Rae Woods (00:22):
From Advisory Board, we are bringing you a radio advisory, your weekly download on how to untangle healthcare's most pressing challenges. My name is Rachel Woods. You can call me Rae. Look, there's always been a lot of conversation about what the tipping point will be when employers start to take more radical action around healthcare coverage. And it's true, we've been worried about this for a long time, but the numbers we're seeing today are unprecedented.

(00:50):
Pre-pandemic, employers could expect about a two to 4% increase in their health benefit costs per employee. And by the way, employers were quick to tell us that that cost growth was unsustainable. And then that rate doubled. Now, brokers estimate that 2026 will bring a whopping 9% increase in healthcare spending for employers. In other words, ballooning healthcare spend has become employer status quo, and that really isn't sustainable.

(01:21):
This matters. It matters to employers, who are increasingly willing to take big swings and try new experiments to lower costs. It matters to health plans, who have to prove their value to employer plan sponsors. It matters to providers, who are all competing to capture commercial volumes. And it probably matters to you if you're one of the 154 million people in the US covered by employer-sponsored insurance. Today, I've invited Advisory Board health plan expert, Sally Kim, to help break down what exactly is going on with employer-sponsored insurance, and what it means for the broader healthcare ecosystem. Sally, welcome back to Radio Advisory.

Sally Kim (02:02):
Thanks, Rae.

Rae Woods (02:02):
Back so soon because you told us in your last episode that actually Medicare Advantage isn't necessarily the only line of business to watch. We have to pay attention to what's happening in the employer-sponsored insurance side.

Sally Kim (02:23):
Yes, for sure.

Rae Woods (02:24):
Cost growth is going up, and it's not the steady, predictable, kind of single-digit increases in cost anymore. My question is, why? What's the source of that spike?

Sally Kim (02:37):
It's a mix of quite a few things. Maybe call it the perfect storm. The big one is drug spend and the other big one I would say is increased utilization. Probably everyone is feeling that. Talked about it in the senior population, but it is still true in the working population as well as the younger folks get sicker. And then the last one is because of a lot of financial pressures that providers, hospitals, and health systems have been dealing with, we are seeing increased provider rates negotiation. So that is also increasing rates for employers.

Rae Woods (03:16):
Forgive me for immediately playing the naysayer here. I agree with everything that you're saying, but when I think about the employer perspective specifically, they've been saying for years, maybe even more than a decade, that their rising healthcare costs are unsustainable. And the expectation for the industry is that that employer frustration would push them to take a more active role in managing spend. I'm not sure that they actually have, at least not for the majority of employers. So I know the numbers are big, but why should we pay attention to what employers are doing today to manage costs? Are we actually getting action or just more talk?

Sally Kim (03:57):
A few years ago, we kept hearing, "This is unsustainable. This is unsustainable." So we looked into, what does that actually mean? And I don't think it is that employers will suddenly say, "We're not going to cover health insurance for our employees." That's just so ingrained into how the American healthcare system works. Although, we actually are seeing some smaller employers, so less than 50 lives, go that route. So of course, it's not status quo yet, but the fact that we're even seeing that is pretty alarming. I think that means this won't be a cliff, but we're already reaching that tipping point.

Rae Woods (04:35):
So you're saying we're already seeing action and we're perhaps seeing action from a more unexpected place within the employer industry, the smaller employers.

Sally Kim (04:43):
Oh, no, I expect it from there actually, because the large employers, they need to retain staff, whereas smaller employers tend to be working with a smaller budget pool, so it could actually make or break their finances at the end of the year by covering health insurance or not.

Rae Woods (05:00):
Let's talk about what's changed in the market more broadly. And here I'm actually talking about the power dynamic between the employer and the employee, which is what you were starting to get at. What's shifted there?

Sally Kim (05:13):
Oh, yeah. So again, when we were looking at this even a couple of years ago, it was very much an employee's market. So employers were scared to do anything, especially if it would decrease the employee's experience. And people cared so much about their healthcare coverage because of COVID.

