It’s been a rough Fall for payers.
A spate of bad news hit the industry. Publicly traded payers missed earnings expectations, share prices dropped, high-profile C-suite executives exited, litigation went against payers, regulatory and political scrutiny continued, public relations challenges seemed never-ending, and more. Indeed, it is hard to recall a period in recent history that felt more bearish on the payer market (except for a brief period in 2019 when payer stocks tanked in fear of a potential Medicare-for-all scenario).
These challenges are real and need to be acknowledged as a necessary starting point for problem-solving. But is there a bull case for the payer market?
Here are three arguments in favor of optimism.
Some challenges are (dare I say) transitory
Medicaid disenrollment is causing financial distress to payers. After tremendous growth during the public health emergency (PHE) when Medicaid eligibility checks were suspended, payer Medicaid enrollment drastically reduced as eligibility checks were reinstated. Payers are reporting sharp decreases in lives and revenue, which is to be expected, but more concerningly, also disproportionately high medical costs driven in large part by a higher acuity residual membership (versus a healthier segment that disenrolled), leading to much lower margins. Payers are taking actions in response including greater focus on medical cost management and lowering plan administrative costs, including difficult personnel decisions.
While very painful for the affected payers, this is a temporary problem. Payers are encountering a lag and mismatch between Medicaid rates and medical costs. States are obligated to offer actuarially sound rates to Medicaid managed care payers, but it can be a lengthy process to work with state Medicaid authorities to readjust rates to reflect the now smaller but sicker Medicaid population. However, the system is designed to eventually adjust to actuarial realities over time.
In the interim, balance sheet strength will matter for payers to tide things over – a good, if painful, reminder for plans to conduct regular “stress tests” of their financial statements to see how they would stand up to scenarios of market evolution (and disruption).
Election-related uncertainty greatly (though not entirely) alleviated
Some of the pre-election uncertainty on political leadership is now alleviated by the election outcomes. General contours of the new administration and legislature’s disposition towards different payer lines of business are emerging.
For example, Medicare Advantage (MA) is generally viewed as benefiting from the election as the new administration is expected to be balanced in regulating the market considering the many challenges in MA. On the other hand, the election outcome revives questions about the future of the health insurance exchange (HIX) and Medicaid markets.
More specifics will emerge as the new administration officially takes the reins. While considerable uncertainty remains, the “band of uncertainty” has narrowed, giving payers a smaller set of scenarios to strategize and prepare for, a more manageable and actionable proposition for payer management and boards.
Core business remains essential (but needs to adapt, perhaps rapidly)
Despite challenges, the core purpose of health insurance has not gone away – people still need protection in the event of high-cost care needs. However, payers cannot rest assured on account of this. Regulatory and market momentum is building to address longstanding affordability and other challenges. One could see scenarios such as price (and quality?) transparency getting more teeth, individual coverage Health Reimbursement Arrangements (ICHRA) growing, and the HIX and Medicaid market shrinking. These scenarios will be good for some payers and not others, but in any case, it will take a greater readiness to adapt to keep serving fundamental needs from health insurance.
For example, as noted above, MA appears to be in a better spot politically, but for the MA market to thrive, payers will need to meet their key provider partners half-way as providers control many of the essential drivers of business performance like risk coding, Star ratings, and managing total costs of care. The key success drivers of a future MA world are more likely to require a stronger “partnership DNA” – payers (and providers) will need to adapt to this new reality.
Path forward: with agency and innovation velocity
While the arguments above represent a bull case, capitalizing on this requires purposeful action on the part of payers, with emphasis on operating with a greater sense of agency and innovation velocity. Payers have agency in how things turn out – to build on the MA example above, payers can capitalize on the much-needed tailwinds from the election outcomes to work out win-win partnerships with key provider partners.
Payers can also better prepare themselves for the future by proactively conducting or refreshing their future scenario analyses. For example, Medicaid plans should model scenarios like what if Medicaid expansion is rolled back, block grants or work requirements for coverage introduced, etc. Similarly, HIX plans should envision and model the impact of potential HIX replacement scenarios. These scenarios will then help inform actions payers should take to sustain and grow their businesses.
Some payers may feel their business is already in turnaround mode or at risk of disruption from regulatory or market actions. While this can feel daunting, turnarounds and preparing for market disruptions can bring out the best in people and organizations, when managed well. These situations can allow organizations to operate with single-minded focus, drop the usual bureaucracy and corporate politics, and focus on the collective good with unusual ambition and urgency.
The future will favor payers that adapt to changing market circumstances with agency and velocity. Payers will need to make tough choices. Enter and exit targeted products and markets. Double down on critical capabilities. Make some bets, with appropriate safeguards. And do all of this with unusual velocity.
It’s been a rough Fall for payers.
But there will be Spring.
After we get through Winter.
Happy holidays.
Thank you for reading the Payer Perspectives blog this year. I hope it gave you something to think about. See you in 2025!
Author’s note: This blog was written before the tragic murder of UnitedHealthcare CEO Brian Thompson earlier this month. Our thoughts are with his family and friends.
