At the onset of COVID-19, payers, much like their cohorts in other industries, zeroed in on immediate actions. While the crisis of the pandemic itself is far from over, it is clear many are evaluating the long-term repercussions for the healthcare sector, due in no small part to the current economic downturn. Against this backdrop, we discuss how payer operations will look three-to-five years from now based on decisions and actions that are being put in place today.
Building on “The great acceleration in healthcare: Six trends to heed,”1 payers may consider strategies to commensurately evolve their operations. We see three major drivers for payers to respond to:
- Changing payer business models with increased diversification. For example, the growth of payer-owned care delivery arms and acquisition of services and technology assets by payers. This change leads us to specific operational archetypes for the next-generation payer.
- Increased reliance on specific capabilities to enable these strategies. This decision may include next-generation managed care models and the increased use of digital and virtual care solutions, as well as the rise in availability of technical solutions such as automation.
- Need to adapt quickly in the face of uncertainty and rapid change, and shift resource allocation to the areas that drive the most value. This includes the ability to respond to potential healthcare reform driven by the current economic downturn and other financial needs.
Operational archetypes for the next-generation payer
The traditional frame of reference for payer operations has been specific, individual functions. Next-generation payer operations, however, may be framed as journeys, each with a specific stakeholder lens. A journey is the end-to-end experience of accomplishing a specific goal or task; this experience may cut across many functional areas in the service of that single end goal. This stakeholder-based lens creates an important switch in perspective. While the pure functional view of operations has contributed to the perception that core processes (such as processing claims) are cost drivers, rather than strategic value enablers, the journey-based view allows us to articulate how different functions contribute to processes that ultimately are critical to driving strategic value. This view may include, for example, building and running value-based relationships with provider partners.
We map payer operations into 18 specific journeys (Exhibit 1), each of which has two classifying characteristics: key stakeholder (member, employer/broker, provider, or government) and core value driver (healthcare value, growth, core transactions excellence, or service excellence). This list excludes journeys that are internal employee-facing only (for example, hiring and onboarding new employees).
In a survey of payer executives conducted in August 2020,2 we asked payer executives to rate the strategic value of each of these journeys.3 While all create value in running the business, some drive disproportionately more strategic value. Based on this research, we find that journeys fall into three categories for a given payer:
- The core value drivers: Three journeys remain consistent in almost all strategic contexts. These three journeys help payers drive healthcare value (for example, manage medical cost) and often translate to membership growth:
- Member: Find and use the right care
- Member: Manage my health
- Member: Select, enroll in, and manage my plan
- The strategic value drivers: These are journeys that payers rely on to advance their unique strategy, and therefore vary by strategic context. For example, a payer whose core strategy is setting up value-based relationships with providers and using these to drive value will likely place a high emphasis on journey 3.5: Set up and manage value-based care relationships.
- Business operations: The remaining journeys, which fulfill essential business functions but are not differentiating sources of strategic value (for example, 3.2: Provider: Update my data).
For a given payer, the strategic value drivers will vary depending on the strategy the payer is pursuing, which can be classified into archetypes. While payers may display characteristics from across all three archetypes, they tend to create value using one of the archetypes much more strongly than the others.
A payer that understands its primary archetype can identify the most important actions to take and capabilities to build. We see three archetypes (Exhibit 2):
- Ecosystem builders focus on strategic journeys that together allow them to develop complex relationships across multiple traditional and non-traditional healthcare stakeholders and service providers, and may serve as the “convener” or “platform” for multiple services provided by different companies. They will need to integrate data for members, providers, and non-traditional service providers to provide personalized and actionable insights for members, and will often do so with shared incentive structures. We expect these payers to be pursuing differentiated and diversified business models. The ability to adapt quickly and dynamically reinvent the business, as the environment changes, is critical to this archetype.
- Value partners focus on developing value-based relationships with core (as opposed to all) stakeholders. Specialization, and the ability to apply industry best practices to a specific situation, are likely to be critical to success in this paradigm.
- Administrators focus on delivering core transactions well, and tend to have slightly higher emphasis than their peers on the business operations journeys. We expect these payers to retain the traditional role of the payer as a manager and distributor of healthcare spending as much as possible. Success in this archetype requires continuously increasing levels of operational excellence, through levers such as automation and right-shoring, as cost pressures in healthcare continue to grow.
Each archetype relies on specific capabilities to drive differential value
Once payers choose a specific archetype, they can consider their strategy as a guiding principle for other decisions, including which operational capabilities to build and how to deploy scarce resources. Some payers have already begun pursuing a specific archetype, and the key for these payers will be ensuring that this choice informs future prioritization decisions.
The next step is to invest in the capabilities to build those journeys. These capabilities vary based on archetype, as detailed below.
- For ecosystem builders, unique capabilities that will drive differentiated value include:
- The ability to engage in complex vendor partnerships and flexibly integrate with diverse ecosystems. An ecosystem is itself based on partnerships and payers will use external partners to build priority capabilities over the next three-to-five years. Payer respondents in a recent McKinsey survey said, for example, they plan to invest 10 percent of their resources into digital service channels over the next three-to-five years. Half said they planned to partner with another company to deploy these channels (either through a partnership mechanism or a purchaser-supplier arrangement). Forty percent of respondents said they may consider outsourcing or partnering to develop data infrastructure. These partnerships may be critical to success because payers think that significant room exists to improve internal performance on these capabilities. Of respondents pursuing an ecosystem-builder strategy, only 16 percent rate their own performance on digital service channels at a 6 or 7 (of 7); only 12 percent rate their own performance on data infrastructure at a 6 or 7 (of 7).4
- Foundational data platforms that enable speed, flexibility, and quality. In the survey referenced above, ecosystem builders rank foundational data platforms as only eighth out of 13 capabilities in terms of investment priorities. However, this underlying architecture will be critical to the success of ecosystems and is a commonly cited pain point today; payers pursuing this strategy should consider whether increased investment is needed.
