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Private insurance shifts toward B2C

Nilesh Chandra and Daniel tranotti | hfma | 29 january 2016

Recent healthcare reform efforts have caused a marked change in the U.S. healthcare environment and all parties—from large payers to small town providers—should revisit and adjust their business models to adapt to the coming changes. One of the biggest changes we foresee taking place over the next few years, resulting from dramatic changes in payers’ customer base, will be the shift in how payers engage and interact with their customers to protect their market share. Employers and healthcare provider organizations alike should be aware of this shift in payer strategy, as they will be affected by the consequences of those changes.

Throughout much of the country, healthcare costs continue to rise. As employers look to further reduce expenses in a competitive economy, many are taking a close look at employee healthcare costs. Increasingly employers are moving away from offering health care as a defined benefit to offering a defined contribution as a way to manage their costs and exposure. Consequently, more employees are turning into direct customers as they purchase health insurance through the health insurance exchanges. This change in health plan dynamics represents a fundamental economic shift for the healthcare payer industry. As the industry changes from a largely business-to-business (B2B) model to much more of a business-to-consumer (B2C) model, payers must develop new capabilities and strengthen their focus to prepare for this new market mix.

The employer migration from a defined-benefit model, where the coverage provided is set by the employer and all costs associated with delivering the plan are borne by the employer, to a defined-contribution model with an employer-designated stipend for employees to use for healthcare insurance, transfers the risk to the payer and the employee while limiting the potential liability for the employer. This trend can already been seen as major employers move toward this model: Walgreen Co. announced plans in 2013 to make the switch for 180,000 of its employees in 2014.a Verizon implemented this model back in 2008 for its retirees, with IBM, Duke Energy and Time Warner following suit with their retiree benefit plans.

This shift is similar in its scope and long-term impact to the move in the late 1970s and 1980s from pensions (defined benefit) to 401(k) retirement savings plans (defined contribution). Healthcare payers can take a lesson from the changes that shaped today’s financial services industry, which similarly led to an increased focus on customers, improving operational efficiency, and delivering value.

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A Three-Step Strategy

To survive in the new healthcare environment, healthcare payers should undertake a three-step strategy.

Invest to retain profitable relationships. Employer plans represent a highly profitable market segment for healthcare payers, so payers should strengthen their efforts to retain these profitable customers by providing additional value-adding services to manage risk for employers. This strategy could potentially result in an employer deferring its plans to move from defined benefit to defined contribution models.

For example, there is an increasing push toward offering wellness programs. These programs provide employees with incentives to make healthier lifestyle choices, which benefits the employer by reducing the cost of providing health insurance and increasing profitability through a reduction in productivity losses due to employee illness.

Payers also can offer insight into employers’ participants by sharing the output of their risk analytics, thereby enabling the employers to better understand their liability and gain a greater understanding of the general health of their employees. Once the risks are better understood, employers can work with payers on programs and incentives to reduce this risk year-over-year.
Through creative and novel solutions designed to improve the value businesses derive from having a health plan partner, payers may be able to secure this profitable revenue stream through this changing market.

Improve operational efficiency to reduce cost. Given the maturity of payers’ relationships with providers, the opportunity to negotiate further cost reductions from network provider groups is marginal at this point. Also, provider groups are consolidating across the nation into larger practices, reducing payers’ leverage in negotiating lower payment schedules.

Therefore, payers will need to look internally to cut costs and preserve profitability. For example, payers can achieve significant operational savings by revamping the way they adjudicate claims, manage cash flow (A/R and A/P), evaluate operational spending decisions (i.e., IT and procurement), manage utilization rates, and procure medical services and supplies.

In addition to improving their operations, payers should develop strong competencies in data analytics, which are a growing source of competitive advantage. Payers can reduce their costs if they can effectively measure the risk associated with their population and take meaningful actions to reduce this risk. One example is actively targeting specific population demographics and improving population health to drive down risk of expensive procedures/remedies.

This changing industry model allows the payers to focus on specific market segments. By adapting their business and risk models to their chosen segments and the challenges that accompany specific population groups, and by being able to accurately analyze the associated data, payers can better predict and manage costs, drive care outcomes to improve health, and create incentives for both members and providers to contain costs in the long run.

Build stronger, trusted relationships with the new consumer market. In the past, payers have marketed their brand and image to the businesses that purchased their services and coverage. Historically, the targeted clients were human resource directors and other business stakeholders. As consumers take on the role of purchasing insurance on healthcare exchanges, payers will need to shore up their brand images to drive customers toward their plan options. In this new environment, health insurers may want to approach the market the way car insurers currently do.

For example, small payers such as Oscar have rapidly built up their brands through targeted marketing and public relations efforts to generate buzz around their innovative approach to health insurance. Brand image will become increasingly important, as the exchanges will add transparency to the options available to consumers. We already see some evidence of this, in the form of increased television advertising on the part of payers, especially during open enrollment seasons. Forward-thinking payers are developing programs and incentives to increase customer loyalty to ensure annual renewals. The openness of the exchanges will keep the costs of switching plans low for consumers, and if payers do not have programs or incentives in place, or a strong brand, consumers will allow their extreme price-sensitivity to guide their decisions and shop for bargains rather than value.

In addition to a strong brand, payers will benefit from improving their relationship with the consumer, who is now also the customer. Improved transparency around pricing and coverage will allow customers to make apples-to-apples comparisons among payer choices. To remain competitive, payers will need to allow customers to customize coverage to match their lifestyles, medical history, and risk tolerance. Today, their options are limited to what their employer offers, usually only two or three options. But as the health exchanges mature and the competition for business increases, payers that become more flexible in their coverage options and can quickly price out these coverage configurations will have a competitive edge.


Economic and regulatory trends have increased the pressure on payers to adapt and change. The routine cost-cutting measures they have employed in the past will not provide the savings necessary to survive in this new environment nor will they help in establishing relationships with consumers. As employers increasingly move to defined contribution models, it is likely that the most successful payers will be those that cement strong relationships with their current clients, find new ways of improving their operational efficiency, and connect with the new consumer market to successfully transition to a B2C model of business. Without this transition, some payers will find they no longer have a viable business. The payers that make the switch successfully will be the ones that survive and thrive in this new reality.


Nilesh Chandra and Daniel Tranotti are healthcare experts at PA Consulting Group 

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