Health & Life Sciences PRIVATE HEALTHCARE EXCHANGES: AN FAQ PRIVATE HEALTHCARE EXCHANGES SEEM POISED TO ALTER THE WAY THE EMPLOYER MARKET DOES BUSINESS. HERE S WHY AND HOW TO PLAY When we talk with clients today, we re almost certain to be asked about private healthcare exchanges, especially as they relate to the employer market. Here are the questions we hear most often. Question: Answer: Why is there so much interest in private exchanges all of a sudden? Private healthcare exchanges are hardly new. In some segments, including group retiree and the individual market, they ve been common for years. But in the past six months, we ve seen a sharp uptick of interest and of announcements of exchange-related acquisitions and partnerships. Private exchanges are unquestionably hot. AUTHORS Howard Lapsley Chris Bernene But it s not clear that the companies currently jumping on the exchange bandwagon understand how important they really are. Many health plans see private exchanges mainly as a defensive play related to the Affordable Care Act as a way to keep small-group employers from sending their employees to the public exchanges by offering them similar levels of savings, a smooth path to a defined-contribution model, and better member experience. That is not wrong, but it misses the bigger picture: Exchanges are going to be a permanent, significant part of the healthcare world going forward because they are a powerful, adaptable way of meeting a variety of employer needs. Third-party exchanges run by consultants and others will be significant distribution channels and potential competitors for payers. And exchanges run by single carriers or consortia will offer an opportunity to create products closely matched to a full range of employer needs, not just lower costs. In this view, ACA is a sideshow, and the opportunity is both larger and more complex.
Q: What do employers want out of exchanges besides lower costs? And why would exchanges be a better way to provide it? A: Several things. For many employers, the appeal is not just lower costs but the predictable costs made possible by shifting to a defined-contribution model. In addition, employees value the choice and transparency of private exchanges, especially today when costs are high even for the insured. In fact, one recent study found that when offered a choice, 80 percent of employees chose a plan less rich than what their employers had chosen for them a striking demonstration of how badly employers have historically misread what employees really want. Finally, though some private exchanges will be bare-bones, we expect that most will concentrate on creating a satisfying customer experience for employees. If employees enjoy the exchange experience, see the value in the offering, feel that they have an appropriate array of choices, and have access to engaging new tools for leading a healthier life, they could end up having not just a new delivery system for health coverage, but a new attitude toward it. That could be important at a time when many employers will be forced to cut back. EXCHANGES ARE GOING TO BE A PERMANENT, SIGNIFICANT PART OF THE HEALTHCARE WORLD GOING FORWARD BECAUSE THEY ARE A POWERFUL, ADAPTABLE WAY OF MEETING A VARIETY OF EMPLOYER NEEDS. Q: Do private exchanges have to use defined contribution funding arrangements? Is it possible to do ASO through an exchange? A: There is a common misconception that private exchanges are synonymous with defined-contribution. But that s not necessarily the case. Some employers, especially those under the greatest economic stress, will be looking at private exchanges primarily as a way to transition to defined contribution. They ll want to use that sort of arrangement from the start. Others might be using it as a pathway to defined-contribution, giving them the option to dial up or dial down funding depending on business economics, the need to retain talent, and the general competitive situation. Still other employers will go on paying for employee coverage as they have but use the exchange as a way to empower employees to choose plans that suit their needs. Similarly, there is no reason health plans cannot operate an exchange in ASO mode. Indeed, we think that will be a particularly important option in working with some larger employers. Copyright 2012 Oliver Wyman 2
Q: What will a successful private exchange look like? A: We see four characteristics that will be the hallmarks of successful private exchanges, whether single-source or third-party: Tailored offerings that match employees to the right sort of health management. The old game in health insurance was to select the risk you wanted. The new game is to manage risk better, using care models, consumer engagement strategies, prevention programs, and care coordination to keep members healthier and reduce costs. The private exchange can play a pivotal role in this process, attracting individuals to the right sort of product and ultimately to a healthier way of life. A customer experience that connects the consumer. Successful private exchanges will guide the individual and provide selected choice so the consumer feels educated, empowered, and engaged (See Exhibit 1). Engagement will be essential to help lower utilization and improves quality of care and quality of life. Retail customers of the future will need to see health insures as the key to healthy living versus the just say no people. The customer experience primarily their interaction with payers through an exchange environment will be critical on proprietary private exchanges, less so on third-party exchanges. Indeed, customer engagement is a potential competitive advantage for proprietary players who can get it right. Network reinvention. The key to achieving price competitiveness on exchanges public or private will be superior network positioning through lower-cost narrow networks, ACO value-based arrangements, or both. THERE IS A COMMON MISCONCEPTION THAT PRIVATE EXCHANGES ARE SYNONYMOUS WITH DEFINED-CONTRIBUTION. THAT S NOT NECESSARILY THE CASE. EXHIBIT 1: CONSUMER EXPERIENCE AND ENGAGEMENT AS FRATERNAL TWINS CONSUMER EXPERIENCE CONSUMER ENGAGEMENT What is it? KEEPING HEALTHY PEOPLE Satisfaction Communication Connectivity Awareness KEEPING PEOPLE HEALTHY Behavior change Trust Collaboration Understanding How do we do it? CHANGING INSURER AND PROVIDER BEHAVIOR Personalization Simplicity Eliminating hassles Convenience CHANGING CONSUMER BEHAVIOR Incentives to reinforce behaviors Benefit designs to reinforce network How does it drive value? INCREASING MEMBER LOYALTY Consumer acquisition and retention IMPROVING MEMBER HEALTH Improved health outcomes Lower medical cost trend 3 Copyright 2012 Oliver Wyman
Brand/marketing. Brand can be a differentiator in the private exchange setting. While price is king, brand will make a difference when employers and employees need to make decisions based on perception of quality, reliability, expertise, and value. Local co-branding opportunities with downstream providers/delivery systems can be particularly powerful. Marketing and brand building will not be through traditional methods because (1) the cost is prohibitive and (2) consumers today rely much more heavily on social media. Peer to peer recommendations and ratings similar to those found at Trip Advisor or Amazon provide more credibility than I am not a doctor but I play one on TV commercials. THE OLD GAME IN HEALTH INSURANCE WAS TO SELECT THE RISK YOU WANTED. THE NEW GAME IS TO MANAGE RISK BETTER. Q: If we end up creating our own exchange products but also sell coverage through third-party exchanges, doesn t that create channel conflict? How do we manage it? A: In recent years, many industries have moved to models that double or triple the number of access points for customers. Healthcare is currently going through the same sort of change. In the future, healthcare channel options will include multiple sorts of exchanges, direct-to-consumer models, and other third-party models (See Exhibit 2). At Oliver Wyman we believe payers have no choice but to play across all channels. That means that there will be channel conflict and it will have to be managed. For examples of how to do that, look at Progressive Insurance and Fidelity Investments. Both companies sell products through their own channel and similar (though not identical) products through competing channels. Their philosophy is to enable customers to self-select into their channel of EXHIBIT 2: WHERE PRIVATE EXCHANGES FIT IN THE DISTRIBUTION CHOICE SET FOR EMPLOYERS TODAY TOMORROW (2013+) TRADITIONAL Payer uses status quo selling processes Continuing to participate in these channels is a given ~100% TRADITIONAL Payer uses status quo selling processes (e.g. agent, direct, e-broker) THIRD PARTY EXCHANGES Payer participates in third-party exchanges PAYER PRIVATE EXCHANGE Payer manages its own single carrier exchange Third party exchanges and a proprietary exchange are the new private options most payers are considering PAYER OPEN EXCHANGE Payer manages a multi-carrier exchange similar to the Aon Hewitt model This option could lead to significant channel conflict for larger accounts DISENGAGEMENT TO PUBLIC EXCHANGES Large scale disengagement and dumping to public exchanges Public exchanges comprised of newly insured, Small Group exodus, and up and out from Medicaid Copyright 2012 Oliver Wyman 4