Rae Woods (05:31):
And so that's a reason why there was talk and not action, because even though employers maybe wanted to take bigger swings to try to manage cost, they really couldn't do it because the power really resided with the employee.

Sally Kim (05:44):
And while that's still true in pockets, this year is feeling more, to me at least, like an employer's year. I mean, you've seen the layoffs, you've seen the stalling and hiring. I think employers are now more worried about cost containment than even the potential disruption and potential loss of employees by changing up their healthcare benefits.

Rae Woods (06:09):
And they're willing to take those swings if it actually leads to cost savings. Being willing to give up a little bit of employee and member satisfaction in the name of curbing spend, that action surely has ripple effects. What does it mean for plans and providers if employers really start to get more aggressive about cost control?

Sally Kim (06:30):
Well, for plans, they want to meet these needs, because they want to keep their employer-sponsored insurance members. They tend to be higher margin members than other lines of business. And then similarly, I'm actually hearing it more from providers these days, saying that one of the solutions to their financial problems this year is going to be gaining more commercial lives. That's going to be easier said than done, since there's only so many commercial lives and it's actually plateaued, if not slightly decreasing year over year.

Rae Woods (07:03):
So providers might be interested in getting in the game here if they can position themselves as being the provider of choice for being a low-cost, high-quality option that meets the needs that employers have. Plans sort of are shuttled along and have to go with this so that they can meet their partners where they are. But it's still unclear, I think, how much employers are going to do. Is there a way for these plans, these providers, frankly, for our listeners, to actually understand what options employers may be actively considering?

Sally Kim (07:39):
That was a question I was asking myself. And I love a good menu, so I did create one. It's hard because everything interrelates and you don't just pick one strategy, but in my mind it buckets out into four main categories. The first bucket is member-facing strategies and plan design. And the second, between the employer and the plan, how they are contracting the different funding options. The third is network strategy. So between the employer and the provider or the plan and the provider, how they're contracting. And then the last one is focusing on specific high-cost conditions that [inaudible 00:08:22] on extra investment in.

Rae Woods (08:25):
Okay. That's a lot, but I appreciate that you're trying to give us a framework of figuring out what sounds like a wide range of options that employers could take. So let's maybe dig into them. And I want to start with the member-facing strategies. My brain immediately jumps to what was popular 10 years ago, which was the high-deductible health plan. I have to imagine that the running room there is pretty limited, if there's anything left at all.

Sally Kim (08:53):
Actually, throughout the 2020s, we were seeing HDHP utilization plateau. So we thought, oh, okay, everyone who wants an HDHP is already on one.

Rae Woods (09:03):
Yeah. You've got a high-deductible health plan already.

Sally Kim (09:06):
Yeah. Interestingly, this past year, we did see a five percentage point jump in HDHP uptake, which is a spike relative to the plateauing that we've seen. And it really is a testament to how much Americans are struggling financially these days.

Rae Woods (09:24):
That surprises me because I've long been of the mindset that there's really not more cost sharing that can even happen anymore and at least still call it a benefit, but it seems that there is still interest in accepting a higher deductible.

Sally Kim (09:38):
I don't know if it's interest or necessity, because they [inaudible 00:09:41] the term and decrease in premiums. To your point, yeah, the deductible is already higher than the average American can afford. So if you add another hundred or a thousand to that, it's not going to make that much of a change in their behavior.

Rae Woods (09:55):
But this is an old story. So is there any innovation happening in cost sharing or is it just swallow more of the costs? Have 10,000, $15,000, that's your out-of-pocket max for a family of four for a year.

Sally Kim (10:09):
Yeah. So I think adjusting cost sharing is just what every employer is going to be tweaking here and there, and that's inevitable. But where we're going to see the most innovation in product design over the next five years is going to be in managed navigation services. So those are anything that help patients get to the care that they need, when they need it, at a site that they need it at. And the most innovative example that we hear these days are variable copay plans. There's not that much innovation in the employer-sponsored insurance space, to be quite frank with you, so this is the new idea that I think everyone is very excited about.

