WHITE PAPER The Implications of Reform on the US Health Insurance Industry Key Research Findings
Table of Contents Executive Summary...1 Research Synopsis...2 Strategic Themes Driving Change...3 1. Shift in the Customer Base...3 2. Role of the Exchange...4 3. Movement from Wholesale to Retail...5 4. Managing Cost of Care...6 5. Payer-Provider Convergence...7 Critical Success Factors for Navigating Change...8 Bending the Cost Curve...8 Developing Products...8 Managing and Segmenting Customers...8 Integrating Data...8 Managing the Impacts of Reform...9 Conclusion...9 About SAS and Stonegate...9 i
Executive Summary The health care landscape continues to rapidly evolve, fueled by change from reform and the unstable economic environment. Health insurance plans face new challenges, seeking to develop go-to-market strategies that define their future position and answer critical questions surrounding growth, profitability and sustainability. And answering these questions will require more advanced levels of information gathering, analysis and decision making. Success or failure will hinge on a health plan s ability to navigate and adapt to unpredictable and tumultuous times. Ultimately, success will be determined by a health plan s ability to accurately predict and manage the shifts in their customer base, solidify its role in the health insurance exchange, navigate the shift from a wholesale to retail connection with consumers, bend the cost curve, and embrace new delivery models resulting from payer and provider convergence. The following paper summarizes key findings from a series of interviews with 40 influential marketing, sales, medical and IT executives from leading health insurance plans across the country. The research was sponsored by SAS, the market-leading business analytics software and services company, and conducted by Stonegate Advisors. 1
Research Synopsis In anticipation of the advancement of reform and continued economic change, health plans are navigating the following five macro areas of strategic focus: Shift in Customer Base. Health plans anticipate that reform, and the subsequent creation of health insurance exchanges (HIEs), will create movement from group plans to the individual market. The individual market will experience significant growth, as mandatory insurance coverage requires the uninsured to become insured. In order to effectively manage the shift, health plans will require tools that can dynamically predict market movement and offer solutions to increase member acquisition and retention. Role of the Exchange. Health plans must decide which exchanges they will participate in and develop innovative products and services that drive success within this new distribution channel. Dynamic models that evaluate exchange product offerings and pricing options will be essential to helping health plans decide where and how to participate in the emerging exchange channel. Movement from Wholesale to Retail. After reform, consumers will play a far more significant role in the health insurance decision-making process. To address the changing needs driven by reform, health plans will have to shift their go-to-market strategies from a traditional wholesale approach, where members were accessed through employers and brokers, to a more directto-consumer approach. To successfully implement a direct-to-consumer business model, health plans must learn from other industries such as financial services and consumer-packaged goods and embrace tools that help them understand and engage individuals at every member touch point. Managing Cost of Care. Reform is increasing the need for health plans to broaden their efforts in managing the cost of care. To address this issue, health plans will need to manage new medical loss ratio (MLR) requirements, optimize exchange products without the ability to underwrite, and manage risk associated with the shifts in their customer base. To support these efforts, health plans need customizable analytics that incorporate multiple data sets to more accurately predict and manage MLR at the member level. Payer-Provider Convergence. Health plans will no longer be able to control the rising cost of care without extensive collaboration with providers to manage costs, quality and outcomes. To achieve effective partnerships, health plans need a platform that facilitates real-time data exchange with providers, along with analytic tools that allow them to forecast and track outcomes data. This data, particularly real-time patient admission and discharge clinical data often inaccessible today, can be used for better care navigation and measurement of program success and ROI. 2
Strategic Themes Driving Change Interviews with 40 key executives across 15 national and regional health plans yielded five macro areas of strategic focus driving change. Each macro area raised a number of critical questions that will require analytics to answer. The five areas include: 1) shift in their customer base; 2) role of the exchange; 3) movement from wholesale to retail; 4) managing the cost of care; and 5) payer-provider convergence. 