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


Health Insurance Gets Personal

More important, health plans will also need to develop a new set of tools to manage the health risks of consumers after they purchase coverage. Some of these tools will help consumers better manage their own health and make better decisions about care. Some will help providers coordinate care, manage population health, and meet quality, outcome, and cost objectives, such as reducing errors and readmissions.

Managing costs. As the need for investment in new retail capabilities collides with the margin and capital pressure created by reform, the cost structure of health plans will require close attention. Further, insurers will likely find it more difficult to cover increases in cost by simply raising prices. For instance, on April 1 of this year, the commissioner of insurance in Massachusetts rejected 235 of 274 small-group rate increase requests, creating a standoff with health plans and, for a short time, making it impossible for new customers to buy health insurance in the state. In May, the state’s largest health insurer, Blue Cross and Blue Shield of Massachusetts Inc., underscored the need to more aggressively manage costs when it announced a US$55 million provision for anticipated second-quarter losses caused by inadequate premium rates.

Health plans will need to pursue lean cost structures more aggressively than ever. One promising means of achieving this is to work with providers to change the traditional fee-for-service model to a pay-for-performance model. Indeed, a number of innovative experiments are already under way, aimed at decoupling payments from the volume of care and attaching them instead to quality and outcomes. These efforts could deliver transformational levels of savings because they represent an opportunity to reduce both administrative and medical costs. (See “A Better Model for Health Care,” by Gary D. Ahlquist, Minoo Javanmardian, and Sanjay B. Saxena, s+b, Autumn 2009, for a description of how such savings were realized in the Healthcare of the Future experiment run in the state of Florida.)

Cost alignment will be another important component of cost control. Acquisition costs, whether through a broker or alternative distribution channels, should be aligned with the expected lifetime profitability of the customer, and service levels can be tailored to meet customer preferences to avoid under- or over-serving specific segments. For example, affluent customers may desire concierge service whereas Gen Y customers may prefer self-service via online channels.

The greatest cost management challenge for most insurers will be developing a viable B2C retail business without disrupting their profitable, group-based B2B business. The new retail market will require a low-cost model, but existing B2B organizations often carry legacies in terms of culture, structure, and process that are not consistent with a low-cost model. Running two models simultaneously has proven challenging in other industries: Witness the inability of DaimlerChrysler to profitably straddle the high- and low-end automotive market and the failure of low-cost ventures among the major airlines, including Continental Lite, United’s Ted, and Delta’s Song.

These failures can be avoided if health plans resist the temptation to stretch their current models in an effort to straddle the B2C and B2B markets. Instead, they should consider several critical strategic choices for the retail market. They all will have a major impact on cost. These include:

  • Where the new B2C business should be housed — whether it should be embedded in the existing business, developed as a separate business unit, or organized as a subsidiary.
  • Which functions should be considered core and which non-core, including which parts of the value chain should be retained and developed to best-in-class levels and which parts can be outsourced or offshored.
  • Whether in-house capabilities should be shared or owned, including where they should reside within the organization.
  • Which new retail market skill sets need to be assembled through outside hiring and which through retraining existing personnel.
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