bonuses might encourage doctors to perform outpatient services, when appropriate, instead of hospitalizing patients. This tactic saves the insurance company from paying unnecessary claims. The formula used to determine year-end bonuses compares costs charged by doctors in the same field of medicine and rewards physicians who keep costs low. The goal of this form of alternative contract is to keep health insurance affordable.


In the construction industry, an alternative contract might be awarded when time is critical, especially on public works projects. Typically, public agencies use the low bid price to determine the most appropriate contract choice when taxpayer money is at stake. An alternative contract might get a job done more quickly without sacrificing quality. This type of contract might be used in an emergency situation when the public is at risk.

Some electric companies offer alternative contracts for their residential, commercial, and industrial customers. Instead of a fixed cost per kilowatt hour, a company might permit customers to choose a time-of-use rate to address peak hours of consumption. Under this contract, a customer might choose non-peak times to perform tasks that require electricity in order to reduce electric bills.

In some areas, child welfare agencies employ alternative contracts to place youth under the guardianship of the government. A youth might be eligible for services and financial resources while living at a residence deemed safe and under the supervision of a relative, friend, or case worker. This alternative contract typically includes a proposal from the youth outlining his or her plans for independent living.


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