1. Shift in the Customer Base Health plans are challenged with determining how their membership will shift. Predictions surrounding retention and new member acquisition remained unclear with the expected shift in the small and midsized group to individual market, exacerbated by an additional 30 million new individuals expected to purchase insurance policies. Industry executives predict that: Initially, the majority of the shift will likely occur in the smallest of groups. Over time, medium and large groups may also shift to the individual market due to the cost savings associated with offloading health benefits administration. These larger groups will have to assess the value of offering health benefits to employees versus the drawbacks of not offering health benefits to employees e.g., increased absenteeism, job anxiety, tardiness and a decrease in overall performance. Health plans expect that a shift in their customer base will not only affect group plan membership, but also group plans risk pools in both the short and long term. It is commonly expected that in the short term, higher-risk uninsured individuals will be attracted to exchange offerings due to lower-cost options for individual coverage. However, over time, individuals enrolled in employerbased group plans may find they can get better, more affordable coverage from an exchange. Specifically, good-risk, young and healthy populations who are subsidizing their older co-workers may find more affordable coverage in the exchange. With good risk exiting, groups may see their risk and resulting premiums increase, therefore challenging the employer to maintain group coverage. Health plans will witness a change in the competitive landscape with the shift in their customer base. New nontraditional players are likely to enter the health insurance space given the growing opportunity in the individual market. New entrants could include Medicaid managed care players, retail stores such as Wal- Mart and Walgreens, and online players such as Google and Microsoft. Existing health plans will have to decide whether to embrace new exchange opportunities or exit the exchange market. Some health plans may decide to form strategic alliances with nontraditional players, as this will enable them to more effectively piece together the value channel. 3
To help predict, navigate and manage the reform-driven shifts in their customer base, health plans will need far more robust predictive analytic tools. These tools should assist in dynamically predicting shifts in the market driven by varying reform scenarios. Additionally, health plans will require tools that can segment consumers and provide insights into the risk of segment cohorts based on socioeconomic and demographic data. Lastly, health plans need game theory and competitive analysis tools that aid in the scenario and strategic planning for traditional and nontraditional competitor response. 2. Role of the Exchange The introduction of health insurance exchanges will not only create new distribution channels for health plans, but will also become integral to member retention and acquisition post-reform. In order to successfully compete on exchanges, health plans need to first determine which exchanges to compete on as well as what products to offer. To prepare for the exchange launch in 2014, as referenced above, health plans will need to predict populations likely to shift to the exchange and profile the risk of shifting members. Based on membership and risk predictions, a plan can determine if, how and where to compete. Health plans must take into consideration factors such as current and evolving regulations, competitive landscape and profit status. Profit status is a key consideration, as nonprofit health plans do not face the same profit-margin sensitivity as for-profit health plans. Simply stated, for-profits have to place emphasis on meeting shareholder expectations, where nonprofits can focus on sustainability. Health plans must also consider each state s exchange regulations, including whether or not any particular state will require mandatory plan participation. Health plans will then decide if they consider the exchange a new distribution channel or simply a compliance play to satisfy regulatory requirements. Health plans seeking to meet compliance may offer only a single, non-marketed product to satisfy minimum regulatory requirements. Alternatively, health plans that truly want to use the exchange as a new distribution channel will likely offer a more robust product portfolio, and will invest in extensive direct-to-consumer marketing and sales efforts. After deciding which exchanges to join, health plans must consider how they will participate. This will require making decisions regarding how to: 1) price products most competitively; 2) take full advantage of their networks; 3) tier their networks; 4) reverse-engineer products to attract good risk; and 5) achieve the lowest-cost operating structure. Plans will also need to adapt current products and develop new innovative offerings, such as zero-premium or close to zero-premium products (after subsidy), unbranded products and fee-based customer service models. 4
Similar to tools required to predict shifts in a plan s customer base, health plans will need tools and analytics to assist in determining which exchanges to join. These tools should take into consideration compliance requirements, migration patterns, profitability and the competitive landscape. Furthermore, health plans will need tools to assist in rapid product concept creation and testing. In addition, plans will need precision pricing and price optimization tools that account for regulatory requirements, profitability, consumer price elasticity and competitor pricing. 