It is depressing to Google “health insurance innovation.” Most links involve rants against a powerful industry, while some make equally spurious claims that public payers such as Medicare have played a scant role in healthcare innovation.
There is far too little published about how a huge industry has actually innovated, and still less about what it can do now in response to the major innovation challenges posed by U.S. health reform. This industry’s tough situation, and its potential responses, offer lessons for innovators in many other fields.
Due to a variety of provisions in health reform (more formally, the U.S. Patient Protection and Accountable Care Act), the old business model of health insurance is seriously threatened. Plans will become more consistent in their minimum levels of benefits, reduce the ways in which they diverge in pricing, and list their features on an online Health Insurance Exchange. Many will need to reduce their marketing and administrative expenditures. In short, the old ways of doing business will become seriously commoditized. The health insurance industry was not particularly attractive to begin with (operating margins under 5% are the norm), so there is a big need to re-think the business model.
A first step is to look for clues from past health insurance innovations. Health Maintenance Organizations (HMOs), while derided for limiting care, succeeded in reducing the growth of healthcare costs, and using technology to monitor quality in new ways could surmount some of the challenges HMOs encountered in previous decades. Consumer-Directed Plans, such as Health Reimbursement Accounts, led at least “healthy and wealthy” consumers to make better care choices. Integrated Delivery Networks (and their first cousin, Accountable Care Organizations) such as Kaiser Permanente or the Veterans Administration have provided outstanding care for relatively little cost due to coordinating care among physicians, putting doctors on salary rather than fee-for-service contracts, and investing heavily in disease prevention. Overseas, South Africa’s Discovery Vitality has been a world leader in using financial incentives to lead members into healthier behaviors. Bangladesh’s Grameen Health uses an innovative care delivery model to bring the right people in for care in a low-cost setting. Nigeria’s Hygeia HMO contracts directly with large employers to link them with its member hospitals and medical practices, even going so far as to placing clinics on-site at many workplaces to help monitor and treat chronic as well as acute conditions.
Next, health insurers should consider asymmetric competitors. An emerging trend is for large employers to cut out insurers through self-insuring their risks, using Third Party Administrators to process claims, contracting directly with medical providers such as local hospitals, and placing clinics on-site. Another approach has been taken by Washington State’s Qliance, a group of medical practices that offers individuals the equivalent of health insurance without the insurance firm — it charges a monthly membership fee for use of its clinics. A third tack has been deployed by some of the big national carriers like Aetna, rolling out sophisticated decision-support software for physicians that may give it a means of steering members into higher-quality, lower-cost treatment protocols (oftentimes in healthcare, a minimally-invasive approach that treats conditions properly the first time around is both better medicine and better business).
Then insurers can consider their options, which depend on their starting point. Big national carriers can invest in IT-centric tools that use their scale and massive databases of treatment outcomes to maximum advantage. They can offer both employers and individuals potentially better care at lower cost. Local players with modest scale but large market share in particular states (e.g. many of the Blue Cross plans) can force providers into relationships where they are compensated a fixed amount per patient and provided quality-based incentives — this is a more decentralized approach to care than the national players might take, but likewise has potential to both improve medicine and lower cost. Third parties such as Pharmacy Benefit Managers might turbocharge their efforts to contract directly with employers, helping to coordinate care on their behalf partly through remote monitoring technologies, call centers, and new proprietary technologies (witness Medco’s high-profile investment into genome-based diagnostics).
This leaves the players who lack either national or local scale. There are plenty of these firms, many of which are non-profit, and they are in a tough spot. These companies need to pick their shots and focus. For instance they could concentrate on certain professions, such as long-haul truck drivers, with tailored solutions. The problem is that health reform limits their ability to price differentially for taking on people with more health risks, although several yet-to-be-issued regulations may give them some ability to do so. Alternatively they may cater to individuals through re-framing their offerings beyond traditional healthcare, such as through offering more types of services through local gyms or combining health insurance with savings and investment accounts. Either way, they need to change the game they are currently playing.
With healthcare costs continuing to rocket upwards, and US healthcare quality often lagging other industrialized countries, there is ample headroom for health insurers to innovate. The key is to make a handful of strategic choices about where a firm’s competitive advantage lies, and then to maximimize the use of financial, technological, and business model tools to stake out ground before a host of wounded rivals follow. In a business that revolves on technology, scale, and trust, first-mover advantage can be very real. It is high time for action.
Story by Steve Wunker.
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