EXHIBIT 3: SHOULD A PAYER CONSIDER A PRIVATE EXCHANGE, THIRD PARTY EXCHANGE PARTICIPATION, OR BOTH? Pros: NO No investment required Can wait and see how the market develops and be a fast follower PAYER PRIVATE EXCHANGE DEVELOPMENT Pros: YES Maintains the customer relationship Allows for product innovation and autonomy Will help retain employers who want to move to DC THIRD PARTY EXCHANGE PARTICIPATION NO YES Cons: Allows others to be first movers and create a de facto standard, enabling large scale share capture and creation of sticky long term employer/ employee relationships Pros: Provides access to new employer/employees Tightens relationships with key channel partners Minimal investment required Cons: Risk of product commoditization Cedes the customer relationship and other cross-sell opportunities Third party exchanges set the rules of the game Cons: Requires capabilities plan does not fully possess Costly and requires partners Will create channel tension/alienation Pros: Creates more channels through which to generate sales and retain business while allowing better targeting of high value accounts Hedge against competitor activity and channel disintermediation Experience in one channel can be leveraged in other Cons: Will be challenging to manage both channels Could lead to potential employer confusion on what plan offers choice, and then to support that channel so that the customer has the best experience there. They will openly provide referrals to competing channels (such as brokers or other distribution platforms) if that is where the customer wants to buy. Q: What enables these models to manage channel tension? A: 1. Allow the customer to self-select into the channel of choice, and then support that channel fully. 2. Be transparent with channel partners. If a customer wants to use a thirdparty, let them and send them there! 3. Keep the basic products similar, but make sure there are differences in each channel. In the same way that Fidelity has different classes of funds and Progressive has different product variations in different channels, a payer s proprietary private exchange suite can be a platform the payer provides to its most valued brokers to sell as an incentive for performance. One especially tricky issue for payers is whether and how to participate in third party exchanges run by consultants. Not only is there is a risk of disintermediation or commoditization, but there is also likely to be tension as payers develop their own proprietary exchange models. The range of choices and tensions is outlined in Exhibit 3 above. MANY INDUSTRIES HAVE MOVED TO MODELS THAT DOUBLE OR TRIPLE THE NUMBER OF ACCESS POINTS FOR CUSTOMERS. HEALTHCARE IS CURRENTLY GOING THROUGH THE SAME SORT OF CHANGE. 5 Copyright 2012 Oliver Wyman
Each channel will have its own pros and cons and corresponding strategies to address them. For example, in third-party exchanges, not only do payers have to know when to sign up (e.g. when there is enough momentum behind that private exchange type but also when there are competing alternatives so payers can leverage their position for category exclusivity or premier shelf space), but do so in a coordinated fashion that creates an effective total distribution portfolio strategy. An important point to note: If done right, private exchanges will not alienate brokers. If you give your top tier brokers your proprietary suite and train them how to sell it, private exchanges can become a way to attract and retain your best brokers. Q: Why so much focus on the members? Isn t the private exchange still basically a wholesale employer-based sale? A: No. That is another common misconception and a huge one, if you ask us. It s true that you still have to sell the employer your proprietary exchange. But that is really just the start. The exchange is not just a way of sorting employees into appropriate categories; it is a way for you to begin engaging with people who are important customers in their own right. Why? We see at least three reasons: 1. Employee satisfaction and engagement have always mattered to employers and will continue to matter. And we believe the way you handle your second sale will have an impact on how employers view your private exchange solution. In traditional employer-sponsored insurance plans, two factors have been the drivers of satisfaction: breadth of network and interaction with the carrier over claims processing. In the private exchange environment, the experience of navigating, comparing, and selecting will become extremely important. We believe that for many members, the exchange experience itself will become the most significant driver of member satisfaction. 