During my career in finance, I’ve had the opportunity to work in both healthcare payer and provider organizations. Now I work with a company that partners with many types of healthcare organizations to tackle data and promote improvement. In this article, I use my finance experience to identify five key areas of opportunity for finance improvement in the payer sector and provide a framework for payer CFOs to build new business models that prioritize growth, strategic recommendations, and performance management.
New Business Models Must Address Cost, Access, and Quality
We operate in an environment with many stakeholders. And while each can describe the issues, no one has developed quick, easy solutions—leaving healthcare’s outlook into the 2020s unclear. Existing business models have created growth for many sectors in our industry, with healthcare now making up 18 percent of the U.S. gross domestic product (GDP). As the threat of healthcare consuming our economy grows, we need a new model to address the problems of cost, access, and quality.
The new model accommodates the needs of all stakeholders (as all stakeholders should have a share of the risk), keeps the patient/member at its center, and prioritizes simplicity and alignment. Perhaps, the best new model example we have is the Medicare Advantage program; it keeps the members the focal point and shares risk with payers and providers under a government program.
Currently, most Americans get health coverage through private health insurance. Small and large employers offer fully insured group plans or self-funded group plans. Based on data from the Census Bureau for 2017, private health insurance covers 67 percent of the population, whereas government plans cover approximately 38 percent. Of the approximately 1,200 health insurance companies in the United States, Forbes lists the top five largest payers for 2018 based on U.S. membership:
- UnitedHealth Group (49.5 million members).
- Anthem (40.2 million members).
- Aetna (merged with CVS; 22.2 million members).
- Cigna (15.9 million members).
- Humana (14 million members).
These large payers feel the urgency to lower cost and improve access and quality. UnitedHealthcare demonstrated this resolve in their market and mission in their fourth quarter 2018 news release—a powerful statement showing commitment to cost and quality:
“UnitedHealthcare provides global health care benefits, serving individuals and employers, and Medicare and Medicaid beneficiaries. UnitedHealthcare is dedicated to improving the value health care consumers receive by reducing the total cost of care, enhancing the quality of care received, improving health and wellness and simplifying the health care experience.”
Five Healthcare Payer Opportunities for Financial Improvement
Five current opportunities for financial improvement can help payers respond to demands for new models for today’s healthcare environment:
1. Understand the Impact of the Affordable Care Act
In 2014, the Affordable Care Act (ACA) triggered industry challenges as it established marketplace exchanges in each state. In 2019, however, the adjustment period for new regulations has ended, and many of the largest U.S. health insurers have left the individual market due to losses. Those insurers, however, who adjusted premiums are now profiting in the individual market, and overall revenue has increased in the Medicaid and Medicare markets. Medicare Advantage and Medicaid Managed Care plans continue to grow as government payers try to control spending.
The following examples show profit for some insurers under the new regulations:
- The Council of Economic Advisers issued a document in March 2018 on the Profitability of Health Insurance Companies. It states all health insurers can expect to be more profitable in the coming year.
- The National Association of Insurance Commissioners (NAIC) published first half 2018 financial data showing aggregate financial results are steady with a profit margin of 3 percent. A couple of notable trends showed changes from June 2017 compared to June 2018:
- Enrollment increased 2 percent in the annual period with overall enrollment increased 13 percent over the past five years.
- Per member per month (PMPM) premiums increased 4.7 percent and claims PMPM increased 2.6 percent.
- Administrative expenses jumped 31 percent in the time period.
- A U.S. Government Accountability Office (GAO) report stated that, in 2016, the three largest issuers cumulatively held 80 percent or more of the market in 37 states. This indicates high concentration for an industry. Medicare Advantage enrollment shows the top three insurers capture 55 percent of the market. These insurers are UnitedHealthcare (25 percent), Humana (17 percent), and Blue Cross/Blue Shield (13 percent).
- We have seen more mergers and acquisitions across different business lines with an emphasis on providing services to members and reducing costs. The most recent was CVS and Aetna, which combined a drugstore chain and the third largest U.S. health insurer. In a Wall Street Journal article, CVS Chief Executive Larry Merlo stated the combined company will focus on reducing medical costs by increasing consumers’ adherence to prescription regimens, expanding its membership base, and offering more services through its bricks-and-mortar stores.
