This article delves into five key market forces shaping the future of health plans and outlines strategies to navigate these changes effectively. We will dig deeper into these topics in the coming months.
1. Specialize or die
At Oliver Wyman, we asked the question: What drives health plan success in each health insurance segment?
Put differently, what causes one plan to win in Medicare Advantage and another to succeed in the Affordable Care Act, Managed Medicaid, or commercial group? We looked at the correlation of growth in each segment with several quantifiable factors and the most impactful was a plan’s level of specialization in a particular segment. Yes, the overall scale created helpful advantages, but specialization carried the day in all, except for the commercial fully insured segment, where local scale proved to be most important.
The healthcare market is becoming increasingly segmented, with each line of business presenting unique challenges and opportunities. The demand for specialized, purpose-built capabilities for each segment is more pronounced than ever. Differences in cost drivers, market dynamics, and regulations in each line of business fuel this trend.
To succeed, health plans must achieve scale within each line of business, enabling them to tailor their capabilities to meet specific needs. National payers have created separate, specialized businesses to serve the unique needs of each line of business. Small payers increasingly are being forced to pick their spots or form partnerships to create the scale needed to compete. Purpose-building capabilities around key segments is no longer an option, but a necessity for health plans aiming to excel in a competitive landscape.
2. Drug spending explosion will challenge healthcare affordability
With growth in expensive therapies coming to market, some at prices reportedly 35% higher than drugs launched two years ago, pharmacy is potentially the most significant challenge on the horizon for health plans. New drugs and therapies, including cell and gene therapies, are emerging with very different profiles. GLP-1s, for example, are being used for conditions well beyond diabetes and obesity. And there is a wave of new curative solutions, personalized medicines, and digital therapies. These new profiles carry incredible promise and may revolutionize care, but they also bring a hefty price tag, different economics, and management challenges. This is exacerbated by an aging population and increasing prevalence of chronic disease that will boost demand and utilization for new therapies. Health plans must prepare for a substantial rise in drug expenditures — 10% and 12% this year — and get good at managing the exploding cost of these therapies. Developing deeper expertise in these new therapies across the pharmacy and medical benefits will be crucial to managing this impending explosion in drug spend.
3. Consumer-driven market can’t be ignored
Individual purchasing of health insurance continues to grow as a percentage of the overall market. This isn’t just about the near-ubiquity of high-deductible health plans; employers are embracing other options that shift decision-making to employees. While still small, there’s a lot of anticipation around Individual Coverage Health Reimbursement Arrangements (ICHRA) as a growing segment. Level-funded plans are also on the upswing, with 34% of small employers offering that option in 2023, up from 13% in 2020. How health plans adapt to these trends will vary based on their current market position.
The employer-sponsored market and ACA are also feeling pressure from members for more holistic offerings and an improved customer experience. Health plans need to recognize that members want and expect the same level of service they get from other industries. It’s the Amazon effect. Being able to offer that level of service requires leveraging emerging technologies, including generative artificial intelligence, improving outreach and customer engagement efforts, and being more adaptive to market trends.
4. The technology infrastructure and AI imperative
The potential of new technologies to transform healthcare is immense. Yet, most payers struggle with a complex patchwork of legacy systems. Payers need to manage their existing tech debt to create efficiency with existing systems while deploying modern technology, upskilling talent, and reimagining processes to meet increasing business demands and stakeholder expectations. The technology landscape needs to be designed to deliver on three distinct use cases… with the role of AI, and Generative AI specifically, as enablers:
- Enable better use of data for decision-making, engagement, and risk management
- Improve operational efficiency, driving both consumer satisfaction and lower costs
- Enhance care and connectivity through digital therapeutics and other technologies
Creating a new mindset and strategy necessitates overcoming some hurdles like knowing when and how much to invest, navigating build versus buy decisions, and scaling up technology from pilots to full implementation while balancing operational needs. This requires the right mix of skills, perspectives, and experiences that bring a clear understanding of the business, the voice of the customer, with the right technology fluency and expertise, in a productive cross-functional working model.
5. Diversify, Enable, or Optimize return?
The trend among health plans has been to invest in a broad range of businesses and capabilities outside their core business. In some cases, these investments are big strategic bets to drive market advantage. Others have little relevance to their current business and are simply investment return plays. While both the strategic and return rationales are valid reasons to invest — and may create meaningful market advantage — the mistake we see insurers making is confusing themselves about which is which and what is what.
Insurers need to have both a sound portfolio view for thinking about their investments across the healthcare landscape and within their capital and risk capacity. It is also important to have clear decision criteria for these investments and most importantly an ability to make honest assessments of the rationale for the deal, including assessing whether the company has the right expertise to run that type of business and the mechanisms to connect it into their existing businesses for strategic investments. Plans also need to acknowledge that these types of investments have different operational and investment risk profiles. Some of these businesses may create more customer disruption than health plans are comfortable with, and the success profile is spikier. In short, rethinking the traditional scope of the health plan business will be crucial for future success, but risks being a significant distraction or money loser if not managed properly.
Capitalizing on the opportunities
The future is uncertain, and always will be. It is fraught with dangers and ripe with opportunities. By understanding the importance of specialization, preparing for the drug spending explosion, embracing the consumer movement, adopting new technologies thoughtfully, and thinking strategically about economies of scope, health plans can arm themselves to win today and tomorrow.
