Employers are driving change for insurance coverage

We are living in a unique moment, driven by a confluence of macroeconomic factors. Specialty drug prices and hospital prices are increasing at the same time, creating unprecedented cost increases. According to the Business Group on Health, an organization that represents employers, healthcare costs are projected to rise a median of 9% in 2026, this will be the second year in a row where costs will drastically outpace projections. The organization’s CEO Ellen Kelsay told the media recently that trends are more “daunting and sobering than they have ever been.” 

What’s driving these price surges? Health policy experts and economists tell me that health systems have more negotiating leverage coming out of the pandemic, and contracts tend to be in three to five year cycles (many are now coming up). There’s also increasing consolidation amongst these systems, which tends to drive prices up. Meanwhile, specialty drug prices are also going up significantly, general inflation is continuing to rise, and we’re feeling the impact of needed care that was delayed or avoided altogether during the pandemic. 

Employers subsidize healthcare coverage for 70% of Americans, and experts say they are both feeling the strain and actively trying to do something about it. “That level of cost just can’t be absorbed,” said Christopher Whaley, an associate professor in the Department of Health Services, Policy and Practice at Brown University’s School of Public Health. “And it’s leading to drastic changes.” 

Whaley’s academic research has explored how “perfect storm” moments, like the one we’re in today, have led to practical, creative solutions. And he thinks we’ll see more of them. One example is reference-based pricing, which got its start in Europe but was brought to the U.S. when CalPERS had its own financial crisis. It was later implemented in the employer market, and we’ll discuss that more throughout the piece. 

There will inevitably be some winners and some losers as employers evolve their strategies. Here are some of the key predictions I heard across vendors, employers, brokers and other experts: 

The original idea behind reference-based pricing is that payers can set a maximum reimbursable amount for a procedure, like a hip or knee replacement. That logic has now made its way into the commercial market. 

Reference-based pricing makes sense in situations where the care is shoppable and patients have all the information they need on quality, and they must have access to providers that tick the right boxes. In an employer context today, it has some overlaps but with a few twists. Health plans reimburse at a fixed benchmark, usually Medicare rates or published facility costs, plus a modest margin. Unlike traditional PPO - where payers and providers negotiate rates - reference-based pricing standardizes payments. That can lead to millions in savings for large employers. But it has downsides too, which have stymied adoption: potential billing issues, and a perception (or reality) of network disruption, amongst them. 

But that all may be changing.  “I’ve shown how it (reference-based pricing) was successful, and I think today we’re in a similar moment,” said Whaley. 

Heavily linked to making reference-based pricing work in practice is the notion of a narrower, more curated network. 

“I think that many employers including my own are consolidating...insurance offerings, and go with a [narrower] network,” said Jeff Bak, CEO of Imagine360, which works with self-funded employers on customized health plans. 

In the past, that’s been challenging as a subset of employees will want more choice. 

“The issue with employers is this: If you and I worked at the same firm, we’d both want a narrow network [if it meant lower premiums.] I’d want [my preferred facility], and you’d want [your preferred facility]. And the employer [then] chooses you or me.” 

In this scenario, many employees would complain, leading to employers moving ahead with broad networks - and then as a result, everyone has to pay more. We’re in a moment, now, however where the rubber may finally be hitting the road. Employees are starting to understand that they’re paying so much for healthcare that they’re not seeing salary increases year after year, and so it may not be worth it for the benefit of more choice. This is the right moment for employers to make a rational argument for the benefits of a narrower network.

What that means in practice is that employers will select a single system that has distinguished itself, and find ways to drive companies to the best providers there that keep costs down and quality high. Companies that help employers discern those providers (Garner, Surist and Embold) and navigate employees there will do well in this market, because there’s even immense variation even within the same health system. The key will be to communicate the benefits to this strategy and provide the right incentives to employees. 

I use the term “narrower” versus “narrow” deliberately. It may still be challenging for employers with workers in lots of states to truly build a narrow network because convenience still matters. But if there’s pockets with large distributions of employees, then there’s an opportunity to build a relationship with a local system. So it may be multiple systems in multiple geographies, plus some flexibility baked in for smaller satellite offices. 

After creating a narrower network, employers could also incentivize employees by removing steps that create friction like prior authorization and deductibles. That wouldn’t be necessary in situations where employers know that the provider have been curated on the basis of affordability and quality. “The PPO network model has been presented as a buffet of healthcare services,” said Sach Jain, CEO of Carrum. “But it’s a fallacy of options.”

Let’s take the example of GLP-1s. Some employers might cover these medications for people who want to lose weight but don’t have diabetes. But many will not. Employers who are reeling from the spiraling costs of these drugs might argue that people should use their HSA dollars for them if it’s for weight loss alone and purchase the drugs directly through the pharma manufacturer or through any number of alternative options. 

And that’s just one example where we might expect to see employers drawing a line in the sand around coverage, even if it means some employees reach out. Because of inflation, employers are also less likely to offer coverage simply because another, similar company is doing it, said Imagine 360’s Bak. “In our purview, we are seeing a lot more about how much coverage we can secure for less. So that we’re offering fair and reasonable amounts of protection — without having a vanity item. Keeping up with the Joneses is unaffordable.”

