Are CHROs hiding a generational opportunity from the CFOs?

US healthcare saw a significant shift in 2020 when enrollment in self-insured employer plans overtook enrollment in fully insured commercial health plans (see Exhibit 1). Consequently, self-insured enrollment is now the largest and fastest-growing segment of the health insurance market. For the first time, this dynamic allows for significant transformation in US healthcare by employers addressing their employees’ health and care needs to drive higher productivity sans national politics. It sets the stage for a new services market worth an estimated $600 billion.

Self-insured employers are missing a trick

Self-insured employers underwrite their employees’ medical risk and typically outsource the administration and delivery of healthcare benefits to health insurers or third-party administrators. While employers can select a set of healthcare benefit choices based on their understanding of employee needs, enterprise financials, and culture, they have very limited control over their employee’s health and care delivery.

Chief human resource officers (CHROs) and benefits leaders at self-insured employers are fairly risk-averse to making changes to employee benefits, given such changes can impact employee morale, attrition, and market perceptions. Consequently, there is a bias toward using the same tried-and-tested approach of procuring employee benefits despite continued increases in costs year over year without yielding improvements to employee experiences or better health outcomes.

Chief financial officers (CFOs) see healthcare as a cost and are constantly trying to manage it financially in the context of current buying behaviors. CFOs are not educated about other possibilities to address their employees’ health and care needs, and given the risk aversion that CHROs maintain, there is a limited collaboration or thinking outside the box. The status quo remains.

Exhibit 1: Self-insured employers are the biggest underwriters of medical risk in the US

Data: CMS, US Dept of Labor, CBO, Kaiser Family Foundation
Source: HFS Research, 2022

Healthcare means costs, but productivity translates to revenues

Employers spend between 20% and 30% of employee salaries on employee benefits that could include healthcare, life insurance, retirement, family care, disability insurance, and more. A recent HFS Research study found that more than 50% of employers have up to 17 line-item benefits, and another 25% plan to expand their employee benefits over the next two years.

Employers are not known to track the efficacy or utilization of benefits in any meaningful manner and don’t fully understand the value of the benefits. There is a sense that the longer the list of benefits, the better the attraction to employees. Despite the healthy selection of benefits, there is no evidence to suggest employees are healthier, happier, or more productive. Consequently, capital deployment is likely ineffective, and CFOs must push CHROs to rethink how they invest in employee well-being.

HFS Research has been digging into potential opportunities employers must consider addressing their employees’ evolving needs, deploy capital effectively, and position themselves for business growth. We see the five archetypes in Exhibit 2 forming with the potential to meet the needs of different employers. Risk-averse employers won’t change their approach and will subscribe to the “Aggregator” archetype, which maintains the status quo. Progressive employers will likely explore shifting their paradigm from reactive healthcare to productivity that can be met by the “Innovator” and “Disruptor” archetypes. Some employers will likely craft direct-to-provider contracts using the “Facilitator” archetype. So, irrespective of where employers are in their journey, there is an archetype to address their needs.

Exhibit 2: The potential for transformation is through five archetypes

Source: HFS Research, 2022

Service providers must leverage their years of experience to address the self-insured market

Service providers have been addressing the health insurance market for the past two to three decades, evolving from manual to digital providers and increasing the sophistication of their offerings from back-office transactions to clinical analytics and care management. Along the way, most of them developed deep domain knowledge, attracted industry expert talent, and built comprehensive portfolios of technology solutions and services. They can now point this incredible asset base to a growth market and reduce the risk associated with the declining commercial insurance market (see Exhibit 3).

However, service providers face three self-created hurdles that appear to drive a lack of motivation for targeting the self-insured employer market:

• Challenges to address: Service providers have not invested time and effort in exploring the self-insured market resulting in a lack of clarity about the problems they can address.
• Constraint of verticalization: To address the self-insured employers, service providers must create a healthcare domain-driven horizontal organization to address employers in multiple industries. That reorganization requires better education about the employer market, commitment at the highest levels, and investments to refactor solutions.
• Unsustainable growth: A dead cat bounce in the health insurance market shows near-term growth as commercial health plans aggressively manage costs through increased outsourcing as enrollments decline. Most service providers are afflicted by the mirage of post-pandemic growth and losing sight of the longer term.

Service providers could look internally to solve these three challenges. Most service providers are self-insured employers with a substantial count of employees in the US. This captive audience base could be the perfect vehicle to test alignment with one of the five archetypes. Service providers could be client zero to better frame employees’ health and healthcare needs, pilot solutions internally, and refine a portfolio to launch externally to self-insured employers.

Exhibit 3: Service providers must maintain a vertical orientation while pivoting horizontally to address the self-insured employer market

Source: HFS Research, 2022

The Bottom Line: CFOs must push for a paradigm shift to productivity in collaboration with CHROs to optimize capital deployment, improve employee well-being, and lead the next generation of health and care management.

Maintaining the status quo is detrimental to the competitiveness of self-insured employers. Employees’ health is fundamental to talent management and a critical driver of productivity and market differentiation. CHROs must be bold to partner with CFOs to lead the transformation to address the next generation’s health and care needs of their employees.