Negotiating is inherent to human nature.
But there is a marked difference between negotiations that feel like difficult zero-sum haggling versus those that come from a deep appreciation of each other’s businesses, strengths and weaknesses, and a willingness to imagine what a new mutually beneficial future could look like.
Payers and providers are at a watershed moment today—and must decide on the fundamental nature of their negotiations and relationships moving forward. We believe an essential transition is required: shifting from leverage to alignment as the primary driver of payer-provider relationships.
While important for all, we believe making this transition is most crucial for regional health plans, including Blue Cross Blue Shield plans, independent health plans, and provider-sponsored health plans.
Why the old business model is fraying
The traditional payer business model is under pressure from several angles. From a regulatory angle, levers such as risk adjustment and utilization management are under greater scrutiny and restriction. The Centers for Medicare and Medicaid Services’ recent Calendar Year (CY) 2027 Medicare Advantage (MA) and Part D Rate Announcement projects a net average rate increase of 2.48% in 2027, less than half of the projected 2026 rate increase. For commercial payers, more scrutiny of premium levels and price transparency is likely (the latter for both payers and providers).
Moreover, medical and pharmacy cost drivers are increasingly diverse. While growth in unit-price continues to be a challenge for payers, more site-of-care and utilization drivers are on the radar that unit price negotiations can’t directly address (e.g., outpatient utilization, GLP-1 weight loss drugs, cell and gene therapies, behavioral health).
Finally, market structures have evolved in many geographies. Payer consolidation resulted in greater negotiating leverage. At the same time, providers also consolidated and became more sophisticated in analytics and payer contracting, and were able to be more assertive and willing to take negotiations to the brink (and beyond).
But a new relationship model is emerging
Some payers and providers are realizing that the current model is unsustainable. “AI wars” between payers and providers that try to “optimize” the existing revenue cycle is accelerating the sense that business as usual will not suffice. Over a longer time horizon, tectonic shifts that have been forming now appear to be picking up pace. Specifically, commercial employers are increasingly open to more drastic options to manage cost of care like reference-based pricing, narrow networks, and Individual Coverage Health Reimbursement Arrangements (ICHRA).
As a result, more lives are shifting either to government health plans (Medicare, Medicaid, or Exchange) or to a lower reimbursed form of commercial reimbursement (or going uninsured altogether). At the same time, government payers are becoming more open to reducing healthcare investments, as evidenced by Medicaid eligibility and financing changes in the One Big Beautiful Bill, and the allowed expiration of the enhanced advanced premium tax credits for exchange plans. The long-term prognosis for funding the current healthcare system does not look good.
So how does the healthcare industry reverse this trend? To us, a big part of the solution lies in a shift in the relationship model between payers and providers that prioritizes alignment over leverage. However, accomplishing this is easier said than done. For starters, decades of friction, mistrust, and animosity cannot be erased overnight. The current misalignment of incentives is real and needs to be acknowledged.
But crisis creates its own opportunities, and we see some payer and provider leaders boldly stepping up in this crisis. We see these leaders carefully nurturing and protecting interpersonal trust as a form of currency. We see them using curiosity and empathy to learn the realities about each other’s businesses and the pressures they are under. We see them using creativity to imagine a future that does not need to look like the past. Fueled by this growing trust, knowledge, and creativity, they are discovering pockets of alignment – both within the current fee-for-service payment model in the near-term and in new care and payment models over time.
For example, health systems operating at or near capacity would be rational to use their precious spare capacity for better reimbursed commercial patients, while trying to keep lower reimbursed MA and Medicaid patients out of a high fixed cost inpatient environment. Payers are struggling with margins in these lines of business and would welcome partnering with providers on better care models for these patients that improve quality and lower the total cost of care.
Another potential area of alignment is the joint imperative to preserve the group commercial employer coverage model. For most payers and providers, that is a more attractive model than allowing that market to convert to ICHRA over time. We may not have changed the world yet, but in these examples, a pocket of alignment has been discovered that could propel a new partnership paradigm between payers and providers.
We believe this emerging relationship model will include the following defining features:
- Multi-year economic alignment structures
- Shared performance accountability
- Explicit linkage between care models/medical management strategy and contracting
- Joint performance management around cost, quality, and experience
- Governance mechanisms to manage conflict before it escalates
This is not about being less disciplined in negotiations. In fact, negotiations are likely to become more nuanced and sophisticated in the new relationship paradigm we describe, but the focus will shift to structuring and aligning incentives in ways that drive mutually beneficial value, reduce friction, and improve predictability for both parties.
Enter regional health plans
We posited at the outset of this blog that this transition from leverage to alignment is most important for regional health plans to make. It is also more strategically advantageous for them. Regional plans are local players deeply rooted and committed to their communities. Unlike national plans with diverse portfolios that can choose to exit a market that turns unfavorable, the destiny of regional plans is tied to their local market, similar in spirit to providers. This is increasingly apparent to both regional payers and providers and could form the basis of strategic competitive advantage for both, driven not just by good intentions but anchored by strong strategic thinking and financial modeling.
This dynamic is increasingly apparent to both regional payers and providers and could form the basis of strategic competitive advantage for both, driven not just by good intentions but anchored by strong strategic thinking and financial modeling.
We believe regional plan leadership teams should be asking questions like:
- Which providers drive the majority of our medical spend and trend?
- Where are incentives misaligned and generating dilutive outcomes?
- Where can we find pockets of alignment and with whom?
- Which providers are likely to be the best partners for the future?
- How can collaboration improve predictability more than confrontation?
- What could multi-year economic alignment look like instead of annual rate resets?
- How can governance structures enhance trust and reduce recurring negotiation crises?
For regional plans, provider alignment is no longer a contracting tactic. It is becoming the most strategic enterprise performance lever in an environment where traditional plan levers are increasingly constrained. Regional plans that treat provider relationships as a tactical contracting function will face increasing friction. Those that elevate provider alignment to an enterprise strategy will be better positioned to navigate affordability pressure, regulatory change, and structural cost trends.
In conclusion
Regional plans without the scale and access to capital enjoyed by national plans will instead need to compete on being local market mavens, with a large part of that value coming from deeply aligned local provider relationships that generate the kind of mutual business value that national plans lack the “ground game” to replicate.
The question for regional plans is thus no longer: “How do we win the next negotiation cycle?”
It is: “How do we build provider relationships that make the next five years more sustainable?”
That shift—from leverage to alignment—could define the next chapter of performance for regional health plans.
The author would like to thank Webster Macomber and Brian Ball for their many insights and contributions to this blog. Thanks are also due to the many conversations with our payer and provider clients who are exploring a more aligned relationship model.