Rae Woods (10:52):
There's definitely a lot of excitement on the employer side and the plan side when it comes to variable copay plan. It's not forced upon the member, which is why employers like it. Because technically, the employee can choose whatever option they want. It's just that one is going to cost more, one is going to cost less based on how the plan and the employer have defined cost and quality. Do I have that right?

Sally Kim (11:14):
Yeah. I mean, some would even argue that members or patients don't even want choice necessarily. They just want the easiest route for them to be the one that they want.

Rae Woods (11:26):
So more of this navigation feels like a compromise. It's not a blunt instrument like a narrow network. It still gives employees, members, patients some financial skin in the game, but it's not this blunt tool like high-deductible health plan, it's done at the service level. So the patient, the member can choose how much they want to spend for an individual appointment and individual need. Is there anything else that fits in this middle ground?

Sally Kim (11:53):
Oh, yeah. So I would add digital navigation tools in here, centers of excellence, advance primary care. And the theme that you'll see through all of these and probably all of the strategies that we talk about for employers, is they always have to be some sort of compromise between patient experience or employee experience and cost containment, because you never know when it's going to flip back to an employee's market.

Rae Woods (13:28):
You just threw out a couple of different strategies within this bucket. We talked about the variable copay plan, but you added advance primary care, centers of excellence, maybe I'll throw in near-site or onsite clinics. These are terms that might or should feel familiar to our listeners, because I would call these experiments that we at least heard employers being willing to adopt over the last decade. How common are these tools today and do we actually have evidence that they're curbing spend? So differently, is there actual real uptake here because employers are finding that the disruption it's causing is worth doing because it's curbing spend?

Sally Kim (14:06):
Yeah, it's interesting because it's different for each one of these. So variable copay plans, because they're still relatively new, it's about 7% of employers have taken them up, another 20% are interested in them. Things like centers of excellence programs, they've been here for decades. So they're pretty commonplace, at least for specific conditions. I think things like advance primary care and near-site and onsite clinics, there's a lot of interest from the employer side, it's just a matter of how fast we can supply them, because it requires providers who want to participate to actually create those. And then navigation services, especially digital ones, those are pretty much table stakes at this point. 60% of employers already have those. And they're now even considering concierge and advocacy, which is the next level up the gap in between digital navigation and full-on care management.

Rae Woods (15:04):
And the reality here is some of these tools that employers and plans are excited by, because there is early evidence that they can do what they intend to do, which is to bring down costs, can sometimes be the scary option for providers. When I talk to providers about variable copay plans, their first comment is, "Wait, what? Where did the plan get these numbers? Why am I rated red? Why am I on the bottom of the list?" That's an example of a ripple effect that's going to impact another part of the ecosystem, even if it's something that protects or supports the needs of the purchaser, in this case, the employer or the plan.

Sally Kim (15:41):
Yeah. I think there's still a lot that needs to be done between plan provider data sharing, especially around quality, because ideally, these rankings of providers should not be done based off unit cost alone, it should bake in quality measures as well as total cost of care management. But of course, it's always a tricky conversation to have between plans and providers.

Rae Woods (16:06):
And I know you said that each of these examples are really different from one another, but allow me to try to connect them. It seems to me that employers are interested in these kinds of cost containment strategies that actually rely on competition among providers to be able to drive down costs. So variable copay plan is a great example of this. Variable copay plans only really work if there's choice and competition within a market so that there can be different prices. In my conversations with health system leaders though, the strategy that I'm getting more questions about is much more blunt. It's much more about having direct contracting between providers and employers, where the provider is leaning in rather than being on the backend of what the purchasers decide. Where does the employer preference it? Are they more interested in the competition route or in exclusivity?

Sally Kim (16:59):
Oh, let's go there. That's exactly what I was talking about in that third bucket of network strategy. And how we're thinking about that is employers want plans and providers to contract better. And what I mean by that is they're considering solutions such as high performance networks or tiered networks. They're also considering value-based care arrangements. And then they're even thinking about direct contracting with providers, whether it's direct to employer or even direct primary care I see listed as a potential strategy for cost management.

