For Insurers, Digitization Is Essential For Competitive Edge

Digitization is no longer a nice-to-have for health insurers — it is table stakes for any company aiming to remain ahead of the curve in a competitive environment. Although our minds quickly jump to dynamic consumer-facing applications or the siren song of generative artificial intelligence to fuel this change, we believe back-office and administrative functions are where most insurers need to focus their energies. Simply put, the current reliance on legacy technology is untenable.

The core problem is that modernizing the tech stack and automating processes is expensive. On top of this reality, there are a myriad of competing demands for capital. This is true for national insurers that are trying to expand their footprints or acquire provider practices, as well as for smaller regional plans that are typically at a disadvantage due to constrained budgets. Across the industry, insurer profit margins stood at 2.2% in 2023, down from 3.8% in 2020.

Knowing where and how to cut costs enables payers to reallocate resources towards digitization, yielding a high return on investment. To this end, CEOs require guidance on cost transformation initiatives that will unlock investments in a more sustainable operating chassis. We’ve zeroed in on five key cross-cutting areas where insurers should focus their attention: automation and process improvement, tech stack improvement, spans and layers, outsourcing, and system rationalization.

Starting your cost transformation journey

It is crucial to thoughtfully prioritize how to capitalize on each savings lever. Cost reduction strategies must align with broader growth ambitions, line of business mix, and administrative cost distribution. The aim is to reduce spending in low-value areas, not to minimize costs across the board. It’s important to note that not all costs are inherently bad. For instance, maintaining in-house expertise is necessary in strategic areas such as member experience design and medical data analytics that rely on institutional knowledge, rather than outsourcing all staff.

Below is a cost transformation tool that can help leaders visualize potential savings across the five levers mentioned above. Using default assumptions for function-level baseline costs and sensitivity to each savings lever, the model projects roughly $6.00 per member per month savings, representing nearly 20% of addressable administrative costs.

This interactive tool allows users to create a customized view by toggling baseline costs versus industry average and zero/low/high sensitivity to each savings lever across nine functional areas:

• Product development, sales/marketing, and underwriting
• Provider management, including contracting, data management, and credentialling
• Medical management, including clinical review and clinical programs
• Claims, including processing, adjudication, and payment integrity
• Enrollment and billing
• Customer service, including member services, appeals, and grievances
• Corporate services, including finance, legal, risk management
• Data and analytics, including corporate performance reporting, analytics infrastructure / architecture
• Information technology, including software licenses, cybersecurity, and system support 

As leadership teams set their priorities, they need to remember that nothing happens in isolation. Pull too hard on one lever and others veer off balance. The tool below enables health plan leaders to gain a better appreciation for potential impact as they embark on cost transformation projects.

The upshot is health plans must control their administrative cost base if they are going to support the modernization efforts required to stay competitive. The opportunity cost is high — dollars being spent to support large system-support teams could be invested in a streamlined automated tech stack. In the long-term, it’s a win-win for health plans for all sizes: a leaner administrative structure generates savings that can then be reinvested in digital capabilities.