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The 30 Years' War Between Payers And Providers Creates Opportunity For Entrepreneurs

This article is more than 8 years old.

Payers and providers have been at war since the 1980s, when employers concerned about rising health benefit costs pushed payers to ramp up efforts to control provider pricing. Payers’ efforts lost traction after five to 10 years, and healthcare costs continued to rise rapidly. But the battle lines were drawn, and payers and providers continue to have deep divisions that evoke the 30 Years’ War between Lutherans and Catholics.

Some thought that the ACA was the beginning of the end for private payers: the government would progressively assume a “single payer” role as in most other advanced countries, and providers would take more financial risk, eventually by-passing payers by becoming risk-bearing health plans.

Providers are taking more risk, and in some cases becoming health plans that deal directly with plan sponsors and consumers: UPMC is a strong example. But, the public exchanges are producing a big shift of lives from employer sponsored health insurance (ESHI) to exchange products; analysts predict this will grow to 60m lives by 2020 (1). Most ESHI lives are self-insured, which sharply limits the value add for payers to “administrative services only”. Exchange lives are fully insured, which greatly increases the role of payers.

And government is relying on private payers to an increasing extent, even as it funds a growing percentage of national healthcare expenditure. Both Medicare and Medicaid continue to evolve to a managed care model: a private payer manages a population with government funded health benefits. Managed care (called “Medicare Advantage” for Medicare clients) has a large and growing share of both programs (see chart below). The driver here is the belief that a private payer can deliver better value for cost by managing the delivery of healthcare.

Plus, a single government payer is just not in the political cards in the U.S. for now, with Republicans controlling Congress and an open seat in the White House.

From the beginning of the Payer/Provider War, the key strategy for providers has been regional consolidation. This enables them to shed overheads and, more important, gain bargaining power with payers. The provider business is local: most healthcare is delivered within an hour of home. Telemedicine and bundled procedures are chipping away at this, but only in limited segments of the market. Today very few metro areas in the U.S. have more than two major health systems. Competitors in duopolies soon learn to compete on the basis of everything except price. Payers compete statewide, and some compete nationally, so their business is inherently more fragmented.

Payers have always managed populations of patients, but the focus has changed. In the past payers’ most powerful population management technique was keeping high cost lives out of the book of business. The ACA largely prohibits this, so now the best population management strategy is reducing the cost of the highest cost lives.

This creates a need for new tools and technologies, and this is where entrepreneurs can play. They can become the arms merchants in the payer/provider wars. Here are examples:

• Retainer-based primary care providers are natural allies for payers. They reduce total healthcare cost (and discipline secondary and tertiary providers) by investing in preventive care, providing as much care as possible in low-cost primary care settings, and steering their customers through the healthcare system. Iora Health (a start-up) is an example.

• Virtual Medicine companies (MDLive, RubiconMD) provide effective, convenient, and much lower cost care in a significant percentage of cases; these companies are mostly entrepreneur-driven.

• A variety of entrepreneurial companies, e.g., GNSHealthcare, provide sophisticated analytical tools for population management.

• And, another group of entrepreneurial companies are developing next generation platforms and products that steer customers to healthier behaviors, e.g. Welltok. They work with both payers and large employers.

Payers are not going away; they are more important than ever. They have a huge challenge to become effective population managers, and to be a counterweight to the increasing local power of providers. Entrepreneurs can help and prosper by inventing and supplying the tools they need.

Notes:

  1. Data via Gary Alquist, head of the Strategy& healthcare practice, from his remarks at the March, 2015 World Healthcare Congress.
  2. NAV.VC, a venture capital fund in which I am a partner, has no financial interest in any of the companies mentioned in this post. It does invest in similar companies.