The employer strikes back: The hollowing of the commercial health insurance market and its impact on payers and providers 

Today, the commercial group health insurance market is hollowing out, primarily driven by affordability pressures that have been building for decades. 

Employers, unions, associations and other entities provided health insurance to nearly 180 million Americans in 2022, or 55% of the population, according to the U.S. Census Bureau, making commercial group health insurance a mainstay of American life that touches most people at some point or another. This coverage is highly subsidized, first by taxpayers in exempting employer contributions from tax, and then by employers themselves, who pay over 70% of premiums for their employees’ health insurance on an average.  

The commercial group health insurance market is important for both health plans/payers and providers. It is the largest segment for health plans, by lives. For healthcare providers, commercial group health insurance offers reimbursements that are significantly higher than those by government payers, thereby giving many providers the chance to stay whole as an enterprise even as they lose money on their government payer business. This cross-subsidization has been essential to the financial sustainability of many healthcare providers. 

The hollowing: different forms 

The strong U.S. economy and a general labor shortage have collectively served as a great buffer for payers and providers. But in recent conversations with employers and their advisors, we hear that employers’ ability to continue to invest in rising healthcare costs is fraying (one advisor described employers as approaching a “benefits cliff”) and that they are willing to consider healthcare cost management options they had not seriously considered in the past. Moreover, greater availability of provider and payer price transparency data and new fiduciary responsibilities for employers included in the Consolidated Appropriations Act of 2021 have driven greater scrutiny of the value employers are getting for their healthcare dollars. 

The hollowing of the commercial market is taking different forms, some of which are a continuation of longstanding trends, while others represent a new or sharp shift in employers’ approaches. Consider the following. 

Increased cost sharing. This is a longstanding trend where an employer increases the employee share of premium cost, deductibles, copays and coinsurance, effectively transferring growing healthcare cost responsibility to the employee — for example, the average deductible among covered workers who face a deductible for single coverage increased from $584 in 2006 to $1,763 in 2022  

Narrow networks (sometimes also referred to as curated or high-performing networks. As another ongoing trend, for a section of the market, narrow network plans are offered in exchange for lower unit costs and insurance premiums. As of 2020, 18% of employers offered narrow networks, according to the Willis Towers Watson Health Care Delivery Survey. 

Reference-based pricing (RBP). In this case, the plan/RBP vendor effectively caps the payment amount for a healthcare service regardless of the provider’s usual unit cost for the service. 

Stipends. In the case of stipends, an employer uses a relatively new mechanism like an individual contribution health reimbursement arrangement (ICHRA) to make tax-deductible contributions for employees to use for their healthcare. (Some employers encourage employees to use the contribution to buy health insurance on the exchange.) 

Dropping of coverage. This is the most direct example, where an employer stops offering health insurance coverage as a benefit. According to the Kaiser Family Foundation, the percentage of firms with three to 49 workers offering health insurance has been in long-term decline from 64% in 2002 to 47% in 2022. 

Impact on payers and providers 

Payers are feeling the direct impact of this hollowing. They are experiencing, for example: 

• A decline of traditional commercial market lives, leading to greater competitiveness for market share (We have heard “rock fight” and “knife fight” as descriptions of what it is like to grow share organically in the commercial health plan market these days.) 
• Greater urgency to innovate with the kind of products employers want (e.g., narrow networks, ICHRA offers, care navigation for members informed by provider price and quality transparency) 
• Greater urgency to drive affordability with providers, an impetus to value-based care (VBC) strategies 
• Increased emphasis on growth outside the payer space as a hedge or diversification strategy (e.g., getting into aspects of care delivery) 

While payers are feeling the direct impact of these trends, providers may have even more to lose, given how dependent many are on today’s relatively generous commercial market reimbursement rates. Implications include the following: 

• Loss of the most profitable volumes, given the cross subsidization explored in detail above (Even lives that move from the commercial group market to the individual/exchange market come back as care delivery volumes at typically lower reimbursement rates.) 
• Greater competition and associated rate concessions to be in-network as payers narrow network participation 
• More cash-price-seeking patients, because employees either forgo buying health insurance altogether or buy low-premium, high-deductible plans (The latter group of members act as if they are practically uninsured and expect to pay cash prices within the deductible limits, sometimes supported in this approach by price transparency apps.) 
• Greater need for a clear strategy to create and deliver value for the commercial employer market, including for patients/members (e.g., brand value in a narrow network environment) 
• Greater need to develop a more direct relationship with the employer community — to understand trends and engage in product concept testing, innovation and piloting (A direct relationship will also enable providers to communicate their value story, without letting payers and brokers control the narrative entirely.) 

While payers have been preparing for more than a decade in the wake of the Affordable Care Act to pivot their enterprise to growth in the government health plan segments, many providers are relatively behind in developing a new financial equation that allows them to continue to succeed in the face of growing government payers and declining commercial insurance. As such, they need to operate with even greater urgency in the face of the hollowing of the commercial market. 

What should payers and providers do? 

Three sets of actions are essential for both payers and providers to chart their paths forward considering these trends. 

1 Market assessment/sensing. Develop a point of view on the evolution of the local market through data collection and in-depth stakeholder engagement (across payers, providers, employers and brokers) to better understand employer perspectives and strategies to address unmet needs around affordability, access, quality and experience. Develop a wide range of scenarios for the evolution of the market (e.g., the base case may be for gradual market evolution, but an event could trigger a rapid decline in the commercial market in an alternative scenario). Establish market “sensing” mechanisms and dashboards to track leading indicators of change — and adjust strategies if needed.  

2 Financial impact assessment. Model the financial impact of the scenarios developed in the market assessment and use the insights to inform the nature and urgency of pursuing alternative strategies. 

3 Strategy development. Leverage the market and financial impact assessments to craft strategies. These efforts could include placing a greater emphasis on existing efforts like developing VBC strategies and capabilities, or on new efforts like building an employer engagement capability or providing additional care navigation and transparency to members in high-deductible plans. 

Conclusion 

Conclusion

The U.S. economy is strong and continues to surprise the world with its vitality and resilience. A strong economy and the ongoing labor shortage protect the healthcare industry from sharp shifts in employers’ stance towards providing health insurance. But right beneath the surface, healthcare cost-driven fault lines remain and are getting deeper as affordability concerns persist and grow. An economic recession could turn these fault lines to fracture. Payers and providers would be well-served to prepare for this potential eventuality.  

The author would like to thank Sarah Wiley, John Poziemski, Scott Christensen, Webster Macomber and Haydn Bush for their insights, research and comments.