Sweeping changes in insurance regulation, increasingly constrained access, growing need for consumer-focused services, and escalating costs are redefining the payer business. Developing the right mix of front, middle, and back office capabilities has become critical post-reform and created an attractive area of potential investment for private equity.
25 Million New Members
Even if only half of the 25 million new people expected by the Congressional Budget Office to gain health insurance via the public exchanges by 2017 do so, traditional care settings (such as physician offices and hospitals) will not be equipped to handle the influx cost-effectively. One solution – allowing patients to experience more convenient, affordable care options such as in-home care, telemedicine, and urgent care – both provides additional capacity to the market and helps payers to better control claims costs. Private equity investors have already been investing heavily in these new care access points and are working closely with payers to ensure alignment of evolving payment schemes.
Over the past two years we've also seen increasing vertical integration between payers and retail care. Humana acquiring Concentra and WellPoint joining with private equity firm LLR Partners to invest in a leading chain of urgent care clinics, Physicians Immediate Care, are just two recent examples. With such strategic alignment, payers are now aggressively finding ways to allow their members to "skip the line" at the ER and find convenient, cost-effective and quality care at alternative care sites.
Direct-to-Consumer(ism)
The recent enrollment of 8 million individuals on the public exchange has underscored the need for payers to effectively communicate and develop a trusting relationship with a massive, new consumer population. Payers must get creative in how they address such a large volume of new individual members, plus prepare to scale up and service these members on a "one-to-one" basis. This new market opens the door for novel, cost-effective technologies and services that can serve increasingly critical front office functions for the payers, such as targeted marketing, enrollment, and member services. A similar wave of new one-to-one consumer relationships will need to be built as a result of the expected growth in private exchanges. This shift from the traditional group sale models is driving payers to develop more robust retention and loyalty strategies – or find a third party to do it for them – that keep these members in their book of business.
Perhaps one of the most significant opportunities for outsourced service providers to support both public and private insurers lies within customer analytics. Payers are now segmenting their membership and pouring through engagement metrics to determine what truly motivates these newly insured populations to stay healthy and engage with their health plan. Traditional paper communications distributed via the company benefit manager on-site no longer works in these growth areas of public and private exchanges. Collecting, analyzing, supplementing, and applying the data that comes from such electronic communication is often out of the typical skill set for insurers, thus creating tremendous growth potential for business intelligence and analytics solution providers who can enhance value in this area.
The Need for Scale
As the medical loss ratio "floors" effectively limit payer profitability in their core medical book, they have also driven the need for a drastic re-prioritization of what payers can or should handle internally or outsource, creating a unique opportunity for outsourced payer services companies to take on key back office operations. We see interesting opportunities to invest in companies that drive scale in areas like claims management, payment integrity, and even standard functions like HR, IT, services and accounting. Regional health plans, especially the Blues, also have the opportunity to build "virtual scale" through partnering with other plans and private equity.
Paying for Wellness
Nestled between all the upfront efforts to capture new members and the back office management of their claims exists one of the most critical components of recent efforts to improve our nation's health: wellness. In line with the increased emphasis on prevention and outcomes, payers and employers alike need new solutions to support enhanced wellness initiatives. Despite recent regulations giving employers more ability to adjust premiums for healthy living, many employers (and health plans for that matter) still require outside expertise to design wellness programs that can reach and engage a diverse employee population, help them adhere to care plans (or better yet stay healthy in the first place), and track results.
Market for Investment
From a private equity perspective, compelling investment themes abound in payer services right now driven by significant industry transformation and several key needs: lowering costs, gaining scale, driving consumerism, and improving wellness. Payers have a lot on their plate and we expect, with limited exception, that they can't and won't want to go it alone.
Brett Moraski is an operating partner at LLR Partners.