Digital is reshaping US health insurance—winners are moving fast

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Digital has begun to reshape health insurance markets. Payers in the United States have been slow to digitize and are still behind other industries in their use of artificial intelligence and automation, as well as in customer satisfaction.1 They’re now starting to catch up. Both incumbents and disruptors are making substantial and growing investments in digital programs. For incumbents, the impetus has been equal parts ambition and fear: the investments are simultaneously bold moves to capture new value pools and defensive actions in response to external tech-driven disruption.

Those payers that invest thoughtfully in human-centric digital transformation are beginning to see value, including material changes in member satisfaction and trust, increased revenue from digital branding and improved sales tools, and double-digit reductions in administrative costs. In addition, the stronger member relationships are often leading to lower medical costs. Nevertheless, many payers are still finding it difficult to establish successful digital programs.

By examining the experiences of successful payers and those still struggling, we have been able to identify both winning approaches and perilous pitfalls. One thing is clear: digital transformation demands a nuanced approach. There are best practices, but no “one-size-fits-all” solution.

Signs of a digital revolution are emerging

In the United States, healthcare accounts for almost 18% of GDP2 and 11% of employment,3 but the industry overall has been generally slow in adopting digital innovation. McKinsey’s Industry Digitization Index, which combines 27 indicators to measure the digital assets, digital usage, and digital workers in each sector, ranked healthcare near the bottom in 2015 (Exhibit 1).4Digital America: A tale of the haves and have-mores. McKinsey Global Institute. December 2015.

Healthcare ranks near the bottom in the McKinsey Industry Digitization Index

The healthcare industry has since been catching up, with CEOs and boards calling for greater digital innovation. As a result, investment in digital assets is increasing heavily. Our research indicates that some payers have started to spend almost half of their IT capital budgets on technology innovation; in some cases, this amounts to several hundred million dollars annually. Venture funding in digital health has grown by an average of 32% year-over-year since 2011 and approached $6 billion in 2017.5

Although payers can derive immediate and direct value from digital innovation, much of the impetus for them to digitize has come from the threat of industry disruption. The largest technology companies are already making big bets on healthcare (although what they are planning is not always clear). There is also a flourishing ecosystem of smaller services and technology companies that could develop offerings that challenge parts (or all) of the traditional payer value proposition.

We’ve identified several possible future scenarios based on technology-driven disruption (Exhibit 2). Notably, status quo is not among them.

Potential future healthcare scenarios

Digital is increasingly delivering value for some payers

Some payers are already deriving direct benefits from their digital investments, finding value in enhanced customer experience, administrative and medical cost reductions, better member health, and revenue growth (Exhibit 3). Not surprisingly, given the required investments, many of the leading players have been large national payers, which have often partnered with smaller tech companies to make bold moves. (To date, smaller regional payers have generally used a targeted approach to address specific challenges.)

Typical breakdown of value generated through digital transformation

However, a few digital disruptors are starting to make inroads by reimagining healthcare as we know it. (For more details about which payers are “winning” with digital, see the sidebar below.)

Digital leaders recognize the advantages of being a trusted partner for patients as they go through care journeys. Common areas of focus include guiding patients to the right care (e.g., through provider-finder tools or tailored communication at the right time and in the right way) and improving care management (using both simpler member interfaces and advanced analytics).

These payers are also finding ways to gain market share with digital solutions. Some of them have invested heavily to improve critical member-facing functions, such as enrollment for those purchasing individual insurance. In the small-group segment, some have digitized the sales process so they can empower agents and brokers through better information and a faster and simpler sales experience. Additionally, some payers have found ways to better retain members as they transition into Medicare, using digital to deliver targeted analytics (to internal sales associates), as well as timely interactions and personalized messaging (to members).

All payers are prone to digital disruption of their administrative functions. We estimate that many payer-centric activities, such as data processing and data collection, could be heavily automated using existing technology. Our experience suggests that achievable administrative cost savings in effort-intensive areas could range from 15% to 40%, depending on the nature of work being automated and the extent to which technology is already being used. Leading payers have recognized this threat and are investing to stay ahead of it. Some, for example, are starting to use artificial intelligence solutions to improve payment integrity. As impressive as these advances may seem, we believe that far more can be done. Indeed, it is highly likely that the next wave of digital innovation will prove even more valuable for payers (Exhibit 4).

The next wave of digital transformation at payers

Many payers struggle to get going with digital

Despite the success that some payers have achieved with digital, most are falling behind. We have identified five challenges that payers typically need to address if they want to head down the digital path.

Lack of enterprise-wide collaboration. Historically, many payers have used functional approaches and created silos as a way to optimize individual department performance. For some national payers, the market-level commercial structure added additional complexity. Digital success, however, heavily depends on delivering an end-to-end constituent experience that is consistent and seamless across functional boundaries. (The term constituent covers a range of stakeholders, including members, providers, brokers, employers, and internal employees.) Creating this type of end-to-end experience involves a level of cross-departmental collaboration that can be hard to establish.

