Health insurance exchanges: Jump ball for health plans

Health insurance exchanges: Jump ball for health plans The advent of mandated government-sponsored health insurance exchanges is expected to create a marketplace disruption larger than that of Medicare Part D in its inaugural year. State-level exchanges have the potential to transform traditional individual and small group health insurance. Commencing with the open enrollment period in late 2013, these new, consumer-oriented, pricetransparent exchange markets are anticipated to be a competitive jump ball for health plans. Across the country, many health plans are looking at the range of potential market scenarios and preparing for change at the state or substate level. As health insurance exchanges are intended to serve individual geographic markets, it is likely that some exchange markets will be more attractive than others. Under any market scenario, however, health plans may struggle to compete effectively in exchange markets without reconfiguring their product offerings and lowering their cost structures. Right now, it s anybody s game. But if market share proves to be as sticky for health insurance exchange products as it has been for Medicare Part D, early winners may have an advantage for years to come. Health plans should start preparations now by identifying their objectives for participating in exchange markets and by conducting a market entry evaluation to determine if they have the right mix of and products to appeal to their desired consumer segments. Understanding the rules of the exchange game Health insurance exchanges are online marketplaces that allow individuals and small groups to identify, evaluate, and compare health plan options that are available to them in their local markets. The Affordable Care Act (ACA) legislation and draft regulations specify the creation of two types of exchanges an individual exchange and a small group (SHOP) exchange for employers with up to 100 employees. States have the option to combine these two exchanges into a single exchange. Exchanges may be offered at the regional, state, or substate level, but must be geographically distinct. If a state does not appear to have an adequate exchange solution by early 2013, the federal government is required to operate an exchange on that state s behalf. The products sold on these exchanges must conform to certain rules in terms of the benefits offered (including minimum essential benefits ), the levels of coverage provided, and pricing (community-rated with limited variation based on age, geography, family composition, and smoking status). Information about quality, member satisfaction, and medical loss ratio must also be reported. Health insurance exchanges are anticipated to transform the current individual and small group insurance markets and create a new, consumer-oriented marketplace encompassing more than 24 million members, according to projections by the Congressional Budget Office. 1 More recently, the Deloitte Center for Health Solutions estimated that the range of potential entrants into the exchange could be anywhere from 23-65 million depending on various scenarios, including the state of the economy. 2 Health insurance exchanges: Jump ball for health plans 1

The size of the exchange market could grow depending on strategic choices made by employers. If exchanges are successful, employers will, for the first time, have a viable alternative to employer-sponsored coverage for their employees who will be able to purchase community-rated, guaranteed issue health insurance. Employers responses and use of exchanges are expected to vary dramatically by group size and other specific employer attributes. Small group employers (1-50 employees) will be eligible to participate in the exchanges starting in 2014. These employers are expected to be highly price-sensitive and to gravitate toward the lowest-cost coverage options. Some of these employers may opt to drop health coverage for employees; others, to purchase insurance through exchanges. These decisions may be influenced by the availability of tax credits for employer-sponsored coverage available to some employers with fewer than 25 employees, and by the fact that employers with fewer than 50 employees face no penalties for not offering coverage. Midsized employers (51-100 employees) will become eligible to participate in the exchanges no later than 2016. In devising their strategies, these employers will likely weigh penalties that apply for dropping coverage with the advantage of the tax deductibility of employer-sponsored coverage, and the value that their employees place on employer-sponsored coverage. Individual employer reactions are expected to vary depending on industry, workforce structure, worker wage mix, and current benefit program. Large employers (100+ employees) likely will not be eligible to purchase coverage through exchanges until 2017 or later, and will continue to need to balance the demands of acquiring and retaining talent against the rising costs of health coverage as they determine whether to modify or drop coverage, or eventually move coverage to an exchange. Many may decide to shift coverage from a defined benefit plan to a defined contribution toward coverage in an attempt to limit their costs. Others may change their workforce composition toward more part-time employees. (Employers are not required to provide coverage to part-time employees.) These actions may be more common in industries like manufacturing and retail; however, companies where intellectual capital is critical will likely continue to offer benefits to retain talent. Employers benefit decisions are complex and will likely be influenced by a number of factors, so it is difficult to predict exactly what will happen within each employer segment and the resulting impact on health plans. The early responders will likely exert the greatest influence over the path chosen by other employer groups. 2 Health insurance exchanges: Jump ball for health plans

