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Aetna’s Frugal Healthcare Strategy

Navi Radjou

Navi Radjou is a Silicon Valley–based strategy consultant, a World Economic Forum faculty member, and a fellow at the University of Cambridge’s Judge Business School.

 
Jaideep Prabhu

Jaideep Prabhu is the Jawaharlal Nehru Professor of Indian Business and Enterprise and Director of the Centre for India & Global Business at the University of Cambridge’s Judge Business School.

 

Mark Bertolini, the no-nonsense CEO of Aetna — one of the world’s leading health insurers — is not impressed with the U.S. healthcare system. In an interview with us, Bertolini called the sector “too bloated and accountable to no one.” The system — which will cost US$4.6 trillion, or 20 percent of U.S. GDP, by 2020 — “charges patients and rewards care providers on services delivered, not patient outcomes,” he said.

That’s not good enough, especially at a time when companies are feeling an increased pinch on their resources. Bertolini is convinced that the only way to deliver better care at lower cost for more Americans is to radically reinvent the entire U.S. health system. And Aetna is helping to lead the charge by adopting a three-pronged disruptive strategy we call frugal innovation:

  • The company is reengineering its core business model so it can make money by saving people money — from now on, Aetna will pay doctors and hospitals based on positive health outcomes for patients, rather than the number of tests and procedures they perform.
  • It is using a low-cost, low-investment lean startup approach to rapidly test and scale up innovative ideas.
  • It is practicing what it preaches by adopting private exchanges and consumer engagement tools for its own employees.

The cornerstone of Aetna’s frugal innovation strategy is the radical reinvention of its traditional business model. The company is boldly replacing the current fee-for-service reimbursement model, which is both inefficient and expensive, with a value-based care model — a pay-for-performance system that rewards providers for successful health outcomes for patients. Instead of getting paid to perform blood tests to ascertain a patient’s cholesterol levels, for example, doctors would be paid based on their ability to keep a patient’s cholesterol levels healthy.

The most powerful force in U.S. healthcare is already making some significant moves in this direction. In January, the Department of Health and Human Services (HHS) announced that the Medicare program, which provides healthcare for nearly 50 million older Americans, is moving from a fee-for-service payment model to a fee-for-value model. Value-based care, if implemented widely, can save the U.S. health system billions of dollars. Pay-for-performance will also increase transparency, accountability, and efficiency by incentivizing providers to offer the best care for patients.

To seize this opportunity, Bertolini is reinventing his 162-year-old bricks-and-mortar insurance company. “To survive, most health insurers either move up the value chain to serve a premium market, or move down by buying out hospitals,” he told s+b. “We chose neither. We decided to move deeper into the value chain by becoming the ‘Intel Inside’ of the entire healthcare system.”

To implement this strategy, Aetna has been assembling a comprehensive portfolio of digital tools and advisory services such as population assessment, clinical analytics, and care coordination that will enable providers to seamlessly transition to value-based care — and benefit from it. Aetna intends to use this integrated set of solutions to help providers establish themselves and operate as Accountable Care Organizations (ACOs): Groups of doctors, specialists, and hospitals that collaborate and assume collective responsibility for the cost and quality of care. By working within an ACO, providers can avoid costly duplication of services, reduce inefficiencies and medical errors through better coordination among care teams, and boost patient compliance with care plans. ACOs are able to deliver high-quality care faster, better, and cheaper.

Aetna has set up a new business unit called Accountable Care Solutions that provides advice and programs such as population health management to providers switching to the ACO model. As this model gains more traction, value-based payments are expected to account for two-thirds of all U.S. healthcare spending by 2020, compared to one-third today. HHS has set an ambitious goal of tying 30 percent of fee-for-service Medicare payments to quality or value through alternative payments models, such as ACOs, by the end of 2016. It plans to increase that goal to 50 percent by the end of 2018.

Value-based payments are expected to account for two-thirds of all U.S. healthcare spending by 2020.

As accountable care becomes the norm, Aetna is developing new lines of business that tap into the trend. Aetna teams up with doctors and hospitals to co-market new health plans that enable its members to get care from providers in that hospital’s ACO network. According to Aetna, during the first year of such plans, its customers save 8 percent to 15 percent on premiums — compared to competitor PPO products — and receive better care, while providers also get more value by spending less. For instance, Aetna’s ACO partnership with Banner Health Network led to a 5 percent reduction in medical costs for its members in the ACO-based health plan in 2013. Quality of care also went up — Aetna members served by Banner Health Network had improved cancer-screening rates, better blood sugar management, and fewer avoidable hospital admissions.

Aetna now has approximately $20 billion — about 30.6 percent of its total spending — tied to value-based contracts, and expects to have approximately 60 commercial ACO agreements featuring risk-sharing arrangements by the end of 2015. More than 5.8 million Aetna members today receive care from providers who practice value-based care. Aetna expects that by 2018, half of its claims payments will go to providers practicing value-based care, a number that will increase to 75 percent by 2020.

Consumer behavior is one of the key forces that can help keep rising costs down. In theory, if consumers have the ability to choose among many custom-built plans — rather than a few take-it-or-leave-it choices — their behavior will inspire competition among insurers. As a result, Aetna is now trying to convince Fortune 100 companies (two-thirds of which are its clients) to switch from offering their workers a small number of choices to participating in private health exchanges, where employees can compare many health plans and custom-build their own.

These Aetna-powered platforms will enable individual employees and consumers to choose from products and plans offered by multiple insurers, including Aetna’s own value-based products. And as more consumers sign up, Aetna can get more providers to switch to an ACO model, thus providing even more choice and creating a frugal virtuous cycle in the U.S. health sector.

To enable collaboration among providers and empower consumers, Aetna has made significant investments in new technologies. For instance, it set up Healthagen, an integrated collection of IT-enabled solutions that encompass population health management, clinical care management, and value-based risk management. The company’s Accountable Care Solutions business is part of Healthagen.

Aetna is also pursuing a frugal innovation strategy here. Healthagen acquires high-growth businesses and acts as an incubator of disruptive digital healthcare solutions. It uses a high-velocity development approach to launch a new health-tech business in fewer than 18 months with limited investment (it generally takes millions of dollars and four to five years to launch a digital-health startup). Healthagen brings together designers, customers, and industry experts to identify pressing healthcare issues, and co-create and launch market-relevant solutions.

Furthermore, to speed up its transition from a company that deals primarily with other businesses to one that will deal more directly with millions of consumers, Aetna set up Innovation Labs, whose mission is to achieve the holy grail of the medical field: personalized and preventive care. Innovation Labs mines personalized consumer data and predictive analytics to provide tailored solutions to individual users; for example, it teamed up with Newtopia, a personalized health coaching provider, to pilot a solution to help reduce health risks that can be detected based on a consumer’s unique genetic profile, such as metabolic syndrome (which can result in diabetes, stroke, and coronary heart disease).

Finally, Aetna is practicing what it preaches: It has shifted its own company health plan to a private exchange and is piloting its end-user engagement tools among its 50,000 employees.

The only thing that could derail Aetna’s ambitious plans is resistance to change from within the industry, Bertolini told us. Indeed, organizations that have long profited from volume-based care will likely lobby hard to oppose the shift to a value-based care model. And Aetna’s investors may also resist change given that the insurer’s traditional business model has been very profitable in recent years. “Why change track when all is well?” investors could ask. Bertolini’s response to them: “We are on the wrong track. Unless we quickly get on the right track and start running faster, we might as well forfeit the race.”

Navi Radjou and Jaideep Prabhu are the co-authors of Frugal Innovation (Economist Books, 2015).

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Aetna’s Frugal Healthcare Strategy