How to Create Value-Based Healthcare Products

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1 CLIENT BRIEFING OCTOBER 2013 TURNING AN ACO INTO AN INSURANCE PRODUCT The best way to capitalize on a relationship with a value-based healthcare provider is to productize it. Why have so few health plans taken that step? And how do you do it? AUTHORS Patrick Barlow Steve Wolin Shivani Shah Nilam Shah Looking at U.S. healthcare today, we see many health plans creating value-based contracts with the country s burgeoning crop of accountable care organizations (ACOs). But what we don t see is health plans creating value-based products building a benefit package around a specific ACO. That is a surprise. To us, ACO-specific insurance products are perhaps the best way to capitalize on value-based care, and they potentially offer health plans a powerful competitive advantage. For example, one leading payer s suite of ACO-specific products currently charge premiums 5 percent to 12 percent below the market which should give them a formidable edge on the public exchanges. To date, though, we have found only 16 ACO-specific products. There are many reasons why a health plan might hesitate to productize its ACO relationships. For example, health plans have long based their business on the breadth of their networks. If they market specific ACO relationships as

2 A given geography has only so many premier providers that can deliver essential clinical and financial results and whose brand equity will enhance the health plan s. Once they are gone, they re gone. products, they fear that other providers will see it as king making a perception that could damage a health plan s relationships with other providers and ultimately threaten its ability to provide good discounts to corporate accounts. But in a rapidly changing marketplace, we believe health plans should take that risk. Indeed, if they don t move quickly to create ACO-specific products, we believe health plans will face much larger risks in just a few years. Why? Because ACO-specific products are necessarily collaborative, and a given geography has only so many premier providers to collaborate with the kind of providers that can deliver essential clinical and financial results and whose brand equity will enhance the health plan s. Once they are gone, they re gone. And being first matters: While providers are likely to continue to contract with multiple payers, it will be difficult for them to be full-fledged partners in a product with more than one. First movers will have the edge in setting expectations for data sharing, care models, and branding. They will have an excellent shot at a solid cost advantage. And with the exchanges opening, that is all the more important. THE ART OF PRODUCTIZATION Value-based health insurance products are fundamentally different from conventional products. The relationship between plan and provider is crucial. Contracts must be structured to align payer and provider on the goals of keeping patients well and avoiding unnecessary costs. And there needs to be a new level of day-to-day cooperation to help both sides succeed. Health plans must be able to share data with providers, develop advanced risk assessment tools, implement sophisticated performance management, and assist in clinical transformation and organizational change. None of these activities are part of health plans traditional repertoire, and many are scrambling to add them. Health plans will need to be flexible, though. ACOs are far from standard, and different patient groups and geographies will present different issues and opportunities. Some examples: An Independent Delivery System (IDS) with all the right capabilities to support a product in the individual market may not belong to the Medicare Shared Savings Programs without which it can t be the core of a Medicare Advantage product. Products for the exchanges will have to follow specific state rules. Insurers will quickly gain experience, but the amount of customization required is likely to remain high for some time. Healthcare in some metropolitan areas is fiercely competitive, while in others it is dominated by a single payer or provider. Some cities currently lack the necessary providers and market conditions to support value-based insurance products at all. In a retail or private exchange context, the relationship with a single provider will need to be expressed as multiple products for patients in various demographics and with various disease states. Copyright 2013 Oliver Wyman 2

3 The first step for payers is to identify a high-priority opportunity, come up with an initial perspective on how you would like to position yourself in the market, and launch a product. All of these factors will affect the structure and implementation of a value-based product. For most health plans a single product model will not be enough; it will be more appropriate to think in terms of a portfolio of models adapted to their own providers, patient groups, and markets. FIRST STEPS For most payers, the first step is simple: Identify a high-priority opportunity, come up with an initial perspective on how you would like to position yourself in the market, and launch a product. Chances are that it won t involve a full-fledged risk sharing agreement with the provider organization relatively few are prepared for that sort of arrangement yet. But an initial product will give you the chance to start understanding how to negotiate a partnership, how to structure the financial deal, how to manage governance and clinical issues, and how to co-market. There will be gaps to fill many of them. Next steps are somewhat more complex and different companies may need to approach them in slightly different ways: Assess your markets by availability of value-ready providers, competitiveness, and additional local market conditions including regulation and approach to Accountable Care Act (ACA) compliance. Identify your must-win markets. Segment your providers by readiness, stage of development, and potential economic impact. Your goal is to identify a cohort of providers with whom you can build products using the same basic template. Plan a flight path through the next three to five years, including how you will roll out a product from customer type to customer type (for example, exchange to individual to small group, etc.), how you will incentivize and assist in provider evolution, and how you will expand into second-priority markets. For consumers, the movement toward value-based healthcare products will doubtless look slow. For those within the industry, however, it will be a race first to seize the one-time opportunity of consumers who become newly insured thanks to ACA, and then to lock providers into favorable arrangements that will produce lower premiums and greater market share for years to come. Copyright 2013 Oliver Wyman 3

4 It s a one-time opportunity to seize consumers who become newly insured, and lock providers into favorable arrangements that will produce lower premiums and greater market share for years to come. ABOUT THE AUTHORS Patrick Barlow is a partner in the New York office of Oliver Wyman and a member of the firm s Health & Life Sciences practice. His primary areas of focus are corporate and business unit strategy for health plans, health service companies, pharmacy benefit managers (PBMs), and provider organizations. Much of his strategy work centers on helping organizations drive success in their value-based health initiatives. Steve Wolin is a principal in Oliver Wyman s Health & Life Sciences practice group. Steve has guided several clients in their efforts to redesign their business models and approaches to the market as they migrate their business to value-based healthcare. He has deep experience in strategic planning and M&A strategy for major health insurers and health IT companies. Shivani Shah is an engagement manager with Oliver Wyman s Health & Life Sciences practice, based in the Chicago office. She specializes in helping clients develop and execute their value-based healthcare strategies. Her primary experience is in establishing value-based models and developing innovative go-to-market commercialization strategies for both payers and providers. Nilam Shah is an associate in Oliver Wyman s Health & Life Sciences practice. He has helped payers, providers, and life sciences companies develop strategies in the face of changing healthcare reform. He earned his MBA from the Kellogg School of Management and Bachelors in Chemistry from Harvard University. For more information, please contact Patrick Barlow at patrick.barlow@oliverwyman.com Copyright 2013 Oliver Wyman 4

5 ABOUT OLIVER WYMAN Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across 25 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm s 3,000 professionals help clients optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE : MMC], a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 53,000 employees worldwide and annual revenue exceeding $10 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in risk and reinsurance intermediary services; and Mercer, a global leader in human resource consulting and related services. Oliver Wyman s Health & Life Sciences practice serves clients in the pharmaceutical, biotechnology, medical devices, provider, and payer sectors with strategic, operational, and organizational advice. Deep healthcare knowledge and capabilities allow the practice to deliver fact-based solutions. For more information, visit Follow Oliver Wyman on Copyright 2013 Oliver Wyman All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions in this report were prepared by Oliver Wyman. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisors. Oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. The report is not an offer to buy or sell securities or a solicitation of an offer to buy or sell securities. This report may not be sold without the written consent of Oliver Wyman.