Developing a game plan The ACA prescribes some basic functions that all exchanges must be able to perform, but also provides states some design flexibility. A host of market drivers are expected to impact the operating model design and functionality of a given state exchange (Figure 1). The two main factors are: Exchange the actual processes and functions performed by the exchange. Some states may take a de minimis approach, while others opt to build more significant operational into their exchanges. Market environment the regulatory climate and approach within the state. Some states may manage markets through regulation, while others may employ a more free-market approach. Based on these market factors, Deloitte anticipates that four health insurance exchange operating models will emerge, each with distinct characteristics: Information aggregator, Retail-oriented exchange, Guided exchange, and Market curator (Figure 2). Figure 1. Market drivers of exchange models Exchange Law mandates that a core set of /processes must be present (i.e., eligibility verification, plan comparison) However, there is some flexibility in how broad these need to be in the exchange itself Open Prescriptive Market environment States have considerable leeway in the degree by which they balance competition with appropriate regulation to encourage health plan participation Competitive Regulated Driver Open Prescriptive Driver Competitive Regulated Funding State infrastructure Population demographics Budget deficit Long and stringent procurement Fewer uninsured; healthier population Budget surplus Flexible procurement cycles Larger state, high population of uninsured individuals, less healthy population Political landscape Regulatory environment Broader reform policy goals Laissez faire Limited regulatory oversight. State reinforces competition and growth Exchange is not viewed as a mechanism to promote broader health policy Rules of engagement Extensive regulatory oversight and limits competitive forces Exchange is viewed as a vehicle to promote broader health policy As used in this document, Deloitte means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Health insurance exchanges: Jump ball for health plans 3

Figure 2. Exchange models Prescriptive Exchange 2 Retail oriented 4 Creates a retail shopping experience with more service (e.g., ability to shop by price or benefits needs) and shop to enroll transaction scope Offers a broad range of products with variation in price and design Provides information and enrollment assistance Provides education, outreach, and technical assistance for consumers 1 Information aggregator Meets requirements of the ACA; enrollment transactions passed to plans websites via links Functions as an impartial aggregator of information on health plan products and quality information Provides structure to allow health plan design and price comparisons Leaves accountability of the product or service delivery to the marketplace Limits carriers available on the exchange through a competitive selection process Creates an end-to-end consumer experience from shopping to enrolling Selects the products that it deems are most effectively suited for customers and organizes them and maintains product data files Provides consumer and member management services, ranging from initial enrollment and billing to ongoing maintenance transactions 3 Market curator Guided Limits carriers available on the exchange through a competitive selection process Standardizes product offerings Provides more prescriptive mandates and regulatory oversight over the market Offers minimal shopping tools and basic plan comparison functionality Open Competitive Market environment Regulated The specific model that emerges for any given state and exchange will likely influence both a health plan s decision to participate in the market, as well as the development of its go-to-market strategy in entry states. 1. Information aggregator: This type of exchange delivers bare-minimum to meet ACA requirements. The exchange serves as an impartial aggregator of information on health plan products and quality, providing a structure to allow health plan design and price comparisons. Enrollment transactions are passed to health plans websites via links. Accountability for specific products or services is left primarily to the health plan that provides them. 2. Retail-oriented exchange: This type of exchange creates a retail shopping experience with more service (e.g., the ability to shop by price or benefit preferences) and a shop-to-enroll process that allows the consumer to compare, purchase, and enroll in a single transaction. It offers a broad range of products varying in price and design, and provides education, outreach, and technical assistance for consumers, as well as enrollment information and assistance. 3. Guided exchange: This type of exchange provides more prescriptive mandates and regulatory oversight over the market. It limits available carriers and plan choices through a competitive selection process, and may require that products be further standardized. Functions owned by the exchange are minimal, and may include basic tools and health plan comparison information. The guided exchange is likely only an interim model for states lacking the initial funds to build more exchange. 4. Market curator: This type of exchange creates an end-to-end consumer experience, from shopping to enrolling. It limits the available carriers and plans through a competitive selection process. The exchange is responsible for selecting the products it feels better fit the customer, organizing them, and maintaining product data files. It provides an extensive suite of consumer and member management services, ranging from initial enrollment and billing to ongoing maintenance transactions. 4 Health insurance exchanges: Jump ball for health plans