3. Movement from Wholesale to Retail Following reform, consumers will play a far more significant role in the health insurance decision-making process. Health plans must shift how they go to market, from a traditional wholesale approach where members are reached through employers and brokers to a more direct-to-consumer approach. Health plans will need to redefine systems and processes in order to effectively manage the growing individual market and create a successful direct-to-consumer business model. The shift to an individual market and adoption of more direct-to-consumer strategies may lead to the disintermediation of the broker and employer channels. To effectively navigate the direct-to-consumer model, health plans will need a more comprehensive and robust view of the individual consumer. This will require clinical data (predominately from EMR/EHRs) and consumer-level data to be seamlessly integrated. Currently, most health plans are unable to achieve this level of integration. The retail mentality is not only reserved for the individual market; retail will permeate the group market as well. Group markets will continue to increase deductibles and shift more costs of health care to their employees, requiring employees to take on more financial responsibility for their health care purchase decisions. With increased financial responsibility, employees will make more retail -based decisions on how best to spend their own money, such as evaluating cost and quality trade-offs in provider selection. Consequently, health plans must consider how to help both group and individual consumers navigate the health care continuum. Total customer management, or the holistic use of all customer data from every customer touch point and every facet of an organization, will be a necessity for health plans to succeed in consumer-driven markets. To evaluate the success of consumer-focused products and services, health plans will need touch point tracking and analytics at every stage of the member relationship life cycle. This data can in turn be aggregated and used to provide marketing and sales ROI, eliminate or combine redundant touch points, improve conversion rates, enhance customer loyalty and advocacy, and strengthen brand equity. 5
To be effective in a consumer-driven retail market, health plans will need to track and influence the retail decisions a member makes and use this information to support consumer engagement efforts. Health plans will need to develop more robust systems and processes that can track and analyze consumer touch point data at every level of consumer engagement, from prospecting, acquisition, customer service, retention and ongoing advocacy. Health plans will then need to dynamically segment and aggregate the large volumes of consumer data and use this information to better understand how best to interact with and engage members using product design, pricing, networks, service experience, distribution and branding. 4. Managing Cost of Care Reform is intensifying the need to manage the cost of care and bend the cost curve. Specifically, health plans will need to manage new medical loss ratio (MLR) requirements and manage risk without the ability to underwrite. The full impact reform will have on health plans remains unclear, as regulation continues to change. The onset of reform will require health plans to more accurately manage and measure MLR in order to remain compliant with regulations. This will require better, timelier MLR tracking systems all the way down to the member level. Also, if health plans do not stay within the parameters of MLR mandates, they will either forfeit profits or pay member rebates. Predicting the cost of care is a key component for MLR management post-reform. This will allow health plans to proactively adjust price and administrative cost structure as needed to stay within the mandated MLR parameters; and for some, assist in maximizing profits while avoiding the payment of rebates. Health plans unanimously agree that MLR prediction and benefit design alone will not be sufficient in controlling the cost of care. Plans will need to embrace new risk management strategies, while improving their case management, care and disease management, and wellness solutions among their fully insured books of business. Health plans are also experimenting with nontraditional programs such as telehealth, medical tourism and highly specialized health care factories in order to reduce the cost of care. Yet health plans still struggle to demonstrate ROI when implementing these nontraditional programs, as robust data on outcomes is still nearly nonexistent. Health plans need analytics to predict and manage MLR at the aggregate, segment and individual level to ensure compliance while maximizing profits and minimizing rebates paid to members. These MLR calculations will need to take into account static inputs such as utilization patterns, elements of risk, levels of care coordination, pricing, and delivery system information. Health plans need tools that can streamline the accurate measurement of MLR. Additionally, they will need to incorporate outcomes data at the individual and cohort level for wellness, disease and case management. This data can then be used to demonstrate ROI for medical programs. 6
