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Payers currently face economic pressures that are likely to last a few years. Utilization of medical services has been higher than expected, providers are passing along higher costs through rate negotiations, and Medicare Advantage reimbursement rates are facing the most substantial downward pressure that payers have seen in years. In the face of these issues, artificial intelligence and automation present untapped opportunity for payers.

The opportunity is sizable and available now

The opportunity to improve affordability, quality, and patient experience is substantial. To better understand the economic opportunity, we analyzed each function or process in health insurance and found substantial potential administrative and medical cost savings and increased revenue for payers that adopt the latest available technology, including AI and generative AI (Exhibit 1). We estimate that by using currently available technology, payers could see net savings of 13 percent to 25 percent in administrative costs and 5 percent to 11 percent in medical costs as well as 3 percent to 12 percent higher revenue. We based the calculations on an average-performing payer—lower performers could see even more improvement, suggesting the opportunity to leapfrog competitors.[[footnote 1]]

[[exhibit 1]]

There are improvement opportunities in all payer domains. Some stand out, including claims, network and contracting, utilization management, care management, and information technology (Exhibit 2).

[[exhibit 2]]

Incremental approaches will continue to yield only minor savings, as we have seen to date across most of the industry. To capture full value, payers must reimagine the end-to-end processes of each domain. The experience of companies in other industries that are further along the journey shows there is a competitive advantage for those who are able to harness AI and automation technologies.[[footnote 2]]

Capturing the opportunity will require fundamental rewiring

Capturing impact is about much more than just the technology. In Rewired: The McKinsey Guide to Outcompeting in the Age of Digital and AI (Wiley, 2023), the authors outline the six areas that matter the most for companies across industries that want to change the way they operate and adopt technologies—a business-led digital road map, talent, operating model, technology, data, and adoption and scaling[[footnote 3]] (Exhibit 3).

[[exhibit 3]]

In our experience, companies that successfully execute AI-enabled transformations pursue all six areas[[footnote 4]]; doing a subset is not enough. And it’s about more than just building an operating model or investing in the tech infrastructure. Getting the job done requires a focus on the change management challenges that arise in the adoption and scaling process. It’s a job for the CEO and the entire C-suite, not just the CIO or CDO.

So what does this mean for payers?

Payer CEOs should consider if they want to lead or follow. The size of the opportunity suggests that those who choose to wait will need to have a ready response plan if competitors move ahead successfully. For example, followers could find themselves in a position where industry leaders have 10 percent lower medical costs or 20 percent lower administrative costs, a daunting prospect. So the ability to be a fast follower will be critical.

In general, most payers are ill-equipped to pursue this opportunity. To do so, they have to close the gap that exists between their current capabilities and those needed to fully address the six areas outlined above (Exhibit 4).

[[exhibit 4]]

Payer CEOs could begin assessing their respective situations by answering these questions:

How would we respond to a competitor with 20 percent lower administrative costs or one with 10 percent lower medical costs?
Where are the biggest pockets of value for our business? Would that be a domain? A business unit? A function?
Even if we’re not ready to take the plunge today, can we “rewire” a portion of the business so that we know what to do if and when we need to move ahead? Do we have access to the talent steeped in the new technologies? Does this tech talent understand how our business works?
Do our leaders and managers understand how these technologies work, at least enough to identify opportunities and work collaboratively with our technologists?
Do we have the underlying technology infrastructure to allow modeling and innovation to happen quickly and without friction?
Is our data clean, clear, and accessible to those who need it to do their jobs better?

Capturing this opportunity is a big leadership challenge for CEOs and their top teams. They will need to establish a governance and risk framework and to mobilize the full organization to pursue the six areas discussed above. They can’t do this overnight, but the combination of opportunity size and the mounting pressure on the industry means it’s time to start asking themselves these tough questions.