Each of these four exchange models will require particular from the health plans that choose to participate in them. To develop an appropriate strategy for a particular market, health plans should understand each of the models that are likely to emerge in a given state or geographic area, and how the models might evolve over time. For example, some states may not fall under any of these models if they are not ready by the 2013 federal deadline, while other states may start in one quadrant and migrate to another as political, fiscal, and other factors change. Stepping onto the court Smart first steps for health plans The complexity and number of potential exchanges mean that health plans exchange planning requires significant lead time. 2011 presents a key milestone in the exchange timeline as states begin reviewing draft federal regulations, enacting legislation to facilitate, and developing their own proposed rules. Health plans, however, also need to think about the development of the market over the next 10 years, as some years may bring more significant changes than others: 2014 (when exchanges are implemented), 2016 (when states must open exchanges to employers with up to 100 employees), and 2017 (when states can choose to allow larger employers to access offerings on the exchange). Given the amount of preparation required to integrate health plans front-end operations into these new, stateor federal-run distribution channels, health plans should start positioning themselves now for the future exchange environment. They should begin by understanding the level and trajectory of exchange development in each state, and by exploring their own exchange objectives and impacts from a market, strategic, and operational perspective (see page that follow). This knowledge can help health plans to develop their overall exchange market entry strategies, including identification of the potential exchange markets they wish to enter and the products they will likely need to develop or offer. Based on their identified market entry strategy, health plans should then evaluate whether their are mature enough and products are appropriate for the chosen exchange markets. Developing a market entry strategy Exchanges are designed to promote price transparency and subsequently are expected to drive more intense pricebased competition. To enter the exchange market and compete effectively, health plans should expect to manage both internal drivers of premium costs while developing strategic responses to external factors over which they have significantly less control. There are two primary internal drivers of premium costs that health plans should manage effectively: network and administration. Given that price may be a key driver of consumer choice, health plans that are at a material unit cost disadvantage in their networks in certain geographies will likely have a hard time competing in the exchanges. From an administrative perspective, while high premiums may afford health plans with more administrative dollars to leverage, efficient markets with lower premiums may have a counter effect, producing fewer administrative dollars that can cover costs and margin. To gain success in terms of market share and profitability, health plans should effectively manage both of these drivers The external factors that influence a health plan s ability to enter the exchange market are a little more complicated and include a given state s insurance market regulation practices, individual exchange membership potential and demographics, and a health plan s competitive positioning. Highly regulated states are more likely to develop more restrictive exchanges, and to deploy rigorous risk adjustment mechanisms that can mitigate any potential advantage gained through positive risk selection. As discussed previously, the level of regulation and resultant operating model that emerges in a given state will likely have a significant impact on the required health plans must have in place in order to compete. In the area of membership potential, some health plans will be challenged to meet administrative and profit requirements in efficient markets with lower average premiums unless sufficient scale can be achieved. Finally, a health plan s current brand positioning and market share relative to competitors could give certain plans a considerable advantage. Health insurance exchanges: Jump ball for health plans 5

