{"id":386,"date":"2024-05-03T13:40:00","date_gmt":"2024-05-03T13:40:00","guid":{"rendered":"https:\/\/www.3pillarglobal.com\/?post_type=blog&p=386"},"modified":"2024-10-08T20:16:27","modified_gmt":"2024-10-08T20:16:27","slug":"navigating-change-how-regional-payers-stay-ahead","status":"publish","type":"blog","link":"https:\/\/www.3pillarglobal.com\/insights\/blog\/navigating-change-how-regional-payers-stay-ahead\/","title":{"rendered":"Navigating Change: How Regional Payers Stay Ahead"},"content":{"rendered":"\n

Regional payers have formed the cornerstone of the US health sector, particularly within well-established commercial markets. They collectively insure ~130 million Americans, including nearly half of the employer market. Yet this position is under pressure as the needs of employers evolve and national competitors introduce new business models.<\/p>\n\n\n\n

In this article, we\u2019ll dive into the drivers of recent disruption and how some regional payers are harnessing innovative technology to reclaim their competitive advantage. I\u2019ve had the privilege to collaborate and connect with exceptional regional plan leaders across strategy consulting roles and more recently in-house at a regional plan. I\u2019ve also conducted numerous interviews with self-insured employers and the brokers they partner with.<\/p>\n\n\n\n

I\u2019ve seen disruption happen at the intersection of these three forces:<\/p>\n\n\n

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Customer expectations.<\/strong> Do your insurance products effectively address the needs of your customers, whether employers in the commercial market of individuals on the Medicare Advantage market? <\/p>\n\n\n\n

For many regional payers and TPAs, the answer is a resounding yes \u2013 and that\u2019s precisely why they\u2019ve maintained their presence in the industry. <\/p>\n\n\n\n

The challenge, of course, is that customers\u2019 expectations and needs evolve. They\u2019re often influenced by experiences in other industries. Regional plans with static products risk being outpaced and disintermediated by competitors. <\/p>\n\n\n\n

Business Viability.<\/strong> Delivering a valuable product is key, but equally important is backing it with a sustainable business model. The end of the low-interest rate era has emphasized the importance of cost-effective delivery and appropriate pricing.<\/p>\n\n\n\n

As competitors introduce new pricing mechanisms and the costs associated with providing insurance shift \u2013 including developing new offerings to meet evolving needs \u2013  business models must adapt accordingly.<\/p>\n\n\n\n

Technology.<\/strong> Is it possible to develop a profitable insurance offering that effectively caters to customer needs within the technological and operational capabilities of your organization? What will it take to build the necessary capabilities, and how does that impact the business model?<\/p>\n\n\n\n

New technology is often a primary driver of disruption in health insurance, accelerating both product and business model innovation. <\/p>\n\n\n\n

While regional payers initially lagged behind national counterparts in embracing the last technological paradigm shift to mobile, the current shift towards AI-enabled tools presents an opportunity for regional plans. Leveraging their deeper understanding of the local market, they can now seize the initiative and gain a competitive edge.<\/p>\n\n\n

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Section 1 \u2013 Customer preferences are shifting. <\/h2>\n<\/div>\n\n\n

Healthcare premium increases have long outpaced inflation, even with the slowdown in growth following the ACA and shift to high-deductible plan designs. <\/p>\n\n\n\n

And during the pandemic, employers were hesitant to shop around for plans. HR were preoccupied with a myriad of other tasks, and during such a challenging period it was not a good time to request employees to transition networks. <\/p>\n\n\n\n

Yet coming out of the pandemic, that\u2019s changed. Healthcare costs are rising dramatically. In Mercer<\/a>, Aon<\/a>, and WTW<\/a> surveys of healthcare benefit leaders showed a typical premium increase in 2023 of ~6 and between 6-8% in 2024, far outpacing inflation. <\/p>\n\n\n

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Sources: Mercer, WTW, KFF, AON, Minneapolis Fed<\/figcaption><\/figure><\/div>\n\n\n

On top of that, the business environment has shifted. The low-interest rate era is over and investors expect profits. That\u2019s putting further pressure on HR leaders to reduce costs. The unsurprising outcome: plans are shopping.<\/p>\n\n\n\n

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\u201cWe will have more changes this year than in previous years because employers are rethinking and reevaluating their plans,\u201d says Courtney Stubblefield, managing director of health and benefits at WTW.<\/p>\n<\/blockquote>\n\n\n\n

Yet along with the pressure to reduce premium growths, employers want bespoke offerings for their specific population. They face tight labor markets and need attractive benefits. In a Mercer survey<\/a> of nearly 2,000 employer healthcare benefit leaders, \u201cenhancing benefits to improve attraction and retention\u201d was the top priority, outranking cost-focused options.<\/p>\n\n\n

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Source: Mercer \u2013 https:\/\/www.mercer.com\/en-us\/solutions\/health-and-benefits\/research\/national-survey-of-employer-sponsored-health-plans<\/figcaption><\/figure><\/div>\n\n\n

They\u2019ve already largely shifted to self-funded plans, bearing risk to lower total spend. However this was also driven by a perception that fully-insured plans did not cater to their specific populations. Many HR leaders encroached on regional payers\u2019 typical role, evaluating and contracting directly with digital health vendors or negotiating their own direct contacts for high-cost procedures with providers.<\/p>\n\n\n\n