Rae Woods (17:35):
And let's just name why providers like that one, where they didn't like the variable copay plan. Again, you mentioned, Sally, that providers are trying to capture more commercial volumes and commercial revenue to protect their margin. Direct contracting would allow them to do that in a way that's very different than a variable copay plan, where they still have to win that consumer choice.

Sally Kim (17:56):
Yeah. I mean, I can see the case for why there's increased interest in direct contracting now from the provider side. I think it will be easier said than done, and that's probably why there are vendors popping up to try and help. I do ask myself at that point, what is the difference between some of these vendors and having a traditional third-party administrator in between? So we're placing middlemen at this point, but there is interest and uptake. And some pretty impressive success stories up in Indiana and also from Bellin Health about how they've set up hundreds of direct-to-employer contracts at this point.

Rae Woods (18:32):
How do plans feel about the direct contracting exclusivity approach?

Sally Kim (18:36):
Oh, they hated it. So just like how providers might not like narrow networks or variable copay plans, it's the same thing in reverse.

Rae Woods (18:44):
Which is super interesting, because it seems to me that maybe employers hold the power. And whatever path they go down, whichever choice on this menu they decide to be their cost containment strategy for 2026, is either going to have more of a direct impact on providers or a direct impact on plans. And it just depends on what the employer decides to do.

Sally Kim (19:07):
Yeah. And that's why we looked at this menu from the employer's perspective rather than the client's perspective, because that would cut out a whole bucket of strategies that employers are considering. And Rae, to your point about employers holding the power, that is increasingly true because more and more employers are becoming self-funded. So at that point, the employer is the purchaser and the plan is more that third-party administrator.

Rae Woods (19:33):
What's an example of that?

Sally Kim (19:35):
Actually, that's a perfect example of another bucket of employer strategies, because that is one of the funding options that employers consider when contracting with plans.

Rae Woods (19:47):
So what should we be paying attention to when it comes to more of this contracting with plans?

Sally Kim (19:53):
Right now, there's another spectrum in this category where lives are moving from fully funded into these alternative funding options. Some examples are level funding, self-funding, ICRAs, even group captives. And as you go further down closer to self-funding, the employer has more of that control because they are on the hook for any healthcare costs.

Rae Woods (20:24):
You just mentioned a term that immediately perked my ears, which is the ICRA. We've talked about this in the past on Radio Advisory, how some employers are turning to the individual market. And this could represent a pretty big shift in how employers just think about providing benefits, from a world where employers offer a defined benefit to instead a defined contribution. Here's a pot of money, go buy whatever health plan you want on the exchanges. Here's my actual question though, how is the instability of the Affordable Care Act, that is newer in 2026, as those enhanced subsidies expired at the end of last year, going to influence ICRA adoption moving forward?

Sally Kim (21:06):
Yeah, that is definitely the hot question of the moment. Because of the end of the enhanced subsidies, we have seen premiums increase in a lot of states, and that is going to impact the ICRA market. Because the number one driver of if ICRAs will take off in a market or not, are if the individual rates in that market are lower than the group rates in that market. I will caveat that because folks on ICRAs aren't eligible for enhanced subsidies anyways, it's not so much the subsidies that are making the difference, but the increase in premiums that that's leading to.

Rae Woods (21:44):
So peer into your crystal ball for me, do you think ICRAs are going to grow?

Sally Kim (21:48):
I think they're going to grow, especially because of the funding options that I listed. They actually are a high-growth option. The big caveat is it's still of a very small population. So a small number increase of a small population ends up being a high percentage increase. There are some plans that are going all in, like Centene and Oscar, but I don't think that this is going to become the norma anytime soon.

Rae Woods (22:14):
I hope that ICRA is a familiar term for our listeners, at least because we have talked about it before on Radio Advisory. I'm not sure that level funding is. What does that approach entail?