Questions to aid scenario planning Health plans are unlikely to know the detailed regulations and rules when they initiate health insurance exchange planning efforts; they will have to make an educated guess based on a set of likely assumptions. Formulating and answering questions that assess exchange market opportunities and potential strategic and operational impacts can provide health plans with valuable insights to help them clarify their exchange objectives, define contingencies, and manage a strategic response. Strategic impact assessment Channels: What strategies will likely be required to incorporate this new channel into our existing distribution model? How can we retain existing members in the transition? How can our relationship with the broker community change? Product and network: How can product design be changed to lower cost and improve consumer satisfaction? How can we deliver value-added experiences through the exchange while facing cost constraints? How can we prevent brand degradation among consumers and providers? What revenue potential exists for buy-up services? How can product bundling strategies shift? Can we lower costs enough by narrowing networks? Operational and technical impact assessment Current operating model: What kinds of analytics can help us succeed with these segments? What changes are required for existing provider and subscriber agreements? What changes are required to leverage new medical management and provider collaboration models? Does our IT strategy align with new technology demands (e.g., new integration requirements)? Capital (human, intellectual, and financial): How does this line of business fit into our existing organizational structure? Where should the funding come from to invest in new? What group within the organization should own the exchange lines of business? Can we meet the deadlines for readiness? Market opportunity assessment Customers and markets: How much investment is required to enter each exchange market? What is the projected return on investment? How are competitors approaching exchanges? What role does this line of business play in our company s product portfolio for each geographic market? How will insurance exchange investments likely be prioritized against other reform initiatives (e.g., administrative simplification, ICD-10, compliance)? 6 Health insurance exchanges: Jump ball for health plans

Health plans can better prepare for the uncertain market direction by engaging in scenario planning to consider the range of ways that the market might evolve and identify how they might differ. Each scenario can then be evaluated to identify an effective strategy containing core and contingent strategies. Core strategies are those that would be employed under multiple scenarios, and contingent strategies would be pursued only in specific scenarios. Once health plans consider the internal price drivers and the external factors influencing market entry and competitive position and develop their strategy, they need to consider the specific product offerings that are most attractive to each potential market segment. Each segment (i.e., individual and small group) has subsegments, based upon age, sex, geography, and other demographic factors, with specific needs as well as different competitors, funding sources, provider networks, and economics. These subsegments should be analyzed individually to develop product offerings with the plan design, tools, and communication strategies that will likely attract and retain high-value customers who move to the exchange market (Figure 3). Closing thoughts Health insurance exchanges can be a significant and attractive market opportunity for health plans that understand the exchange models that may emerge, develop a flexible strategic response, and then carefully evaluate and identify required capability investments and potential markets to enter. This can position health plans to more effectively identify and develop the products that will likely be competitive from a network, price, and brand perspective. By adopting more efficient, lower cost platforms, health plans can increase their price competitiveness, play to their product strengths, and potentially gain long-term strategic advantage. Endnotes 1 CBO, Manager s Amendment to Reconciliation Proposal, March 20, 2010. 2 Health Insurance Exchanges: A strategic perspective, Deloitte Center for Health Solutions, July 2011. Figure 3. Product attributes and considerations Tier 1 Networks administration Tier 2 Branding Plan design/ Benefit provisions Consumer tools Communications Lower-cost, high-quality networks are key to creating competitive price points. Lower-cost, limited geographic networks are more likely to be accepted by consumers and small groups who lack national scope. Addressing root causes of product complexity simplifying provider contracts, rationalizing benefits, and simplifying medical policies can lower product administration costs and increase simplicity/ease of use for members. The exchange shopping experience will vary; local brand recognition is important to proper positioning. Branding on exchange Web portals likely will be subject to limitations; product naming could be a critical brand issue. Quality ratings will likely become part of exchange branding. Product designs should be expected to vary within a given actuarial value category. Alternative benefits/nonessential benefits (such as acupuncture) may be an opportunity for differentiation. There is an opportunity to rationalize investments in consumer tools and lower administrative costs given that exchanges/other entities will provide plan comparisons, cost, and quality data, etc. All communications must be at a fourth grade reading level. Adding online employee communications materials to core product offerings could meet small group needs and create differentiation. Health insurance exchanges: Jump ball for health plans 7

Authors Paul Lambdin Director Deloitte Consulting LLP plambdin@deloitte.com Dhan Shapurji Director Deloitte Consulting LLP dshapurji@deloitte.com Additional insights The Health Insurance Exchange provisions within the ACA impact multiple sectors within the Health Sciences & Government industry. Access additional health plans and cross-sector thinking from Deloitte at www.deloitte.com/us/hix, including projected enrollments in exchanges under four scenarios in year 2020, as outlined in Health Insurance Exchanges: A strategic perspective. Additional contact Sarah Wiley Director Deloitte Consulting LLP sawiley@deloitte.com This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this presentation. Copyright 2011 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited.