When Your Legacy Operating Model Costs More to Maintain Than to Modernize 

Key Takeaways

• For payers, inaction is not a neutral choice—legacy operating models carry compounding costs that erode financial performance, member satisfaction, and competitive positioning over time.
• Health plans that delay transformation face increasing regulatory exposure, rising operational costs, and growing member dissatisfaction.
• A clearly defined operating model gives health plan leaders a structured path from where they are today to where they need to be — without requiring a wholesale overhaul.
• The organizations that act now will be better positioned to absorb future regulatory and market changes as the pace of industry evolution accelerates.

Rising margin pressure and regulatory demands are forcing health plan leaders to confront a difficult question. When does maintaining a legacy operating model become more expensive than modernizing operations?

In April 2026, the Centers for Medicare and Medicaid Services (CMS) finalized a 2.48 percent Medicare Advantage (MA) rate increase for 2027, well below the 4 to 6 percent the market had expected. Medicaid rate increases are running at about 3 percent.

McKinsey’s Gathering Storm 2.0 analysis shows 37 percent of MA plans operating at negative margins. At the same time, health plans absorb increasing expenditures on provider contracts and administrative costs. Eighty-four percent of payers report severe financial pressure in 2025, up from 41 percent in 2022 (S&P IQ, 2025). At a 3 to 4 percent margin, the room to absorb new costs has closed.

In this environment, standing still has become the more expensive option for many health plans.

Why are Traditional Payer Operating Models Falling Short?

Most health plans have already optimized at the edges through lean staffing, point solutions, business process outsourcing (BPO), and ongoing efforts to get more out of their core administrative platforms. But for many, returns have flattened and remaining incremental fixes no longer reduce costs or improve margins.

Even health plans that have modernized technology still face overhead and fragmentation across their operations. Handoffs, rework, vendor management, data delays, and operational complexity persist.

For example, health plans need the ability to scale quickly in order to implement a CMS rule change, enable new market expansion, and launch new lines of business. With traditional point solutions, it can take months to adjust to process change, documentation, training, and other related work.

Health plans can optimize individual systems, but eventually, the organization has to ask whether it is optimizing the right thing.

What Standing Still Costs Health Plans

The cost of legacy operating models rarely shows up as a single line item. It compounds quietly across several patterns:

• Continued spend on the current environment. As HealthEdge® leader Ken Dixon shared on a recent episode of Current Trends for Payers podcast, one health plan is paying $4 million a year to preserve infrastructure while it waits to expand. “The very thing they need to do to grow is being prevented by inaction,” Dixon notes.
• Regulatory cycles as recurring projects. Each CMS change or benefit adjustment can take a health plan 3 to 6 months to configure and deploy across a fragmented environment. Legacy systems, along with the vendors and operational teams required to maintain them, reduce agility and increase the cost and complexity of every regulatory change.
• Compounding technical debt. As a recent HealthEdge analysis of hidden operating costs shows, total cost of ownership of legacy systems can be spread out over 7 to 8 years, masking increasing expenses. Chief Information Officers often manage 15 to 20 systems that require continuous upgrades and support.
• Staffing constraints. Bringing operations in-house may reduce vendor dependence, but it also introduces significant staffing, training, and scalability challenges. Health plans must evaluate whether their operating model can support long-term growth without increasing operational complexity and cost.
• Widening artificial intelligence (AI) gap. Plans on legacy stacks spend cycles bolting AI onto core systems. AI added to a fragmented stack inherits the same handoffs and inefficiencies the stack already has.

Over a 3 to 5 year period, these costs compound—and few plans see the full bill.

Improve Predictability and Margin Recovery

In the Cost of Inaction episode of the Current Trends for Payers podcast, Dixon also points to a health plan that cut roughly $5 million from its monthly admin spend after moving to a modern operating model.

For health plans, modernizing their operating models helps reduce administrative spend per member per month (PMPM) and frees capital for other investments that drive outcomes, such as member outreach, quality programs with provider networks, and value-based care.

Among health plan leaders, the conversation has shifted. Now, plans are asking not just whether they can get a better contract with operations vendors, but whether their operational infrastructure can support the margin recovery they need.

A New Operating Model Is Emerging for Payers

The bottleneck in modernization is not the availability of modern technologies. Whether plans have modernized their core platforms or added point solutions and tools at the edges, the returns plateau when the operating structure around the technology stays fragmented.

Functions such as claims, enrollment, billing, and member services are each handled by a different vendor with its own contract and reporting cadence. A new CMS rule or product change ripples across each function on its own schedule. There is no single party accountable when end-to-end cost or member experience falls short.

With tight margins, that fragmentation costs more than plans can absorb.

The HealthEdge AI-Powered Operational Infrastructure

Through our work with more than 130 health plans, the HealthEdge team saw this pattern and built a different model: the HealthEdge AI-Powered Operational Infrastructure. With this model, HealthEdge is the end-to-end solutions partner managing the AI-powered technology, operations, and outcomes.

The HealthEdge AI-Powered Operational Infrastructure includes 4 key capabilities:

1. Cloud-native AI-powered technology with AI-driven tools embedded across the entire solution ecosystem.
2. A service delivery team of more than 7,000 subject matter experts with experience in claims handling, eligibility, enrollment, billing, and member services for more than 10 million lives on the HealthRules® Payer platform.
3. Intelligent automation and standardized processes embedded across workflows that reduce manual processes while increasing accuracy and timeliness.
4. Centralized data architecture enables shared visibility across workflows, reporting, and performance management.

What can payers achieve by leveraging HealthEdge AI-Powered Operational Infrastructure? Risk-free implementation, fast time to value and ongoing optimization that enables payers with a foundation that drives measurable performance improvements. Existing customers have achieved:

• 30 to 40 percent reduction in administrative spend on a per-member-per-month basis.
• Budget variance under 1% (compared to industry benchmark of 10-15%)
• ROI in 12 to 15 months after implementation

And with HealthEdge, outcomes like these are guaranteed as part of the contract.

Take the Next Step to Modernize Your Operations

For most plans, what once felt like the safe option now carries the higher cost. The path to a modern operating model is well-defined, and the plans that move now will recover margin, absorb regulatory change, and free the capacity to grow.

For the full conversation, listen to The Cost of Inaction on Apple Podcasts or Spotify. For a closer look at the operating model, please visit the HealthEdge resources hub.