Employers, the largest sponsor of health benefits in the US, cover 49% of Americans and spend $1.2 trillion annually on healthcare for employees and their families. Often the second largest operating expense after employee wages, health benefits are the fastest growing expense for the vast majority of employers with costs rising over 50% since 2008. Principal drivers of this rapid increase include care being delivered in improper care settings, variations in cost and quality across providers, geographies and facilities, poor management of chronic conditions including behavioral health, and rapid growth in the use of specialty drugs.
In an effort to regain a level of control over their healthcare spend, employers across the large and mid-market have turned to self-funding strategies, effectively managing their risk pools by putting mechanisms and programs in place to encourage employees to better manage their health. Large organizations of scale have been deploying more sophisticated self-funded strategies for some time, often internally managing a best-of-breed vendor approach to help employees navigate their growing financial responsibility, engage them in the active management of their health, direct them to the highest quality of care, and provide additional tools to help them make better choices about their treatment decisions. Mid-market employers have more slowly adopted cohesive cost containment strategies as a result of both a lack of attention from leading vendors and lack of internal resources to properly manage these strategies. This dynamic is changing quickly and many industry participants including third-party administrators, benefits captives, and forward-thinking benefits consultants, are helping influence greater access to comprehensive benefit design strategies that have historically been accessible exclusively to the very large end of the market.
In this evolution, employers have focused across a number of strategic priorities to improve the cost and quality of care. The types of vendors mentioned above are playing a critical role in the implementation and execution to these strategies:
- Near Site and On-Site Clinics - To support the utilization of primary care, employers are directly contracting with vendors of near site and on-site clinics, viewing primary care as a critical strategy to driving down high-cost acute utilization and promoting preventive care and treatment of minor illnesses.
- Managing Specialty Drug Utilization - Over the past two decades, the number of specialty drugs to treat a variety of conditions (e.g. hepatitis C, cystic fibrosis, hemophilia) and their associated costs has grown exponentially. To address this rapidly rising cost, employers are implementing a diverse set of strategies across their pharmacy benefits including: multi-tier medication formularies where employees pay less for generic drugs, custom pharmacy network design to negotiate better drug pricing per unit, and prior authorization and step therapy programs to ensure specialty drugs are being appropriately prescribed and evaluate lower cost therapies.
- Direct Contracting with Providers and Narrow Networks - Employers are looking to contract directly with local health systems to bring more consistency to the cost and quality of care. This has taken the form of direct contracting with local hospitals in addition to specialty networks for more specialized care such as surgery centers, oncology and renal care. According to a National Business Group on Health (NBGH) study, direct contracting with health systems and providers is expanding, growing from 3% in 2018 to 11% in 2019. Direct contracting between employers and Centers of Excellence (COEs) is also expected to rise sharply, from 12% this year to 18% next year.
- Reference-Based Pricing (“RBP”) - Rather than paying an expensive price for network access, employers are increasingly turning to reference-based pricing strategies to reduce cost variation across providers. The latest evolution of this strategy has employers leveraging RBP vendors to directly negotiate a fair-market reimbursement with providers using Medicare as a reference-point. This approach has mitigated many of the historical balanced billing issues that slowed the adoption of RBP initiatives.
- Adoption of Value-Based Reimbursement - As the sophistication in adoption of value-based care among Medicare and Commercial Plans has grown, so too has it gained traction within the employer market. According to the same NBGH study, 35% of employers are implementing alternative payment and delivery models such as ACOs and high-performance networks either directly or through their health plan.
- Population Analytics - Employers are increasingly utilizing software to aggregate data across claims, biometrics, and pharmacy to identify opportunities for engagement, intervention, and cost reductions among their employee populations. This has brought an extra level of transparency to healthcare cost drivers, enabling employers to shift resources to where they can gain the largest impact.
The market is rapidly evolving. Large employers are acting like health plans and mid-market employers are putting in place sophisticated strategies with a variety of interesting vendors emerging to meet an underserved need. This has created an increase in M&A activity with a number of themes emerging:
- Acquiring additional scale is valuable but just one component of a broader M&A agenda.
- Buyers are looking at capability adjacencies where they can leverage existing distribution to capture a greater share of the HR wallet.
- Buyers are focused on strategically combining capabilities to support customer retention, drive cross-sell, and maximize consumer engagement.
Interest and investment across these themes are being driven by both strategic organizations and private equity sponsors who share a collective vision that employer-sponsored healthcare is at an important inflection point. We expect to continue to see broad interest across this space but most notably for market-leading independent TPAs, consumer decision support technology and services, digital health and well-being solutions, platforms bringing benefit design innovation to the mid-market, and leading engagement solutions supporting a strong ROI proposition.
We look forward to watching the market evolve as employers make healthcare benefits a strategic priority. Let us know what you think.