Creative collaborations are key for mid-sized payers | Viewpoint

To remain independent and relevant, mid-sized insurers must seek meaningful alliances with like-minded organizations, the authors suggest. (Image credit: ©Amazing Studio - stock.adobe.com)

Long-term success in any industry requires ongoing investment to progress customer-facing capabilities and internal operations.

Health insurance is no exception and – one could argue – due to often thin differences among competitors, is a side of the health care ecosystem where smart reinvestment can create the margin to win in the market. This is especially true for mid-sized insurers.

Because of resource constraints, small, local health insurers typically focus on a limited product portfolio with a narrow demographic and homogenous needs. Since success is often based on regional relationships, capability investment is less of a factor.

On the other end of the spectrum, large national payers have an extensive reach and resources to match. Their target audiences are broad both for membership and for healthcare delivery partners. They compete and invest to leverage their scale: spreading the cost of new capabilities over millions of premium-paying members.

In between the two are mid-sized insurers. Carrying several million members, they exert a strong influence on their markets and are often the dominant plan locally. They have a degree of scale and possess resources, yet those are limited and require trade-offs in making investments to improve their competitive positioning.

For larger payers, their size and M&A coffers enable them to acquire companies who have developed leading edge technology, patient engagement tools, and health management solutions. That advantage positions them as market-makers.

The depth of their resources also allows them to monitor the landscape for acquisitions of other insurers, opportunistically growing their footprint. M&A activity among the largest U.S.-based health insurers in recent years demonstrates this aggressive pursuit of competencies and expansion. Tens of billions of dollars are spent annually spanning hundreds of deals, demonstrating large insurers’ commitment to consolidation.

Recent examples of insurer M&A acquisitions include CVS (Oak Street Health for $10.6 billion), UnitedHealthcare ($13 billion bid for Change Healthcare), Centene ($2.2 billion for Magellan Health), Anthem (acquiring BCBS Louisiana for $1.5-$5 billion), and Humana (Kindred at Home for $8.1 billion). It’s noteworthy that non-traditional entrants in the healthcare space (Amazon, Google, Apple, et al.) are equally ambitious, well-funded, and do not bring with them the encumbrances of years acting as a health insurer. Nonetheless, the rich stay rich, which creates risk for those who are not.

While smaller insurers present a less interesting prize for large payers, mid-sized health insurers find themselves in a precarious position. They’re large enough – and meaningful enough in their market – to attract the attention of large payers. Mid-sized payers have sufficient size and diversity of their customer base to need scale to remain profitable.

Yet investments in back office capabilities or those to advance their market position are costly and time consuming to build and even more expensive to acquire. Their size (typically in the $10B to $20B revenue range) provides capital for reinvestment, but it is orders of magnitude less than their larger competitors possess.

Additionally, M&A has not traditionally been a skill these payers own, making them inexperienced at curating a meaningful M&A pipeline, much less effectively executing on an opportunity when it arises. Strategic partnerships provide an option to outright acquisition, avoiding the capital investment and accelerating access to meaningful capabilities. But the risk of national competitors acquiring a partner looms; either positioning a mid-sized plan to pay the competition for the means to compete or leaving them out in the cold and competitively disadvantaged again.

Over time, the risks and ways to mitigate them are unsustainable for these payers to solve on their own, while the big get bigger. Larger insurers willing to be patient can capitalize on mid-sized insurers’ slow retreat from competitive to antiquated. The resulting inability of mid-sized payers to maintain market share eventually positions their larger competitors to overtake their market position.

Why should this matter to other parts of the healthcare industry? Why should it matter to consumers? Consolidation and the lack of competition is never good for the consumer. For health care delivery systems, consolidation of payers or the absence of meaningful competition in the health insurance space lessens the negotiating power of those delivering the care. Fewer independent payers equates to market dominance by fewer insurers, who can drive contracting arrangements based on their agendas, and offer consumers fewer, more expensive plan choices. Nearly three-quarters of metropolitan statistical areas in the U.S. are dominated by large health insurers already, according to a recent analysis from the American Medical Association.

To remain independent and relevant, mid-sized insurers must be judicious in their capability investments. They must abandon a “we can do it all” attitude and seek meaningful alliances with like-minded organizations, including other mid-sized payers.

They lack the financial resources and luxury of time to move slowly, however. The urgency exists today for these insurers to embrace a more purposeful strategy of partnership and resource pooling to create consortiums that share capabilities to make each competitive in their own markets. They must also act with greater vigilance in how they operate, as their margins are already thin.

Making strategic investments alongside similarly motivated partners requires discipline and difficult decisions about operating near peak efficiency. This approach will create access to much-needed capabilities upon which they can compete without feeding their competitors, who will continue to acquire transformative competencies through their considerable M&A war chests.

Importantly, mid-sized health insurers cannot go it alone. Time is not on their side. The sooner they get creative with alliances and strategic partnerships, the better their odds of survival.

New strategies require fresh thinking to support achieving these new outcomes. Mid-sized payers are beginning to recognize that those who don’t pursue new approaches have a dire outlook.

Chris Peronto is senior consultant and engagement manager at Numerof & Associates, based in St. Louis, Missouri. Michael N. Abrams, is managing partner of Numerof & Associates.