In 2022, our articles on the gathering storm in healthcare focused on the uncertainty facing the payer sector. While most of the metaphorical storm has passed, its aftereffects should not be underestimated. Looking to 2024, we offer five main considerations for payer executives.
Higher costs—and the promise of generative AI
Payers have noted a rise in utilization spurred by effective but expensive therapies such as broad population drugs (for example, GLP-1s for type 2 diabetes and obesity, and treatments for nonalcoholic fatty liver disease) and high-cost infusion drugs (for example, precision oncology).
Health system labor shortages remain unabated and are unlikely to ease in 2024. We estimate that a $100 billion increase in health system costs could translate into a 9 percent employer insurance rate increase. Cost pass-throughs to employees could result in the most vulnerable members paying more than 75 percent of discretionary income for medical services.
Our analysis shows that even for payers that have undertaken administrative transformations, opportunities remain to further optimize processes using artificial intelligence, including generative AI, adjacent automation, and digital technology. The potential reductions in administrative and medical costs, as described by my colleagues in the earlier part of this compendium, show how the rapid pace of adoption of generative AI could have favorable implications for all payers. This could range from health system and benefit contract collation and querying to a more sophisticated request-for-proposal response generation. However, challenges around data privacy, governance, and change management remain. For many payers, the biggest question is where and how to start.
Government business resilience despite constraints
Recent regulatory changes in Medicare rates, risk adjustment models, Stars criteria, and Medicaid redetermination have strained the very businesses (Medicare, Medicaid, and individual) that have provided a steady source of payer profits and growth.
If Medicare Advantage offers an analogue for the evolution of the Individual segment, the basis of competition may shift from price toward benefits, distribution, and retention. The more established players may therefore displace disruptors, given the depth of their capabilities in those areas.
For Medicare Advantage and Managed Medicaid, relentless execution of established value levers is imperative. Duals (members who qualify for both Medicare and Medicaid) acquisitions and management will be a critical battleground for Medicare Advantage. For Medicaid, our analyses of request for proposals suggest that creating tighter integration with providers through risk-based arrangements and joint ventures could be competitively differentiating.
Pharmacy value-chain complexity driving innovation
Prescription drug purchases are a complicated, frustrating experience for many members. Out-of-pocket spending on prescription drugs will exceed $50 billion in 2023, more than what members pay for hospital care. Despite the benefit structure of a highly shoppable product, choice is limited by difficult-to-transfer prescriptions, network design, and partial price visibility. In many cases, a consumer’s drug-cost share exceeds the net price paid by the plan sponsor. Patient out-of-pocket costs on certain drugs can often be set at 25 percent or more of list price, creating significant adherence issues.
Payers could consider working more closely with manufacturers and health systems on alternative payment and financing models (for example, outcome-based or site-neutral payments). Several examples of cost management approaches came to light in 2023: Elevance Health’s acquisition of BioPlus to enter specialty pharmacy services, the Blue Cross/Blue Shield creation of the Synergie medication contracting organization, and the decision by Blue Shield of California to deconstruct the pharmacy benefit manager value chain and work with partners to move toward net price direct contracting and other models together with pharmaceutical manufacturers.
Reenergizing the administrative-services-only segment
Administrative-services-only (ASO) profitability ranges from negative 5 percent to positive 20 percent EBITDA. For a group of 500 to 2,000 employees, we estimate an average ASO revenue yield differential of about $80 to $120 per employee per month between a leading national and an average regional player. This difference suggests opportunities for greater pricing innovation, comprehensive and tiered product packages targeted to specific customer segments, and corresponding competitive reporting and sales force effectiveness.
Unproven business models paving the way for partnerships at scale
Payers have been experimenting with vertical integration through investments in pharmacies, providers, and alternative sites of care. However, increased value from investments could be realized upon more complete use of and integration with the acquired assets by a plan’s members. This has remained elusive. For example, most established payers currently attempting integration have less than 20 percent of their members using their owned provider assets, according to McKinsey analysis. In this case, the payer-agnostic nature of the asset could offer access to new profit pools but without the expected cost benefits of a more integrated model.
For most payers, material M&A transactions are cost-prohibitive. This has resulted in the proliferation of “point solutions.” These may be effective viewed individually, but collectively they can be administratively burdensome and can degrade consumer experience. Payers could consider a comprehensive revision of their vendor strategy in favor of building partnerships at scale based on shared risk on outcomes, platform agility, and striving to be a seamless solutions integrator. Those who accelerate and sustain their solutions at scale can not only succeed in the short term but also create a foundation for future growth.