2. Risk management and member engagement are your tools to build margins. The goal in setting up an exchange is not just to offer a range of choices for employees to choose among. Instead, the goal is to build products that will reduce costs and promote good health for a variety of patient segments, and use retail-style strategy and tactics to attract the right patients to the products that give you the best chance of managing their health effectively at low cost. Once they are signed up, the key is to engage them to take better care of their own health and utilize medical resources wisely. This is a far different business from what many health plans have done in the past. 3. Consumer experience is your brand. Private exchanges are an ideal environment to build demand for your products from the bottom up. Do it right, and employees will demand that their employers stick with you, and if they leave for a different job, they will seek you out on the public or other exchanges or demand transferability to their new employers. IF DONE RIGHT, PRIVATE EXCHANGES WILL NOT ALIENATE BROKERS. IF YOU GIVE TOP TIER BROKERS YOUR PROPRIETARY SUITE AND TRAIN THEM HOW TO SELL IT, PRIVATE EXCHANGES CAN ATTRACT AND RETAIN YOUR BEST BROKERS. Copyright 2012 Oliver Wyman 6
EXHIBIT 4: EMPLOYERS MIGRATION TO ALTERNATIVES THE MAJORITY OF EMPLOYERS ARE CONSIDERING NEW APPROACHES SUCH AS PRIVATE EXCHANGES % OF EMPLOYERS WHO WOULD CONSIDER SWITCHING TO A PRIVATE EXCHANGE 100% 90% 80% 70% 20% 26% 26% 60% 23% 50% 40% 30% 62% 20% 57% 55% 49% 10% 0% 10 to 50 51 to 100 101 to 3000 >3,000 Would consider switching for no savings Would consider switching as long as they saw savings of at least 10% Source: Oliver Wyman survey of 1,329 employers, weighted based on employer size, December 2011. For these reasons, we encourage carriers to treat private exchanges as fundamentally different from their traditional employer-sponsored and individual-market products. Don t be misled by the presence of the employer sale private exchanges are fundamentally a retail business, and it is important to invest in the talent and knowledge to take full advantage of their possibilities. Q: So this isn t just a fad? A: Far from it. We believe that the current problems beleaguering healthcare can only be solved with a healthy injection of consumer decision making and engagement. The market is in the midst of a fundamental shift toward retail. As Exhibit 4 shows, private exchanges are becoming a key consideration for employers. As such, they will be a critical education, acquisition, and retention platform and an integral part of your distribution portfolio for a long time to come That said, the key thing to remember is that a private exchange that is only a distribution system might make sense for some employers and members but not for you. For health plans, the key to a successful private exchange is to have the care management and engagement programs to back it up. The goal is not to offer employees trivial differentiation in products or superficial choices. Rather, perceived correctly, the private exchange is a tool to get closer to members, respond more specifically to their needs, and ultimately keep them healthier at lower costs to create value. In healthcare s turbulent next decade, nothing less will do. FOR MANY MEMBERS, THE EXCHANGE EXPERIENCE ITSELF WILL BECOME THE MOST SIGNIFICANT DRIVER OF MEMBER SATISFACTION. GIVEN EMPLOYERS CARE A GREAT DEAL ABOUT EMPLOYEE SATISFACTION AND ENGAGEMENT, THE SECOND SALE MATTERS. Copyright 2012 Oliver Wyman 7
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, organizational transformation, and leadership development. 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 52,000 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, www.oliverwyman.com 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 www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman. ABOUT THE AUTHORS Howard Lapsley is a partner in Oliver Wyman s Health and Life Sciences practice. He can be reached at howard.lapsley@oliverwyman.com Chris Bernene is a is a partner in Oliver Wyman s Health and Life Sciences practice. He can be reached at chris.bernene@oliverwyman.com www.oliverwyman.com Copyright 2012 Oliver Wyman