In previous posts we’ve discussed the impact on providers of the industry’s transition to value based reimbursement concurrent with the devolution of healthcare providers, settings, and technology.

But our payer and third party administrator (TPA) clients are also facing significant risks and challenges from these changes in industry structure and dynamics. Just as with providers these changes present great opportunities for payers when you understand them and develop strategies to survive and thrive in the rapidly evolving environment.

The Inevitability of Cost Control

Since at least the 1980’s the role of payers has been evolving from the original tasks of providing and administering traditional health insurance. Cost containment has taken on more importance as prices for healthcare products and services have risen. What’s more, quality health outcomes and member service are now recognized as consistent rather than incompatible with cost management.

As a result, payers of all types have taken on creation and management of provider networks as one strategy to control costs. In addition, they are growing robust population health management capabilities out of the original medical and utilization management functions – all designed to keep members healthy, productive, and with minimal need for clinical services.

Devolution with Value Based Reimbursement Creates Challenges for Payers

Now the industry’s transition to value based reimbursement, concurrent with structural devolution, poses significant new risks to this evolving payer business model.

Remember, there are three types of devolution:

  1. Devolution of healthcare providers results in clinical patient care increasingly provided by non-physicians, including home health aides and family caregivers, and in some instances patients themselves.
  2. Devolution of healthcare setting means this care is increasingly provided across a spectrum of facilities outside the hospital.
  3. And devolution of healthcare technology brings clinical and information technology capabilities closer to the patient wherever they are.

Providers are responding to threats to their traditional revenue streams by consolidating and integrating their business and clinical operations both horizontally and vertically to better manage their costs and improve their care coordination.

4 Critical and Direct Challenges for Payers in the New Environment

1. Administrative Services Disintermediation

Payers are threatened in certain situations by the potential for disintermediation from large self-insured employers. Self-insured employers with significant geographic concentrations of employees will be tempted to direct contract for care services with large integrated healthcare delivery systems.

These direct contracting arrangements typically offer specified services, often either bundled or packaged with a form of fixed fee schedule such that self-insured employer costs are more predictable. Often there are performance incentives of various types built in to the arrangement. Sometimes providers find it optimal to set up and/or staff onsite clinics at key employer locations that include primary care for employee families as well as occupational healthcare for employees.

While not the best solution for all situations direct contracting of this sort is of increasing interest to both employers and providers. Payer protestations that they are essential to manage risk and provide the data required to effectively manage health benefits are being challenged.

Direct contracting could create significant revenue loss for some payers since administrative processing to support these packaged arrangements is no longer needed. These services account for a significant component of payer/health plan/TPA revenues.

2. Network Management Disintermediation

Similarly, if employees in a given geography receive health services from various providers under a common provider organization umbrella (a form of network) then there will be no need for traditional payer/health plan provider network creation and management. These services also account for a significant component of payer/health plan/TPA revenues.

3. Health Management Disintermediation

Further, employers are beginning to insist on performance incentives (value based reimbursement) in their healthcare benefits as a cost and productivity management strategy. These newly performance-incented provider systems increasingly offer a full range of population health and wellness management services.

Such services are identical to and directly competitive with health management services expanding out of traditional payer/health plan utilization management. Integrated provider organizations offset revenue loss from constraining services with fees to improve employee health and productivity for their employer customers.

Employers will not pay twice for these health management services – again threatening payers with lost revenue. In some cases there will be opportunities for Payers to backstop direct provider-employer arrangements in various ways to provide certain administrative capabilities and provider choice outside the primary ones. But the overall revenue impact of even partial disintermediation will be negative.

4. Loss of Negotiating Leverage

Another obvious implication of provider system consolidation and integration is that there is potentially less competition for provider services in certain markets. This threatens the ability of payers to leverage competitive pressure to keep prices in check. This will be true regardless of which value based approaches are used. Each approach still has pricing associated with it, and there will be less negotiating power for many payers.

Nevertheless, there are always strategies for payers/health plans and TPAs to address these threats and to thrive in the evolving healthcare industry environment.

To explore how threats to your health plan or TPA business model from the industry transition to value based reimbursement and industry devolution can be identified, quantified, and strategies designed to address them and thrive in the evolving environment, call 703-887-6615 to schedule a complimentary one-hour consultation or an on-site executive briefing.

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