Internal orientation. Digital transformation requires reimagining all operations from the constituents’ perspective. It usually involves breaking old norms and reimagining the way things work. Typically, payers transform business processes using traditional levers. They tend to treat technology teams as back-end functions, but that approach will no longer do. Digital entails greater collaboration and proximity between technology and business; from the outset of the transformation, technology needs to be involved and represented on targeted cross-functional teams.

Digital talent. Digital demands the sort of talent that payers usually cannot find in-house (Exhibit 5). This talent is in short supply and is typically attracted to technology companies and/or health-tech start-ups. Most payers still rely on old recruiting approaches, mostly waiting for inbound applicants. Our research suggests, however, that only 4% to 5% of digital talent applies to posted job openings.6 As a result, payers rarely find the best digital talent. Attracting and retaining digital talent requires rethinking culture, performance management, and candidate experience. Most payers struggle to find the HR flexibility to adjust these processes to a new type of talent.

Top digital talent combines new technical/functional skills with behavioral/leadership capabilities

Technology foundation. Healthcare lags other industries in technology investments, and as a result has accumulated significant “technology debt.” Most payers still take conventional approaches to infrastructure and technology updates. They are also slow to embrace organizational agility or “DevOps” (a new approach that focuses on cross-departmental integration and automation), both of which could help them improve turnaround cycles. In many cases, payers remain trapped in large multiyear efforts to change core systems or consolidate redundant platforms. Many of them have also been slow to adopt IT architecture based on modular application programming interfaces (APIs), even though that architecture would pave the way for external partnerships with more innovative tech companies and start-ups.

Scale. All these challenges are exacerbated for payers that lack scale. Most smaller payers struggle to keep up with the investments necessary to overhaul their operations and technology so they can expedite their digital transformation.

Digitizing healthcare—opportunities for Germany

Digitizing healthcare—opportunities for Germany

Elements of a winning formula

As daunting as the challenges sound, digital winners have already started cracking the nut in the health insurance industry. We have identified several elements of a winning formula that can help payers gain traction along the digital transformation journey:

Make digital business-led and not IT-led. The business leadership team must be responsible for the success of the digital transformation. Business leaders need to create the digital vision, define and prioritize concrete areas of improvement, and mobilize their teams around joint implementation with the IT and digital organizations. In addition, they must track progress towards delivery and, ultimately, ensure business value is captured after rollout.

Appoint a chief digital officer (CDO). Digital is not IT. It requires a strong leader who can paint a bold vision of the future and excite the entire organization around it. The CDO needs to assume a role equal to that of other functional leaders; working with these leaders, the CDO can devise digital-first approaches for the organization. (For a fuller understanding of what the role of a CDO entails, see the McKinsey white paper, “Transformer in chief: The new chief digital officer.”7)

“Meet” your constituents. Successful digital programs require a human-centered design approach that is rooted in a deep understanding of all constituents. One of the first tasks for the CDO is to reorganize the organization’s technology delivery teams to ensure that constituent voices are driving all product-design decisions. Designers and product owners who are experts in user experience should be put at the helm, informed by business leaders. The CDO must ensure that there is consistency across functions and technology offerings in the experiences delivered to users.

Manage talent differently. A dedicated talent team for digital-specific needs should be created within the HR department, and this team should be given autonomy to bring innovation in attracting, hiring, retaining, and incentivizing digital talent. A payer’s mission-driven work, combined with its technology ambitions, can be used to attract the best talent.

Adopt new ways of working. New approaches, including design thinking, agile, and DevOps, can be used to shatter organizational silos and improve a payer’s speed to market. This is as much a transformation for business as it is for technology.

Look outward and partner heavily. The digital ecosystem is dynamic. Payers must therefore keep an eye on emerging technologies and potential partners across the value chain. They should be realistic about their strengths and weaknesses, and prepared to strike bold partnerships to improve constituent outcomes and experiences (Exhibit 6).

Potential approaches payers can take to leverage the tech ecosystem

Don’t neglect the foundation. Pursuing business wins is important, but so is continuous investment in the technology foundation. Whenever possible, legacy complexity should be eliminated; when it’s not possible, the older systems should be consolidated and upgraded. API-enabled interaction points can be added to the technology infrastructure to allow for external partnerships.

Prioritize momentum builders. “Lighthouse journeys”—early transformation projects—can create value and build excitement, and so focusing on them is important, especially for smaller payers. The success of the lighthouse journey should demonstrate what is possible and free up the financial resources necessary to invest in the next waves of innovation.

Start now. The CDO should have a strong bias for action. There is never a perfect time to kick off a digital transformation, and so the lighthouse journey should be started as soon as possible to get the organization going. That project can help the CDO begin to build the capabilities needed for longer-term success. Early efforts may not be perfect, but the organization can learn as it goes along.

Strong digital skills are now a must-have—not a nice-to-have—for US health insurers. A few payers have succeeded with digital; those that haven’t cannot afford to be left behind. The steps outlined in this article can help all payers meet the expectations of today’s consumers.

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