From evolution to revolution: investors focus on benefits and health care

In highly regulated industries such as health care and financial services, the difference between evolutionary and revolutionary transformation usually boils down to the pace of change and the level of disruption that results. The shift towards a more patient-centric model for health care and employee benefits, while hardly new, comes at a pace and magnitude of change that makes the evolutionary feel like something bordering on the revolutionary.

Nearly two decades of developments have placed greater financial responsibility on patients, whose share of medical expenses is growing at a far greater rate than those of payers or employers. In response, providers and employers are adapting to meet patient demands for improved access, transparency, digitalization and cost effectiveness. The resulting patient empowerment, or “consumerization,” of health care and benefits puts the industry at a crossroads in many areas of financial technology and with other mainstay financial institutions. As these trends continue, investors are seeing greater opportunities to support innovation and growth at leading health care finance and employee benefits-related companies.

Greater costs, but greater choice

For decades, health care costs in the United States have increased at a faster rate than inflation. Patients are responsible for an ever-growing share of health care expenses due to the steady migration towards high-deductible plans, higher coinsurance amounts, and other structural shifts. With patients covering an increased share of medical costs, they face a broader set of considerations, not just around the availability and quality of care, but in how to plan, save and pay for health care costs and wellness needs.

Faced with greater financial responsibility, patients demand access to price and quality transparency tools to make smarter decisions, as even within provider networks, the quality and prices for the same procedure can vary greatly.

Related: 2021 outlook for health care industry: COVID, politics and telehealth

To address quality and cost of care concerns, a growing number of patients are taking advantage of tax-advantaged health spending accounts and technology tools to make more informed decisions on where to seek care. In particular, HSAs have attracted significant patient balances owing to their triple tax-advantaged status and the ability to accumulate balances and avoid use-it-or-lose-it tradeoffs inherent to accounts like FSAs. HSAs, FSAs and HRAs all present growing consumer-focused ways to pay for care, but as these and other consumer-directed health care benefits proliferate, it presents newfound challenges for employers.

Employers face a shifting paradigm

Employers represent an important stakeholder in the decisions and delivery of benefits in the private sector. Employers recognize the changing landscape and many are taking steps designed to improve the accessibility and quality of benefits while also trying to lower their own financial burden associated with rising health care costs.

In addition to consumer-directed benefits plans like HSAs, FSAs and HRAs, employers seek to provide a seamless, integrated delivery of other benefits lines, such as COBRA, commuter plans, childcare plans and wellness programs. While these plans carry innumerable benefits, they also introduce added complexity, as employers struggle to navigate the various options, vendors, technology, compliance and administrative needs that accompany multiple plans. Employers are turning to specialized technology and administrators to ease that burden. While large employers embrace unbundling of benefits programs as a way to capture maximum cost effectiveness and best of breed capabilities, many small to mid-sized employers are drawn towards the simplicity of one-stop solutions providers. Among the latter, many technology and administration providers are increasingly acquisitive, looking to build a more integrated, holistic suite of solutions and use increased scale to help support a steady need for technology investment.

Beyond expanded offerings, employers are also looking to control costs. For many companies, benefits costs represent the fastest growing expense on their P&L. For this reason, employers are increasingly looking at self-funded, level-funded and risk-based pricing models to help curb their own health care costs. As program offerings continue to evolve, employers are looking to both old and new sources of expertise to navigate these alternatives.

Evolving ecosystem and financial services intersection

Rising costs, regulatory changes, technological innovations and structural changes are reshaping the roles of key industry participants and have set the health care industry on a collision course with financial services. Historically focused on government and insurance payers, health care providers have been forced to pivot and adjust their revenue cycle management operations to accommodate a large and growing stream of payments from patients themselves.

While early efforts focused on redesigning billing and collections functions to handle a growing volume of consumer payments, next generation strategies have moved upstream. Integrated payments gateways, which often coexist along patient scheduling, estimation, preauthorization and physician communication systems, offer more holistic solutions, often through a complex web of vendors and APIs to interconnect payers, providers, administrators and financial intermediaries.

In addition to patient access payments solutions, health care providers are using other financial services to support patients, including the expanded use of patient lending programs, which help bridge the gap between personal and health care savings when large, unexpected medical expenses occur.

Further downstream in the value chain, the distribution space continues to evolve as well. While consultants, general agents and brokers continue to play pivotal roles in benefits program design and selection, the landscape is shifting. The COVID-19 pandemic accelerated industry digitalization trends that were a decade in the making, forcing enrollment and other key sales and service portals to a paperless, online delivery model.

While many administrators and technology platforms work closely with legacy brokerage and general agency functions, helping employers to wrap, deliver and administer traditional fully insured plans, there are disruptive models emerging, ranging from the B2B solutions focused on self-funded plans, to the tech-heavy direct-to-consumer models.

Growing investor interest in industry developments

As these trends develop, investors are finding opportunities suited to their own strategies, ranging from the evolutionary to the revolutionary. While industry complexity and regulation provide large hurdles for new entrants, health care, financial services and technology investors are adept at navigating these dynamics to find opportunities. Despite some overhang from past regulatory developments and policy uncertainty, the benefits and health care finance segments are attracting strong interest from public and private markets investors.

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Earlier stage investors, particularly venture capital investors, are drawn to the disruptive opportunities at hand. These include areas like health care and benefits technology, patient payment solutions and direct-to-consumer benefits distribution opportunities; areas ripe for disruption with large addressable markets. Meanwhile, private equity investors are drawn to investments in continuation themes and scale-driven strategies. These include areas like benefits distribution, self-funded program administration and consumer-directed benefits; areas that are well-suited to scale and those where the forces in motion are more evolutionary in nature. Finally, public investors have provided steady support for a variety of pureplay and integrated components of the value chain, providing yet another channel for capital investing in the space.

Between private and public markets, investors will continue to seek out opportunities in the benefits and health care finance space. As they do, the additional capital, innovation and efficiency they introduce will only further accelerate the industry’s pace of change.

Brad Armstrong is a partner in the Philadelphia office of Lovell Minnick Partners. He joined the firm in 2009. Evan Sameroff joined the Radnor office of LMP as a vice president in 2016.