What will be important to watch is what health and wellness-related perks employers deem to be vanity items, versus those that are associated with prevention. And there’s complexity involved even with the example cited above, related to GLP-1s. Many obesity medicine doctors have told me that the drugs can bring down a patient’s blood sugar so that they’re no longer diabetic. But if taken off too quickly, they can flip-flop into having blood sugars in the diabetic ranges. So there’s a blurry line between taking the medication for weight management, versus diabetes that brings into question issues of cost, medical appropriateness, and more. 

But when employers cover these drugs, other employees who never use them still share the cost. So those hard decisions may be necessary, and even approved of by many employees if they’re properly communicated. “There’s millions of Americans who don’t have discretionary income,” said Bak. “And they’re getting hammered in paychecks with the contributions related to healthcare they’ll never use.” 

The key here, per Bak, is to protect out of network, out of area utilization using some type of reference point. It means anchoring reimbursement to a consistent benchmark, which reduces variation in healthcare costs. 

There’s huge variation in pricing between commercial and Medicare rates. It’s one of the quirks of the healthcare industry that there’s a massive amount of price variation. Employers are paying 2.5 times what Medicare would cover for the same service, per a report from RAND. An analysis from Patient Rights Advocate revealed that at the same hospital, a patient could be charged $650 for a cervical spine fusion, while another on a different plan could be charged more than $26,000 for the same procedure. Bak said that because of this variability, employers are citing annual healthcare increases of more than 30%. 

Employers are embracing reference-based pricing and closer relationships with health systems and providers that are providing lower-cost and higher-quality care. 

How reference-based pricing might work in a practical sense: 

Another strategy for cost containment is bundled payments for high-cost procedures, which is where companies like Lantern and Carrum come in. Navigation companies are increasingly guiding employers to these types of solutions, and more. “You see more employers more willing to take on drastic innovations in the spirit of cost savings,” said Steven Knight, COO of Quantum Health, which sits in the healthcare navigation space. 

One of the most exciting trends in the venture capital world right now involves the idea of an alternative health plan, which is fundamentally different from what we’ve seen before. One example is a company called Curative, which is offering $0 in-network visits and prescriptions and is doing that via its own card that employees can take with them. Firefly Health is another, which centers its health plan around the concept that primary care should be virtual – and therefore convenient and accessible. XO Health is building a value-based provider network. Reference-based pricing, as previously discussed, is another key trend targeting cost. 

Per Mercer, the needle is starting to move on these alternative medical plans with more employers finally starting to dig in. Still, there’s a substantial group that believe an option like this might be too disruptive still for their plan members. If costs continue to rise at this clip, though, they may face little choice. 

Single payer may be hard to imagine for most Americans, even as the current system is creating incredible amounts of waste. Yet amidst all this regulatory uncertainty, it’s hard to know what will happen over the coming years. It could be very plausible that the U.S. ends up with a system where the most basic healthcare needs are covered free of charge for everyone, and then a highly competitive private market sits on top of that. If I had to guess, that’s where I personally think the system will go - but the reality is that no one really knows. 

Disrupting the traditional PBM space has been a very challenging feat - until very recently. The big three PBMs have historically had a very huge hold on the industry, but there are some signs of change in the ether. I’m hearing that companies like Capital Rx, which offer more transparent PBM offerings, are starting to break through - even with jumbo employers. 

“Employers are wading carefully because it’s such a complex supply chain - but I’m seeing more openness and employers seeking to learn a lot more,” said Knight from Quantum. Specialty drug costs are “a top three issue right now.” 

The solution to all problems. Enough said. I could probably have said little more as the healthcare industry does view AI as the panacea. And yet, there is enormous opportunity, particularly in primary care where there are massive shortages of providers. We’re seeing PCPs managing enormous panels, and many are getting burnt out and moving into concierge care. 

So, AI may be inevitable as a solution to that problem – and therefore, a source of potential cost savings for employers if it can be leveraged as the “quarterback” (to draw upon an American sports analogy) for care, and making referrals to high-cost specialists only where appropriate. 

It may now be a moment for ICHRA as more employers start to wonder why they even got saddled with healthcare in the first place. The option exists through ICHRA, which stands for Individual Coverage Health Reimbursement Arrangements, to offer employees a tax-free monthly allowance to purchase health coverage. It’s still early days, and there’s some unknowns, including how many members are even enrolled in ICHRA. 

But Whaley and other experts are watching it closely to see if there’s momentum. Employer-focused organizations like the Business Group on Health are skeptical that jumbo employers will jump on board, but there may be a very clear near-term path with small-to-medium sized businesses, as well as those who currently don’t offer any insurance coverage to their employees at all. Startups are also joining in—and the beauty is, they can grow into much bigger players.

“If we do not see a reduction in the inflation rates on price of services, some [jumbo] employers may elect to go in that direction, but for now our employers are still trying to solve the problem with existing tools and solutions,” said Knight. 

Ultimately, it’s my belief that all of these trends are well situated at a time when costs are out of control. And investors agree, judging by how many are currently developing theses around alternative health plans. Healthcare rarely advances because a new solution is more rational; it tends to happen only in times of crisis. And for better or for worse, we’re definitely there - and I’m not seeing any signs that costs will slow down if employers don’t make some radical (versus incremental) changes. Passing through costs to the employee isn’t a long-term solution. 

“Employers are going to have to pull as many levers as they can on the vendor side to address the overall plan costs and certainly within that is the affordability for employees,” Kelsay from Business Group on Health recently said.