Payer CFOs can stay in sync with the current state of healthcare finance by asking questions on three key categories:
- Growth: What is a potential area of growth in your market by segment? Who are the competitors? (Each geographic market has different characteristics, but we know our population is aging, so the Medicare Advantage market should be strong. CMS projected enrollment in Medicare Advantage to increase 11.5 percent for 2019.)
- Strategy: What healthcare companies would help us reduce costs or offer services our members value? (In general, insurers have chosen their plan offerings, and the state market has made decisions for the exchanges.) Now the pivotal question is, who are my best partners in providing value?
- Performance: How can we reduce the spend in administrative areas? Should we look to zero-base expenses and rethink any spend areas? (The increase in administrative expense invites CFOs to address some specific issues for cross providers and payers and remove waste from the system.)
2. Be Ready for Potential Shifts Due to Regulatory Impacts
The fate of the ACA is part of our political landscape. We have heard calls to repeal and replace the ACA on one side and Medicare for All on another. Both options could bring huge changes for the health insurance industry:
- In 2020, the government could reinstate the health insurance tax (HIT), leading to increased premiums. As I listened to quarter-end investor briefings, most companies were proceeding with business as usual and not reacting to this potential shift. Internally, CFOs are considering all options and gathering data needed to react.
- In April 2019, CMS announced the final rule for Medicare Advantage plans with a 2.5 percent pay increase for 2020. CMS also plans to change the amount of encounter data it uses for risk score calculations. Current scores are calculated using 25 percent encounter data, which CMS wants to increase to 50 percent. More complete and accurate encounter data could lower the risk scores and reduce overall payment. CMS is allowing more flexibility for plans to offer supplemental benefits to patients with chronic conditions.
- The large insurers created innovative models that improve care for members and provide a source of revenue. Consumers find value in Medicare Advantage with quality and cost and navigation of health systems. Consumers know their costs and can work with one vendor. Payers can offer prescription drug coverage, dental, vision, and fitness. “Medicare Advantage has rebranded ‘managed care’ to ‘care coordination,’” said consultant Paul Keckley of The Keckley Report.
- In 2019, there were approximately 300 companies offering Medicare Advantage products. In some cases, providers are entering the space with assistance from insurers or by starting a new business venture. The Medicare Advantage model has provided the best value for many stakeholders.
Regarding, the current and future regulatory environment influences, the payer CFO can ask the following questions:
- Growth: Do we have options in the government world of Medicare Advantage or Medicaid? How can we partner with government initiatives to enhance our services?
- Strategy: What can we offer our Medicare Advantage members with chronic conditions? What is impact of new regulations on encounter data?
- Performance: Can we offer new insights into monitoring the risk scores of our populations as the methodology changes?
3. Understand How Social Determinants of Health Impact Member Health Status
Social determinants of health (SDoH) is new territory for finance teams and promises some exciting changes. SDoH data is external to claims and comprises the conditions and environment that impact overall health status (e.g., food access, housing, transportation, literacy, family and social network, and many other non-medical components impacting health).
Healthcare needs to collect more data about impacts to the health of populations, which generates a lot of activity around SDoH. Pilot SDoH efforts exist in Medicaid managed care plans, and Medicare continues to expand options for chronic care. Recently two large payers showcased their efforts with investments that will benefit the community’s health status:
- In January 2019, Kaiser Permanente announced initiatives totaling $200 million to tackle housing insecurity in Oakland, California. The proposals are part of a comprehensive strategy to improve health outcomes by improving economic, social, and environmental conditions.
- UnitedHealthCare invested over $400 million to help build 4,500 affordable homes with on-site healthy-living support in 80 communities across 18 states.
The challenge to collect SDoH data will expand roles in all care delivery areas, as care providers will survey populations, add notes to medical charts, ask questions to help find barriers to good health for each member. Most importantly, SDoH data needs to be accessible by clinicians, care managers, and social workers, and we need to connect members with community resources. In April 2019 UnitedHealthcare and the American Medical Association (AMA) unveiled a plan to create nearly two dozen new ICD-10 codes related to SDoH. These codes would standardize the way healthcare collects SDoH and increase accessibility for clinicians.
CFOs can ask key questions about SDoH:
- Growth: Can the use of SDoH help us grow sectors of business?
- Strategy: In what areas should we invest to improve the outcome of our members and community? What are we currently doing with SDoH, and what are our future plans? Who are the best community partners to help with the focus areas we evaluate as important to our members?
- Performance: How will data be collected and used? How can we maintain focus on specific areas? What are the results from the interventions, and how do we measure them? How can we minimize gaps in care and improve health?
