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Spring 2012 / Issue 66 (originally published by Booz & Company)

Healthcare: Cut Costs, Strengthen Segmenting

The U.S. Supreme Court’s decision to hear challenges to the Patient Protection and Affordable Care Act in March 2012, combined with the national elections, would ordinarily have a paralyzing effect on the healthcare payor industry (which includes health insurance and managed care companies). But whatever happens to the healthcare reform laws, there is sufficient certainty about the future for payors to pursue long-term strategies and develop the capabilities they will need to succeed.

For example, baby boomers will continue to age and get sick. Medicare will account for ever-increasing percentages of patients and revenues. Employer-sponsored plans will continue to be the major source of health benefits. Sophisticated IT systems will be deployed. Cost reduction will remain a priority, and patient segments will further expand and shift.

Payors have built their established businesses by serving employers and large groups. Now they will increasingly serve other segments of the market, particularly individuals. The new capabilities they will need include managing Medicare and Medicaid populations across multiple sites of care, developing new ways of engaging patients, and reaching individuals through new or revamped retail channels.

Healthcare providers — hospitals, clinics, and medical services groups — make up the sector in the U.S. in which most costs are determined and incurred. Thus, working with payors, providers need to build a new kind of cost reduction capability for the industry’s long-term fiscal health. Care distribution will shift from a hospital-centric model to one more focused on ambulatory services (with care given at patients’ homes or in other locations). Investment in next-generation IT systems will continue, until most diagnoses, procedures, and results have been codified and an infrastructure for information exchange established. We also expect continued “productization,” especially of high-cost inpatient services and chronic disease management. System-level coherence — with shared incentives and seamless interactivity among providers, payors, and patients — will be more valuable than ever before.

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