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 / Autumn 2010 / Issue 60(originally published by Booz & Company)


Health Insurance Gets Personal

As reform legislation makes the U.S. healthcare industry more consumer-centric, companies will need to change their business models and add new capabilities.

The historic healthcare reform enacted by the Obama administration and the U.S. Congress in March 2010 will fundamentally alter how health insurance is bought and sold in the U.S., and will have a major impact on the companies that provide or manage coverage for nearly 250 million people. The retail market for individuals and small businesses will become much larger and more transparent. Coverage parameters will be defined by government rather than by companies, and medical underwriting will be eliminated. Consumers will be asked to make purchase decisions on their own, often through online healthcare exchanges. Price and brand will become a more influential factor in consumer buying decisions and health plan strategies.

In this new retail era, the individual consumer will play a far more central role in the healthcare market. Already, we have seen increased cost sharing by consumers (often in the form of high deductibles and user fees, such as co-pays and co-insurance), online price comparison tools for easier shopping, and a rising awareness of consumer needs on the part of insurers. Soon, more and more consumers will make health insurance purchase decisions directly. Small employers, for example, may not participate in the selection of health plans at all, choosing instead to simply pay all or a portion of their employees’ health insurance premiums. With lower barriers to switching, consumers will increasingly vote with their feet when they are not satisfied.

By 2016, as coverage is extended to the previously uninsured, the retail segment of the health insurance market, which includes small group, commercial individual, and government individual products, will expand dramatically to about 55 percent of the overall market. According to Booz & Company estimates, most of this growth will occur in the commercial individual segment, which will swell to 27 million people — far more than the 16 million buyers who would have made up the segment if the reform bill hadn’t passed.

State-run healthcare exchanges, similar to the Massachusetts Commonwealth Health Insurance Connector and the Utah Health Exchange, will be a major distribution channel in this market. The exchange-based market will be highly regulated and far less opaque to consumers than it is today. The ability of health plans to manage risk — at least on the traditional basis of medical underwriting — will be severely restricted. The Patient Protection and Affordable Care Act requires the elimination of lifetime spending caps and preexisting condition restrictions, and limits waiting periods for coverage. It also requires the introduction of products that conform to government-imposed benefit tiers and that are priced according to modified age and gender bands.

The retail market that emerges from these changes will ultimately be more buyer-friendly. But reform will also significantly challenge the traditional means by which health plans manage the three fundamental drivers of their business models — revenue, cost, and risk.

Demographic trends in the U.S. will further exacerbate the challenges facing health plans. Cost pressures will intensify as consumers age and need more care. Chronic diseases, which already account for approximately 75 percent of total healthcare costs in the U.S., will rise at an alarming rate, according to the Centers for Disease Control and Prevention (CDC). The CDC estimates that the number of people who are contracting or at risk of contracting chronic diseases in the U.S. is growing at five times the population growth rate and that by 2016, almost half of Americans will suffer from these diseases.

Redesigning for Retail

Health plans that choose to compete in the retail market will have to learn to operate profitably in a regulated environment in which quasi-governmental agencies set standards for participation and require benefit tiers for products. They will need to cope with the downward pressure on premiums that will result from greater consumer choice and market transparency, as well as the emergence of new competitors, including government-sponsored and consumer-organized plans.

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