The same is true in the segments where individuals are choosing their carriers directly. Individuals want a plan that feels personalized to them. In the Individual and Family Plan (IFP) segment, regional plans have lost market share over time as insurance tech start-ups created a sense of customization for consumers, both on the product and marketing fronts. <\/p>\n\n\n\n

Oscar is the most well-known disruptor in this space, though Taro Health <\/a>is illustrative of the insurance product innovation that\u2019s outpaced regional payers. They offer plans designed with bundled \u201cfree\u201d direct primary care.<\/p>\n\n\n

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This won\u2019t appeal to every customer and that\u2019s the point \u2013 competitors are building a menu of insurance products that customers can choose between. <\/p>\n\n\n

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Source: McKinsey \u2013 https:\/\/www.mckinsey.com\/industries\/healthcare\/our-insights\/the-individual-health-insurance-market-in-2023<\/figcaption><\/figure><\/div>\n\n\n

Regional payers achieved success with fully-insured products. The foundational systems built to support that legacy are now in the way of innovation. Similarly, they\u2019re presence in multiple segments complicates network building. Constructing a narrow network tailored for the IFP market necessitates negotiations with healthcare systems that are vital partners in the commercial market.<\/p>\n\n\n\n

In addition to affordability and tailor-made solutions, customers now demand simplicity. The era of point solutions is behind us. With over $100 billion<\/a> invested in digital health solutions over the past decade, HR leaders are feeling the strain. They no longer have the bandwidth to sift through myriad options for diabetes management or contend with a deluge of emails from eager digital health vendors.<\/p>\n\n\n\n

Don\u2019t just take my word for it\u2014esteemed healthcare journalist and investor Christina Farr recently articulated these sentiments in a published a<\/a>rticle<\/a>.<\/p>\n\n\n\n

Employers\u2019 new expectation is that insurance companies act as their single platform partner, providing optionality for bespoke offerings while shouldering the burden of complexity.<\/p>\n\n\n\n

Traditionally, insurance has operated as a platform business, with regional payers excelling in the development of robust regional networks. However, the landscape has shifted with the rise of geographically uniform, software-enabled care, with the iPhone emerging as a central tool for accessing healthcare services.<\/p>\n\n\n\n

In this evolving landscape, large payers have the upper hand, as they construct vertically integrated care ecosystems that seamlessly blend traditional local in-person services with software-enabled Pharmacy Benefit Managers (PBMs), specialty pharmacies, chronic condition management, and behavioral health solutions.<\/p>\n\n\n\n

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\t\nSource: Hospitology \u2013 https:\/\/hospitalogy.com\/articles\/2024-01-05\/year-in-review-part-1-vertical-integration-dominates-payor-landscape<\/figcaption><\/figure>\n\n\n\n

This push for simplicity won\u2019t go away any time soon. Consumers want the convenience and simplicity that well-build software products give them in other industries.<\/p>\n\n\n

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Section 2 \u2013 Business Models are under pressure<\/h2>\n<\/div>\n\n\n

These shifts from customers introduce new business model challenges. How to deliver on the expectations for competitively priced, customized, and administratively simple insurance products<\/p>\n\n\n\n

Consider employers\u2019 shift from fully-insured products to Administrative Services Only (ASO). The vast majority of employers with more than 200 employees are now self-insured. This has put serious financial strain on regional plans, who\u2019s fully insured commercial products account for the majority of their business. The fees paid on ASO plans are significantly less than the net revenue on fully insured products.<\/p>\n\n\n

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Source: KFF \u2013 https:\/\/www.kff.org\/report-section\/ehbs-2023-section-10-plan-funding<\/figcaption><\/figure><\/div>\n\n\n

National payers have met this challenge by building tech stacks that can host highly configurable products, paired with innovative pricing strategies. <\/p>\n\n\n\n

They typically offer much lower baseline administrative feeds for administrative services than their regional payer competitors. However they then build back the revenue they had on fully insured products by offering compelling \u201cadd-on\u201d purchases for employers. Beyond stop loss insurance and integrated PBM services, the national payers offer chronic condition management services, specialty pharmacy services, wellness programs, EAP services, etc. <\/p>\n\n\n\n

Critically, the employer chooses the benefits that appeal to their specific populations. The young tech company can opt for the fertility benefits solution into their solution. The company with a solidly middle-aged workforce struggling to aid aging parents can add on caregiver support programs. <\/p>\n\n\n\n

But this product and pricing approach requires tech capabilities far different from a fully insured product where each member has the same benefits. Systems must account for not just plan design but also the network each group can access (inclusive of digital-only programs), and facilitate the coordination between what will be a unique combination of services for each self-insured employer.<\/p>\n\n\n

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Of course, national payers have held the advantage when it comes to this new approach to insurance products, which necessitates building software. They\u2019ve benefited from economies of scale, bringing in outside help (like 3Pillar) to build great software products and complement internal product, design, and engineering teams. For instance, one of our payer clients<\/a> brought us in to build the core member-facing portal used by 30 million of their customers. <\/p>\n\n\n\n

Plans like UHG have also been able to quickly expand ASO functionality through acquisitions. With $22B in profits in 2023, they are able to invest at a scale regional plans cannot. A different strategy\/approach is needed. <\/p>\n\n\n

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Section 3 \u2013 New technology tools to the rescue. <\/h2>\n<\/div>\n\n\n

Regional plans\u2019 are well positioned to respond to these challenges, though. They can draw on assets that give them significant advantages over national plans:<\/p>\n\n\n\n