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


Health Insurance Gets Personal

The current go-to-market models of health plans are not well designed for this new retail era. The prominence of employer-sponsored plans is diminishing, but health insurers still have a decidedly business-to-business perspective. Their revenue assumptions are transaction based and group focused. Products tend to be “one size fits all,” and product portfolios are limited to medical insurance. Today’s models assume relatively little direct contact with consumers: They depend on brokers to sell products and navigate the complex, cumbersome application and renewal processes, and on care providers to submit and manage claims.

The current prevailing risk management model, which will soon be prohibited, is focused on the point of selection. Insurers use medical underwriting to select applicants who are healthy risks and either reject those who are high risk or price their policies accordingly.

Cost management models are focused on negotiating the lowest cost from providers on a fee-for-service basis. The cost structures of health plans are also burdened by high legacy costs, such as complex claims processing systems, and are designed to serve the group market, which is less price-sensitive and generates higher revenues and margins.

In the coming years, these models will not serve health plans as well as they have in the past. As the retail marketplace for medical insurance expands, health plans will need new models that are based on the changing drivers of revenue, risk, and cost. The way these models are built will depend on the answers to a number of key questions.

  • How will consumers make purchase decisions in a more transparent, less restrictive market, especially one mediated by online exchanges? Which consumer segments will be most attractive, and what will it take to identify, activate, and retain them?
  • How can risk be managed in the absence of medical underwriting? How should investments be staged to preserve scarce capital? What levels of capital are needed to cope with the volatility created by the regulations that limit medical underwriting?
  • What capabilities will be needed to attract individual consumers? What cost structures will be needed to offset the downward pressure on margins and capital?

Driving revenue. As health plans respond to the changing retail market, they will need to create go-to-market models that are specifically designed for a business-to-consumer environment in which exchanges will often play an intermediary role. In many ways, they will begin to emulate successful consumer companies in other sectors, such as Capital One, Harrah’s Entertainment, United Services Automobile Association (USAA), and Progressive Insurance.

Like these companies, health plans will need to decide which consumer segments to serve. They will also need a tailored value proposition for each segment, addressing consumer needs across various health insurance products and services (such as dental and vision) and aligning the price, brand, and channels through which they are offered. They will need a more granular approach to marketing, one that uses behavior-based data and analytics to better identify consumer needs and further customize their value propositions. Think of Capital One’s micro-segmentation approach to designing its credit card offers, which depends on copious data and an intimate understanding of consumer behavior.

To retain the best customers in a competitive marketplace with fewer barriers to switching plans, health plans must intensify their focus on managing the customer life cycle — calculating the acquisition, retention, and lifetime value of customers by target segment. They will also have to simplify customer touch points. Consumers have been “trained” by other service industries to expect a transparent, no-hassle experience. A recent Booz & Company study of the Massachusetts Connector, an exchange established by the state’s 2006 healthcare reform act that is very similar in design and intent to the exchanges mandated by the national reform act, suggests that consumers will demand the same ease from their health insurers. Benefits will have to be transparent and comparable. Interactions with the health plan, such as enrollment, renewal, and adjudication, will have to be fast, straightforward, and user-friendly.

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