5. Payer-Provider Convergence Health plans will no longer be able to control the rising cost of care without extensive provider collaboration. These collaborative efforts will need to focus on the use innovative delivery systems that enable the provider to lead the coordination of individual care, introduce shared savings models, and deliver tangible outcomes that drive down the cost of care. Several provider models are currently being tested by health plans to drive down the cost of care, with the two most prevalent being accountable care organizations (ACOs) and patient-centered medical homes (PCMHs). These programs focus on improving quality and controlling cost of care by aligning the interests of health plans and providers. Additionally, health plans are exploring other ways to partner with providers to promote evidence-based medicine, comparative effectiveness, integrated care and pay-for-performance. Health plans face challenges in measuring the return on investment of programs that provide difficult-to-quantify savings, such as wellness, case, care and disease management. In order to rectify this, health plans will need to work more closely with providers to coordinate care, develop performance metrics, and implement long-term data tracking systems and processes. Real-time data exchange between health plans and providers is necessary to enable collaborative delivery model operation and measurement. Specifically, the exchange of clinical, claims and pharmaceutical data between health plans and providers is essential to track and analyze outcomes. To develop effective partnerships and collaboration with providers, health plans require tools to assist in the design of alternative delivery models and assess which models have the greatest impact on bending the cost curve. The tools will need to validate that the right members are in the right programs at the right time, and ultimately assist in calculating subsequent cost savings at the population, group and individual level. To gain provider buy-in, health plans need care coordination metrics that assess the performance of alternative delivery models and clearly demonstrate the impact on improving member health and lowering costs. Lastly, for the tools to be effective, real-time data exchange between coordinating care providers and health plans will be paramount. 7
Critical Success Factors for Navigating Change The five macro areas of strategic focus will require health plans to proactively address and manage the following critical factors to ensure success in the post-reform health care environment. Bending the Cost Curve Limiting growth in costs is job number one, with or without reform. Opportunities include designing alternative delivery models, validating the ROI of cost improvement programs, and assessing performance of delivery models using metrics other than cost. Developing Products Health plans need to develop new products and understand the impact of these products from a book of business and MLR standpoint. This category also includes the development of precision pricing models that take into account new MLR requirements. Being able to predict MLR and set prices accurately using individual level data is a tremendous need in both the individual and group markets. Managing and Segmenting Customers As health care focuses on the consumer, health plans have the need to aggregate data from consumer touch points with demographic data. They need to be able to model and influence consumer behavior to increase sales, promote loyalty and manage medical costs. This consumerism, combined with the movement to retail, is increasing payer needs to develop sophisticated segmentation schemes in order to drive product design, acquisition, retention, pricing, risk evaluation and consumer engagement. Integrating Data All health plans are facing the need to integrate data that is currently in disparate data warehouses across the enterprise. Additionally, health plans need to seamlessly overlay external data, such as clinical data, with internal claims data to gain holistic insights at the member level. The majority of this data can be gathered real-time from provider EMR/EHR records. 8
Managing the Impacts of Reform Health plans need to predict market and enrollment shifts as reform is implemented. Furthermore, they need to assess the risk of shifting populations and the impact it will have on health plans overall book of business. This category also includes understanding the potential market impact of traditional and nontraditional competitors. Conclusion In order to be successful in a post-reform environment, health plans have identified the need to proactively manage five macro strategic drivers. These strategic areas of focus will become the basis for implementing new robust data and analytics capabilities along with processes that provide insights at the consumer level, such as predictive analyses, MLR management, segmentation and real-time data integration. These new capabilities and processes will become the cornerstone for the successful evolution of health plans current strategies to those that meet the needs of a post-reform environment. Ultimately, a health plan s ability to bend the cost curve, manage and engage consumers at the individual level, rapidly develop innovative and affordable products, and navigate the ever-changing impact of health reform will define its path toward competitive distinction or extinction. About SAS and Stonegate SAS is the leader in business analytics software and services, and the largest independent vendor in the business intelligence market. Through innovative solutions delivered within an integrated framework, SAS helps customers at more than 50,000 sites improve performance and deliver value by making better decisions faster. Since 1976 SAS has been giving customers around the world THE POWER TO KNOW. Stonegate Advisors provides research and analytics, strategic counsel and business advisory services to companies within or targeting the health and wellness industry, including the top 10 US health insurers, as well as life, dental and disability insurers; wellness, disease and care management companies; pharmacy benefit managers; and pharmaceutical companies. 9
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