Despite inflation cooling off in the United States, the country’s health insurance leaders are still feeling the strain of the recent 40-year-high inflation.1 Commercial healthcare costs are expected to rise by 9 to 10 percent annually between 2024 and 2026. That’s roughly two to three times the average annual growth over the past four to five years.2 Employers, collectively the largest purchasers of health insurance, are gearing up to deal with these rising costs, which in turn is adding to the pressure on payers to offer new solutions that meet their needs.
Amid this backdrop, about two-thirds of respondents to McKinsey’s 2024 Employer Health Benefits Survey say they are looking to switch carriers over the next four years or less, likely seeking alternative plans that reduce costs and improve member experience.3 About two-thirds also indicate they are looking for cost savings of greater than 10 percent.4 To meet employers’ needs for affordability and better member experience, many carriers have introduced novel plan designs and strategies, which, according to our experience, could lead to potential cost savings of 10 to 30 percent, along with high member engagement and satisfaction.
Payers that stay on the sidelines of innovation may risk losing membership in the coming years. Our estimates suggest that by 2030, roughly 12 million commercial members, irrespective of the plan they are enrolled in, could move to innovative products5 (Exhibit 1), which would represent just over 7 percent of the projected 165-million-member commercial market and about $500 million of the fully insured profit.
To help payers respond to employers’ needs and capture a portion of the expected growth from innovative products, this article offers a perspective on evolving market dynamics and details the attributes of these new nontraditional products, their savings potential, and strategies for incumbent payers.
Market evolution and impetus for innovation
Based on our experience, many payers have been reluctant to move first on product innovation—possibly because of uncertain returns on investment, strong positions in local markets, and fear of cannibalizing their other products. Furthermore, there has not been a strong perceived need to offer alternative benefit plans, especially for payers with entrenched, highly profitable books of fully insured business. However, fully insured membership has been in steady decline, and the overall market size has stagnated (Exhibit 2). The contraction in the market accelerated in the wake of the COVID-19 pandemic (–2.7 percent CAGR in 2021–23 versus –1.2 percent CAGR in 2016–21), according to McKinsey analysis of enrollment data.
Keeping a competitive edge is thus tougher in a declining fully insured market, and novel product designs may help payers protect against further declines in membership. But growth within the overall commercial market must come primarily from the modestly expanding self-insured segment, where employer and employee preferences hold more weight than their fully insured counterparts.
Employers must now confront rising healthcare costs head-on, as medical inflation is expected to remain above historical levels. Previously, employers sought to pass costs on to employees by, for example, cutting ancillary benefits, reducing plan options, or shifting to high-deductible health plans (HDHPs). However, employee cost sharing has likely reached a saturation point, with consumer inflation and macroeconomic conditions making employees increasingly cost-sensitive. One point of evidence for this is that while HDHP adoption grew by 17 percent per year from 2006 to 2019, it then contracted by 1 percent annually from 2020 to 2023.6
As cost-conscious as employers and employees have become, they are simultaneously demanding an improved healthcare experience. This includes getting coverage, understanding benefits, finding care, and saving and paying for care. However, they are deeply unsatisfied with their experiences. In the past, payers innovated mostly on benefit design (for example, HDHPs and narrow networks). Now, to meet employer and employee expectations, they must also place a strong emphasis on developing digitally enabled products to improve the member experience.
Landscape of innovative products
Over the past few years, several new types of plan designs have come to market, promising roughly 10 to 30 percent savings, though each employer might have a different experience. The common thread through these nontraditional products and strategies is an emphasis on cost savings, strategic member incentives, and enhanced member experience. We outline three key products and strategies with different focus areas: benefit design (for example, zero deductible and dynamic copay plans), network-based (for example, reference-based pricing), and risk aggregation and group purchasing (for example, captives).
Alternative member cost-sharing plans
Plans that step away from traditional models of sharing costs with members through a deductible alongside standard copays and coinsurance are one way that payers are innovating. Alternative health plans are set up without deductibles or coinsurance, leaving only a transparent and dynamic copay that shows members provider-specific copay amounts, with the aim of encouraging the use of high-quality but less expensive services. Additionally, they put member engagement at the center with high-touch digital experiences.
Since alternative member cost-sharing plans are similar to traditional models, they are easier to set up compared with other product strategies. They do not totally disrupt a payer’s provider contracts but may require some work to tier and recommend specific providers who are most cost-effective. Payers concerned about cannibalization of their other (and often more profitable) plans or the investments needed to optimize members’ digital experience should consider that a segment of members are likely to switch regardless, so creating options that are tailored to retain those members is critical to not losing overall market position.
Alternative cost-share models have grown relatively quickly in recent years, according to a McKinsey analysis of publicly available materials. Their savings reflect a combination of a few factors. First, those who select such plans are often healthier or otherwise lower-risk members. Second, methodological considerations also play a role, such as the modeled or projected populations used. Another element is members’ growing tendency to shop for care; this represents the most robust portion of savings in the long run. Some 24 percent of medical spending is highly shoppable, and with members engaged when offered best-in-class solutions, approximately 79 percent of them could shop for a high-value procedure, according to our analysis (Exhibit 3). We find that the variance between median and third-quartile provider costs is typically 30 to 40 percent. So if it’s possible to shift all engaged consumers to median-cost providers on shoppable procedures, plan sponsors potentially have the opportunity to save 6 to 8 percent of their total spend.7
Alternative provider payment plans
Alternative provider payment plans similarly offer members incentives to see high-quality yet lower-cost providers, but these plans also incorporate different payment models. For instance, a no-network offering in which members pay providers directly with a prefilled benefit card encourages them to save money. This is complemented by an intuitive app that allows members to identify nearby providers who are recognized for being popular among members and relatively more affordable. Another model is reference-based pricing (RBP), in which reimbursement is typically 120 to 170 percent of Medicare rates, with 10–30 percent savings for employers.8 These plans are unmatched in savings potential. However, for hospitals that do not accept RBP, patients could be responsible for the difference between the provider’s charge and the plan’s allowed amount. To counter this issue, leading RBP players are launching plans with warranties to cover the member’s cost share if facility negotiations fail.
