The health insurance market in a post-ACA world
As Anthem acquires Cigna, Aetna acquires Humana, and Centene acquires Healthnet, the health insurance industry is in a phase of rapid consolidation. Part of this move towards consolidation is driven by the minimum Medical Loss Ratio implemented by the Affordable Care Act (ACA), which limits the amount of margin payors can take in from premiums. With caps on profitability, M&A has become the primary lever for delivering shareholder returns.
The other major driver of this consolidation is how the new health exchanges are changing patient behavior to be more value-conscious. When individuals are given more choices, it turns out that they are quite price-sensitive – in fact, they’re even more price-sensitive than their employers. A preponderance of evidence shows that on average employees choose lower-cost coverage when they make that choice themselves, rather than when their HR benefits team chooses for them. And in doing so, they save money for themselves, and for their employers.
The new reality in the health insurance market is that value conscious employees and consumers are creating ripple effects of change in the industry, and this is just the beginning.
Employers move toward private exchanges, away from insurance as HR benefit
As employers see that employees on private exchanges make choices that lower overall benefit costs, many will change how they offer health insurance and other benefits to employees. Eventually this could even be in the form of a defined benefit (e.g., $5,000 for healthcare), which an employee can augment with out-of-pocket spend to get the health plan they want. According to consulting firm Accenture, approximately 6 million workers went through private exchanges in 2015, which doubled from the previous year. While these numbers indicate a trend, this won’t be a change we see overnight and some employers will be slower to make the change. We live in a world where companies are constantly adding benefits, and with healthcare being seen as key to employee satisfaction, companies will be careful when approaching this change.
Over time, however, as companies realize there is money to be saved – both for employers and employees – by having employees choose their own plans through the private exchange, the decision on which healthcare plans to select will move from the employer’s to the consumer’s hands. Industry experts believe this will drive adoption for private exchanges in the coming years to cover as many as 40M lives in the employer market, and a similar number through public exchanges.
Payors prepare for direct-to-consumer marketing
Following the implementation of the ACA, insurance providers are not only dealing with finding new ways to provide value to their shareholders, but also adapting to marketing directly to consumers. Right now, comparison shopping in healthcare is difficult. For example, insurance exchanges present health plan comparison information in a format designed for experts, not the average person. Similarly, it is difficult for patients to know the cost of any particular healthcare service, as health system price lists are particularly opaque and often don’t reflect negotiated discounts.
Consumers are beginning to play a bigger role in healthcare, and as the consumer influence continues to rise, the industry will need to present comparison information and costs in a way that empowers patients to make the right decisions for themselves and their families. The industry will need to adopt consumer-marketing ideas in what has previously been a B2B model.
Higher out-of-pocket costs = Increased patient awareness
Over the last 10 years, out-of-pocket spending in healthcare has seen a meteoric rise as individuals have adopted high-deductible plans. This trend will only continue and means patients will be weighing healthcare services like they never have before.
These costs are changing the current way patients look at their healthcare coverage. In the past, patients have visited the doctor, paid a co-pay, and received a bill in the mail that they then pay without asking questions. Patients are not accustomed to comparison shopping for doctors, imaging scans, or medication, but as deductibles reach to the thousands of dollars, patients will start paying attention to where their money is going and will begin treating healthcare like a commodity. Consumers are approaching the healthcare decision more practically, and with a lot more questions, forcing insurance companies to change their previous B2B marketing strategies to relay information in a patient-friendly manner.
So, what’s next?
Fundamentally, these changes are going to be a huge challenge for the US healthcare system. These ripple effects require large investments in technology, consumer marketing and well-designed pilot programs. As the payors continue to consolidate, it will be easier to scale these investments and deploy them across large populations. This industry transformation is also a key driver of the consolidation of the market. This is just the beginning of what will be an interesting, multi-year shift.