Health systems and health plans are used to warily eyeing each other from opposite sides of the negotiating table as foes to be conquered, and not potential allies. But as competition heats up, and costs march ever-faster toward the stratosphere, many providers and insurers have come to the realization that working together may be the only way forward in a healthcare industry veering toward full-on crisis.

The existential challenges of the current industry – and the frightening prospect of rapid obsolescence – have convinced many payers and providers that the risks of avoiding strategic alignment and partnerships are far greater than the challenges of collaborating with a onetime competitor.

Intense competition from integrated companies

UnitedHealthcare’s Optum division, Kaiser Permanente, and other large, integrated healthcare entities are aggressively expanding into new markets, and threatening to disintermediate all legacy health system and health plan incumbents in their path.

A race for profitable lines of business

These new entrants are largely competing for the most profitable lines of business, including Medicare Advantage enrollees and commercially insured consumers. Without these lines of business—which previously mitigated the cost of caring for more adverse patient and member populations—legacy incumbents will be in dire financial shape.

A rapidly shrinking marketplace

The prospect of a much smaller available and addressable market represents a major threat to future growth for health systems and health plans alike. Traditional concerns about “the death of a thousand cuts” from payment changes or shifting payer mixes may soon give way to the prospect of being cut off at the knees from one’s entire customer base in short order.

An affordability crisis

Consumers beset by ever-rising insurance premiums and out-of-pocket hospital bills are already rebelling, creating a hostile political climate for hospitals and health plans alike. And Boeing, Intel, and other large employers have also tired of the status quo and are driving extremely hard bargains on performance and cost when they purchase healthcare benefits for their employees.

Pressure to eliminate waste

As health systems embrace cost reduction to help address calls for more affordable care, eliminating unnecessary waste is top of mind. Administrative complexity—which is often generated by payer-provider interactions in billing, coding and other insurance-related requirements—generates an astounding $265.6 billion in waste each year, according to an October 2019 article in JAMA.

Demand for a seamless consumer experience

Amazon, Walmart, CVS Health, and other companies skilled at delivering an excellent consumer experience are racing to open new, competitively priced virtual and brick-and-mortar clinics. Health systems and health plans must be able to compete with these tech-savvy new entrants to maintain relevance.

The high cost of the zero-sum mentality

Payers and providers may have spent years fighting each other across the negotiating table during contract season. This divisive dynamic is simply unsustainable moving forward.

This volatile combination of heightened competition and political uncertainty has significantly raised the table stakes for legacy health systems and health plans. In the gloomiest scenario, a vertically integrated competitor skilled at delivering a seamless consumer experience might lure away a health plan’s membership or lock a health system out of critical local networks.

Ideally, payer-provider partnerships will lead to the creation of seamless new platforms offering an excellent customer experience at a competitive price, quickly establishing a reputation as a must-have option within their market.

The journey to that “partnership nirvana” depends on where health systems and health plans are positioned today. In some markets, potential partners may already be losing business to integrated delivery systems. In other situations, health systems may be looking to grow or sustain membership in a health plan. And in other markets, organizations that are already partnering with like-minded entities may be considering how deeply they want to push the payer-provider partnership model.

In any market, however, successful partnerships will embrace the following strategic imperatives:

Engage the entire C-Suite

While not all C-Suite executives will be involved in every discussion, leaders throughout both organizations should be engaged in both shaping the partnership and championing its implementation within their departments.

Forge a spirit of pluralism

Most payers and providers need to operate within an ecosystem economy and maintain relationships with other counterparts in their markets, making exclusivity a less viable option.

Understand the market

Successful partnerships will carefully study what purchasers and consumers in their market need, and use those insights to design effective products and processes. Both parties should also be prepared to make concessions, as they develop a formula that supports the profitability of the health plan and the impact of the health system.

Figure out where independent physicians fit

Independent physician practices and affiliated networks play a key role in any market, given the reality that most organizations can’t afford to employ every physician. Partnering organizations will need to determine how these entities will function within the partnership and organize physician supply and capacity accordingly.

Develop a shared vocabulary

Payers and providers approaching partnership for the first time need to be mindful that seemingly basic terminology like “price competitiveness,” “risk sharing,” or “network adequacy” may have different meanings to their counterparts. Taking the time to define the terms that will be used to structure the partnership is absolutely critical to its future success.

Understand your counterpart’s capabilities

Organizations should discuss and evaluate their respective capabilities and competencies in facets including the delivery of care, network and benefit design, and information technology. These conversations can help determine which organization will handle specific operations, and uncover gaps requiring further investment.

Remember that form follows function

The structure of any given partnership should support the partners’ overall strategic alignment, including their collective vision, objectives, principles, and parameters. These considerations will help shape the structure of the partnership’s scope, including how narrowly or broadly defined its operations will be within a geographical area or line of business, and the relative level of integration.

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