This week marked the annual meeting of America’s Health Insurance Plans, an event that drew an unloved group of executives to commiserate about poor margins, upheaval following health reform, and even a group of protesters waving placards calling for the industry’s abolition.
As trade shows go, it was a real downer. Yet the story of a handful of winners bears strategy lessons for companies in any industry grappling with fundamental change.
Strategy for health insurers in this environment requires a keen sense of how the industry will evolve. Assuming that the courts do not strike down the Affordable Care Act (ACA) underlying U.S. health reform, by 2014 insurers will have to offer a minimum level of benefits, at very transparent prices, in an electronic exchange that facilitates comparisons. In other words, their core products will be commoditized. While reform will drive many of the uninsured to be new customers, they will create scant profits for the industry.
Amid this mess, there are three categories of winners. One group consists of large insurers such as UnitedHealth and Aetna have been getting into adjacent businesses like healthcare IT, disease management, and clinical decision support. The businesses derive advantages from the data, physician network, and immense customer bases that these companies have, while helping them differentiate the quality of their insurance offerings through promising better health outcomes. Already, these businesses are producing substantial profits for the early leaders.
Another set of winners are IT companies facilitating data mining and integration of care provision. Health insurers, hospitals and physician practices were historically discrete silos that scarcely communicated with each other, but the management of complex, chronically ill patients benefits hugely from coordinated care. If insurers are to have a hope of profits with the transparent pricing under the ACA, they will need to tightly manage these costly customers. The trade show’s exhibit floor was a scrum of IT booths jostling for share in this rapidly expanding market.
A final group seizing the upside are hospitals that are leading integration with physician practices to form “Accountable Care Organizations” that will bear the financial risk, and benefit, of effectively managing disease. Some insurers have tried to lead the creation of ACOs, but except in certain circumstances (e.g. some rural areas, states dominated by a single Blue Cross plan, plans that own hospitals) they lack a large share of the total number of patients served by a given group of doctors, so they are supporting the costly creation of a care management organization only to reap a small portion of the financial reward. They will learn about ACOs’ dynamics from their efforts, but it is hard to see them scaling up these programs.
If they are not in one of these groups, many health insurance companies seem lost at sea. They are tweaking their model, but the model is broken. Differentiation will come from providing higher quality care, which in healthcare usually results in lower costs (due to avoided hospitalizations and the like). Insurers claim that hospitals cannot do what insurance companies can — they will not take out insurance licenses, mine data, or sell to employers. But that misses the point. Those activities are commodities; they offer little way to differentiate. If companies are not seriously invested in IT or very tightly integrated with a set of hospitals or physician practices, they are relatively inter-changeable.
For readers outside the healthcare industry, forgive the long discourse above. U.S. healthcare is complicated. Let’s look at the implications for any firm:
Health insurance is a complex, competitive, and highly regulated industry. It’s tough to win. But those who have managed to triumph in this environment provide a roadmap for capturing the upside of new markets.
Story by Steve Wunker.