Lincoln International shares insights into key macro trends that are driving the self-funded market and how they will impact near-and longer-term M&A activity across service and technology providers.

LABOR MARKETS AND EMPLOYER-SPONSORED HEALTHCARE RESILIENT AMID COVID-19

Prior to COVID-19, participation in self-funded medical plans experienced decades of uninterrupted growth. Labor markets were disrupted by the pandemic – particularly facility-based services – but stabilized as a result of the Paycheck Protection Program as well as the adaptability of employers and employees. The number of employees and plan members covered by an employer-sponsored medical plan once again continued to grow after the initial shock of COVID-19 and has continued into 2022. Employers increasingly recognize that employees value quality, accessible medical coverage and consider this a standard part of a competitive compensation plan.

COST OF EMPLOYER-SPONSORED MEDICAL COVERAGE CONTINUES TO GROW

As the demand for medical coverage has increased the costs of providing this benefit have also gone up. The average per-employee cost of employer-sponsored health insurance was $14,542 in 2021, up 6.3% from 2020. This rise in cost is attributable to multiple factors including an aging population, an increasing prevalence of chronic and difficult-to-treat medical conditions, growth in specialty retail prescription drug prices and increasing care utilization. The cost of employer-sponsored medical coverage is expected to increase by 4.7% annually from 2022 through 2027, presenting a long-term challenge for plan sponsors and members.

CONTINUED DEVELOPMENT OF STOP LOSS AND LEVEL FUNDED MARKETS ALLOWS SMALLER EMPLOYERS TO EFFECTIVELY SELF INSURE

Stop loss markets have become increasingly accessible to small- and mid-sized (SMB) employers, allowing these groups to effectively sponsor self-funded plans with acceptable risk. The growth in popularity of level-funded plans has allowed employers to achieve many of the benefits of self-funding with a more limited and sustainable risk profile.

MEDICAL TPAS AND ANCILLARY SERVICE & TECHNOLOGY PROVIDERS POISED TO PLAY A BIGGER ROLE

Service and technology providers that support the self-funded market — from medical TPAs to data analytic solutions to software providers — are well positioned to play a critical and ever-growing role in allowing employers to control medical inflation and drive positive population health outcomes. Medical TPAs have seen a shift from simple back-office claims adjudication and processing to the forefront of employer-sponsored healthcare and have continued to bring additional value-add services and technology in house. Network- and reference-based pricing (RBP) providers are expanding their portfolio of solutions to improve access to healthcare while simultaneously lowering costs. Technology solution providers are increasingly utilizing big data to create actionable analytics that have a direct impact on plan costs and member health.

KEY PLAYERS AND SELECT ACQUISITIONS ACROSS THE SELF-FUNDED MEDICAL INSURANCE ECOSYSTEM

There has been substantial investment across the entire self-funded medical ecosystem with a focus on services to date. The pivot towards investing in analytics, population health management and other technology solutions is just beginning to materialize.

KEY TRANSACTIONS IN SELF-FUNDED, EMPLOYER-SPONSORED ECOSYSTEM SINCE COVID-19

There has been substantial investment across the entire self-funded medical ecosystem with a focus on services to date. The pivot towards investing in analytics, population health management and other technology solutions is just beginning to materialize.