Sally Kim (22:25):
Yeah, so I would think of that almost like being in a value-based care arrangement, but with only upside risk. So the employer does take on a little bit more risk, but they are promised returns at the end of the year if their healthcare costs stay under what they were anticipated to be. So for the employer, you kind of get your cake and eat it too, because you can take on more risk and go closer to self-funding. But for risk averse employers, at the end of the day, you're not actually taking on any downside risk.

Rae Woods (23:02):
So it sounds more like a win-win. How common is this approach?

Sally Kim (23:07):
Yeah. So actually last year, 37% of covered workers at firms under 200 lives were in a level-funded plan already.

Rae Woods (23:15):
Wow. So we've talked about member-facing strategies, we've talked about more of the provider-facing world and more of the plan-facing world. You gave another option on the menu that I'm not sure fits neatly into any of those buckets, which is more about approaches to managing high cost conditions, because we know utilization and acuity are both up. What's new here?

Sally Kim (23:41):
Yeah. I feel like the first three sections, we talked more about the finances for employers, but this last one is really about their clinical needs. And it's a little different than a typical other line of business population. So for employers, especially this year, but really every year, they're focused on cancer care management, family planning and fertility benefits, weight management, and behavioral health. So the providers who can provide wraparound services in those conditions especially, are going to be the ones that employers want to partner with more.

Rae Woods (24:20):
Here's the biggest thing that I'm taking away from this conversation. If you are listening and you represent a plan or you represent a provider, you have to understand the types of actions that employers can take, because there is a big menu of options and those are going to affect either the plan or the provider, depending on which path they go down. Here's my question, how do you recommend plans and providers prepare for these potential moves knowing that employers are going to take different actions and different paths?

Sally Kim (24:54):
Yeah. It's slightly different for the plan versus the provider. So I'll start with plans. I would look at this list of potential strategies employers across the country are considering, and ask yourself, which of these don't I already offer and why? And if the reason is my market isn't ready for that, that's very fair, because we're seeing them in different pockets across the country. But that has to be constantly reassessed every year, if not every quarter. And then I would also think as a plan, which of these are threats for me and which of these are gaps that I need to fill? And then the last thing would be, if I offer something that's not on this list of options that employers are considering, then that means you're being innovative and you should be getting credit for that.

Rae Woods (25:42):
What about the provider perspective?

Sally Kim (25:44):
Yeah. So for providers, I mean, if you want more commercial lives, I think this podcast shows you that it's not easy, right? Employers are constantly wanting both cost containment as well as a good patient experience. So look at this long list of things employers want, pick a few that you are already excelling at, and invest further into those and make sure employers know that you're doing those well. Don't try to do all of this at once.

Rae Woods (26:13):
There's clearly so much happening here. It's not obvious who the winners and the losers are going to be, which is why we appreciate this detailed menu so much, Sally. Can we add some resources to the show notes to help our listeners?

Sally Kim (26:27):
Yes. I'm a visual learner, so I think once y'all see these slides, this will come to life even more.

Rae Woods (26:33):
Perfect. Sally, thanks so much for coming on Radio Advisory.

Sally Kim (26:36):
Thanks for having me.

Rae Woods (26:41):
Here's the biggest thing that I heard in this conversation. Employers have more power, perhaps more power than they have in the last decade. That's not only important for how members, employees, patients are going to move through the system, it's also important because as employers wield that power, it's going to affect providers and plans differently. So if you represent an incumbent organization, it's time to pay attention to what employers are doing. It's not just talk anymore, they're taking action. But remember, we are always here to help.

(27:46):
New episodes drop every Tuesday. If you like Radio Advisory, please share it with your networks. Subscribe wherever you get your podcasts and leave a rating and a review. Radio Advisory is a production of Advisory Board. This episode was produced by me, Rae Woods, as well as Abby Burns, Chloe Bakst, and Atticus Raasch. The episode was edited by Katy Anderson, with technical support provided by Dan Tayag, Chris Phelps, and Joe Shrum. Additional support was provided by Leanne Elston and Erin Collins. Special thanks to Aaron Hill. We'll see you next week.