4. Focus on Provider Relations
Payers rely on providers to provide care to their members. In recent years, the industry has focused heavily on value-based care (VBC), as CMS has implemented programs for various providers (e.g., hospitals and physicians). Measures are used to monitor quality, and poor quality has an economic consequence. Measures include patient experience, readmission rates, mortality rates, and safety of care (e.g., rates for hospital-acquired conditions).
As a value proposition, VBC links quality of care with cost to provide improved outcomes for patients and health plan members. Importantly, this trend is forcing discussions between the payer and provider, as both parties work on improvement. Payers and providers have a common ground with emphasis on quality by reducing utilization, preventing illness, and avoiding complications. Payers have claims data that shows all the places a member has received care. Providers need this data is to view the total cost of care for the member. For example, without comprehensive health data, a physician group may not know their patient has visited different EDs and urgent care centers.
Providers and payers need to work together to design payment plans and implement these models. Health plans are familiar with the concept of risk, and as the risk shifts to the providers, providers need education around managing it.
Payers can ask these questions about how the move towards VBC impacts their relations with providers:
- Growth: Can we partner with providers to design products that will attract more members? Can we ease the administrative burden of billing while increasing satisfaction for members?
- Strategy: How can we improve information exchange? How strong is our primary care network? Where are gaps in the network?
- Performance: How do we monitor and reward our providers? How can we align incentives? How are current care management programs performing (results)? How can we improve those results by 50 percent? What value-based payment programs have been successful?
5. Prepare for Future Trends—Big Challenges and Uncertainty
Moving forward, healthcare promises big challenges coupled with rising uncertainty:
- Healthcare needs to transform the way it addresses our population needs. The 2019 HBO program, One Nation Under Stress, describes how U.S. healthcare is not meeting the our country’s needs, as social determinants, such as zip codes, increasingly determine life expectancy.
- Medicare for All could shift the market and eliminate large sections of health insurance. This will depend on election in 2020 and could be the largest threat to provision and payment of healthcare.
- Radical proposals are emerging, as consumers take a larger role in their health and many disruptors (e.g., Google and Amazon) enter sections of the market. The overall market is shifting from inpatient hospital care towards increased outpatient and ambulatory care.
- Medicare Advantage shows many indicators of positive performance, enrollment growth, increased offerings, and extra benefits. MedPac wanted payment parity between the fee for service (FFS) and Medicare Advantage programs, which it’s accomplished. As those programs perform well, they may be key to new models.
- Health plans will continue to prioritize the development of a value-based payment model.
- When the Arizona Republic covered healthcare in April 2019, Linda Hunt, CEO of Dignity Health in Arizona, described the state of healthcare and asked key questions:
- The payers, the federal government, everybody is looking for value-based care—what is the right cost, the right place and the right time to care for people?
- How do we focus less on illness and more on wellness?
- Amazon, JPMorgan Chase, and Berkshire Hathaway formed a partnership, Haven, to focus on technology and other measures to reduce health costs. “The ballooning costs of healthcare act as a hungry tapeworm on the American economy,” said Warren Buffet, CEO of Berkshire Hathaway, in a JPMorgan Chase press release. “We share the belief that putting our collective resources behind the country’s best talent can, in time, check the rise in health care costs while concurrently enhancing patient satisfaction and outcomes.”
CFOs can ask the following questions to formulate and model potential new options as healthcare faces challenges and uncertainty:
- Growth: How can we attract new members? What technologies and investments do we need?
- Strategy: Who are our most important partners? Have we completed a SWOT (strengths, weaknesses, opportunities, and threats) analysis that could provide direction for new offerings? What drives the consumer decision for health insurance?
- Performance: What are the most important metrics to monitor?
Embracing Today’s Payer Financial Challenges: An Opportunity for Transformation
Payer CFOs can use the questions throughout this article to review their overall strategy in their market, recruiting many areas of each organization to analyze the trends and share results. CFOs and their teams can provide valuable insights to their management leadership on products, new markets, and impact of initiatives. By focusing on the many opportunities over the next five years, payer CFOS can drive down healthcare costs, improve quality, and increase access to healthcare.
Would you like to learn more about this topic? Here are some articles we suggest:
- Customer Journey Analytics: Cracking the Patient Engagement Challenge for Payers
- Six Challenges to Becoming a Data-Driven Payer Organization