- For value partners, the capabilities important to future success depend on the main stakeholder(s) that the payer is solving for (for example, providers, specific member cohorts). In many cases, the ability to design and service increasingly complex and custom products and bring them to market may become more important. This capability needs to be further built out; only 14 percent of respondents felt they were ready to build this capability to the degree required (6 or 7 on a scale of 7).5
- For administrators, levers that drive improved efficiency will be most important to success. These include the ability to digitize and automate core business processes. These levers can be prioritized over other next-generation capabilities such as digital service channels, though survey data shows that payers are not planning to do so. Payers who are pursuing the administrator path may consider shifting their priorities to ensure they are investing where it will create the most value relative to their specific strategy. Automation is underdeveloped in the industry; it offers an industry-wide $150 billion opportunity for operational improvement.6 Even otherwise “best in class” payers have room to improve: in the survey referenced above, only 22 percent of respondents said that best-in-class payers were performing at a 6 or 7 (of 7) on their ability to digitize and automate core processes. As discussed in “Making health care more affordable through scalable automation,”7 areas for potential success include improving data quality through auto-validation algorithms, strengthening customer-agent relationships using portals and smart workflows, and simplifying the enrollment and onboarding process using bots.
Successful organizations understand and activate the elements that strategically differentiate them from the pack
Several success factors may contribute to payers’ ability to drive value for their organizations over the next few years. Successful organizations are likely to have a clear strategic approach tied to specific areas of competitive differentiation, a plan to shift resource allocation to those areas, and a path to execute within a nimble and flexible organization (Exhibit 3). Administrative expenses have been roughly flat in commercial lines of business and grew by 10-to-15 percent in government lines of business between 2017 and 2019.8 Establishing clear criteria for how and where to deploy this funding will help organizations both maximize every administrative dollar and potentially decrease spend overall through rigorous prioritization.
- Understand strategic differentiators. Each organization, in line with its overall strategy, can rely on specific strategic value drivers. As detailed above, we find that we can classify payers into three broad categories based on this prioritization. Understanding and articulating the value drivers for the organization is a critical first step in ensuring differential investment in those areas.
- Use a strategic lens against investment priorities. The organization’s investment approach should be “fit-for-strategy.” This means considering heavy investment (capital, executive energy, resources) where it will drive the most value, and minimizing the spend on other “table stakes” areas, as detailed below. A zero-based budgeting methodology can help make these decisions.9
- In successful next-generation payers, we would expect operating expense and capital deployment to be concentrated in the areas driving strategic value. Historical analysis from McKinsey’s payer administrative cost database shows that payers do not consistently allocate disproportionate value on these priorities. Non-journey spend10 is up to 50 percent of payer administrative expense. Payers have an opportunity to further invest in journeys that drive strategic value if they can reduce the portion of their spend on this area. National payers have been able to do this, but only marginally: spend in these priority areas grew by only $1 per member per month (PMPM) (6 percent)11 between 2017 and 2019. Medicaid payers have decreased spend on healthcare value journeys by approximately $3 PMPM (20 percent) while spend on service journeys grew $4 PMPM (25 percent).12 Reallocating spend from healthcare value journeys to service journeys in Medicaid would be consistent with an administrator archetype; however, for any Medicaid payers who want to drive value through healthcare value levers, this shift in spend demonstrates that payers are not consistently able to allocate disproportionate value to priority areas.
- To enable this investment, payers may consider developing operations that are as efficient and scalable as possible, especially in “table stakes” areas of the business. Administrative costs have outpaced revenue growth in recent years for many payers.13 Controlling this trend could loosen investment capital for strategic priorities, position the organization for growth, and provide balance sheet flexibility to weather unexpected changes. This approach includes deploying operational efficiency levers to critical processes (for example, lean redesign, strategic sourcing), especially those that will not need differentiated investment for the organization’s strategy. Journey-based redesign, where payers break down each process step of a priority or high-cost journey to identify key areas for improvement, can also help drive simultaneous cost and quality improvements.
- Reimagine the organization for speed and flexibility. Healthcare payers have historically struggled to change rapidly, in part due to the high degree of regulation in the sector. The COVID-19 pandemic has shown that this lack of speed does not always need to be the case: for example, payers and providers have moved quickly to implement telehealth,14 which can better serve members. Payers who can make business decisions quickly will be best positioned to adapt and thrive in complex and changing environments, even post-COVID-19. Among the ways to reimagine organizations for speed include deploying agile methodologies to rapidly test new solutions and products, flattening organizational structures to increase the speed of decision making, and cultivating partnerships that spur technological and business model innovation, as detailed in our paper “Reinventing the organization for speed in the post-COVID-19 era.”15
The pace of change in healthcare continues to accelerate and this acceleration will have an impact on payer operations. Payers will increasingly drive value through varying business models that require prioritizing different operational capabilities. Payers can position themselves for success by understanding early on what operational archetype will best enable their strategy, and dynamically allocating resources—including organizational mindshare—to those areas that will drive differentiated value.