Why investors are taking a hard look at the employer-sponsored insurance market

It's no secret that healthcare has been a hot market for investment for quite some time.

One area that's flying under the radar amid record investment in telehealth and virtual care: the employer-sponsored insurance market. Employers themselves were already taking a serious look at ways to shake up the status quo as healthcare costs rise, but the pandemic put a stark spotlight on the need for changes.

"One emerging area that investors are taking a notable interest in is the employer-sponsored insurance market, as employers themselves are taking a serious look at ways to shake up the status quo.

"These employers have been frustrated for the last decade or so, seeing costs of healthcare rising 5%, 6%, 7% per year," Rafael Cofiño, partner at Boston-based private equity firm Great Hill Partners, told Fierce Healthcare.

The demand for new models is especially felt among midsize employers—those with about 50 to 500 employees—that are often in fully insured plans and lack the scale and resources of their larger counterparts to drive significant change, he said.

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That's why Great Hill, for instance, backed Pareto Health, a platform that assists midsize employers in becoming self-funded. The goal for these companies is to achieve more efficient benefit management and cost savings.

Other companies in the employer plan space backed by Great Hill include Quantum Health, which offers care navigation and coordination services to midsize and large firms, as well as RxBenefits, a pharmacy benefit optimizer that works with small and midsize employers that are self-funded.

Cofiño said employers are really interested in rethinking traditional models to get more bang for their buck and ensure workers get the care the need at the best value.

"We think there is a trend in the employer world of taking ownership of their spend and finding ways to be much more effective with their money," he said. "Ultimately, they will speak with their pocketbooks, and they’re forcing traditional payers to rethink their world."

Another area investors are watching closely that could force payers to take a different tack is value-based care, as a number of startups see the opportunity to facilitate such arrangements, Mark Taber, managing partner at Great Hill, told Fierce Healthcare.

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Part of the challenge is that the industry is mired in old models and approaches and is used to taking to change at a glacial pace, he said. Companies that are drawing the most interest from payers and providers are able to fill gaps to speed up the process, such as enabling better interoperability.

And while these areas do offer opportunity, the slow pace can frustrate investors who are used to a speedier return, Taber said.

"I just don’t think you can compare them necessary to the growth rates of, say, a new app on the technology side," he said.

Cofiño said COVID-19 has also made value-based care an even greater imperative for survival, particularly for providers who were financially slammed by sudden drops in care utilization amid the pandemic.

He said that seeing the worst that could happen in a fee-for-service environment will likely convince otherwise hesitant providers to find ways to engage in value-based care.

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"Providers who don’t embrace this likely won’t be in business very long and we think that’s an important trend," he said.

Another trend in this area, he said, is the fact that the pandemic-driven telehealth boom will necessitate long-term adjustments to payment strategies that have yet to fully shake out. Insurers will have to weigh whether the return on investment in paying for virtual care at a similar rate to in-person care will be worth it.

"Once you get out of this pandemic, those models are going to have to settle out," he said.