Alternative funding products with pooled risk
Self-funded plans have been popular for decades due to their ability to reduce administrative costs and offer more control over plan design. Consequently, the fully insured commercial market has been decreasing. From 2021 to 2023, it lost 2.9 million members.9 By 2030, per McKinsey research, anywhere between four million and up to 14 million more fully insured members could shift away from fully insured plans.10 Besides fully insured members shifting to traditional self-funded arrangements, the next area of growth is risk-pooling products such as group captives, professional employer organizations, multiple employer welfare arrangements, and association health plans (AHPs). These products allow small and medium-size employers to increase their bargaining power and enjoy benefits typically reserved for larger companies, potentially offering greater cost savings. For instance, smaller employers can access more flexible stop-loss programs with lower deductibles and enhanced digital offerings by participating in a captive.
While payers will need to prepare for the added administrative complexities that come with handling filings from different employers within a risk aggregation arrangement, they stand to benefit from margins that are closer to their fully insured book of business. Payers with a targeted focused on capturing smaller employers that are not already part of their fully insured business could improve their market position. There is, of course, the risk of cannibalization of a payer’s own fully insured members, but the trade-off could be worthwhile for payers who are otherwise losing membership to competitors.
How payers can adapt across their product portfolio
This article focuses on existing innovations, but we expect there to be new strategies in the longer term that utilize emerging technologies like generative AI and offer truly novel benefit designs not yet seen in the market. So payers should strategize not only to address competition from those already offering alternative plan designs but also to get ahead of upcoming innovations. To get started, payers will need to assess their local market dynamics, organizational goals, and existing capabilities—for example, payers can use their core platforms or a flexible third-party administrator chassis to build these types of products. Once this grounding is in place, they can start to strategize for the near term and the long term with a focus on benefiting employers and their employees.
Near-term plans can be implemented in the next 12 months and should focus on modernizing the value proposition:
- Pooled-risk product offerings. Alternative funding products with pooled risk (for example, captives) have a relatively higher potential for employer savings compared with other new plan designs, so they can be a beneficial near-term launch for payers. Insurers will need to develop underwriting capabilities to create risk-pooling criteria and target interested employers. To ensure member engagement, payers will need to build reporting tools to demonstrate cost containment for employers. In addition, a customer support team dedicated to these groups will be key to staying competitive.
- Partnering. One avenue to launching rival plan designs is to partner with those that already offer the benefits or superior digital platforms that are of interest to employers and employees. Besides speed to market, this strategy also allows payers to sidestep the complexities of building administratively heavy solutions from scratch and instead focus on building certain tech assets and integrating with the partners’ IT systems.
- Product positioning. Whether a payer builds its own solution or partners for one, ramping up sales and marketing efforts to better position the new solution alongside its existing strengths will be critical. Additionally, payers can augment their plan portfolio with point solutions—for example, virtual care, fertility assistance, and healthy-behavior programs—and cohesively integrate these solutions into their existing plans.
Over the long term, payers will need to focus on developing the breadth of their innovative products to achieve sustainable growth:
- Full coverage with modular add-ons. Plans with a modular approach allow for a base package with tailored add-on options, catering to specific customer segments. Having more targeted offerings priced competitively enhances a payer’s revenue from administrative services. Payers will need to develop actuarial models to effectively price coverage, adjust claims mechanisms to factor in varying benefits, and train brokers, HR teams, and customer service representatives on buy-up options.
- Tiered payer–provider risk-sharing models. These models carve out chronic conditions under risk-based contracts. Payers should take a two-pronged approach that emphasizes value-based contracting, starting with negotiating provider contracts with the ideal mix of upside versus downside risk. They will also need to develop technology that can efficiently incorporate providers’ patient data to assess cost-of-care savings across numerous and potentially varied value-based provider contracts.
- Payer–provider integrated ecosystems. Payers considering vertical integration of care-delivery assets would benefit from creating effective care-navigation teams and building digital features that guide patients to preferred providers. And to fully realize the benefits of an integrated network, payers can integrate back-end claims management, care coordination, electronic health records, and call center activities.
New health benefits products are growing their membership, and while mainly targeted at self-insured accounts today, these products are expected to make their way downstream to the fully insured segment. To truly showcase the range of advantages for members and to capture full value from the introduction of new products will require effective go-to-market approaches. Payers can offer improved pricing through a combination of reduced administrative fees, at-risk pricing (for example, performance guarantees related to expected savings), and bundling discounts. Sales teams can closely engage with brokers to educate them on new offerings, while delivering a quantified value story clearly articulating the potential for savings and member engagement. By providing more innovative products and achieving go-to-market excellence, payers can compete more effectively to meet employers’ and members’ evolving needs.
