The Innovator’s Dilemma, the seminal book by my mentor Clayton Christensen, describes how companies focus tightly on their biggest, most important customers, to the extent that they ignore alternatives that would be more appropriate to the bulk of the market.
Then something happens — new technologies, business models, or regulations — that creates “disruptive innovation” which upends the industry, giving the ignored portion of the market a new way to consume the offering, and the old incumbents become relegated to the top tier of the market chasing customers into a dead end.
For health insurance carriers, sick and costly patients have been one set of those important customers, and large employers have been a distinct set. The carriers haven’t wanted to enroll sick patients, but once these people become subscribers the carriers have been highly incented to manage their costs. These patients have become a major focus of innovation efforts. On the other side of the business, the big employers who pay for insurance have been key customers to win, and carriers have sought to become closer to them.
The Affordable Care Act and its associated health insurance exchanges are the disruptive impetus — technology, business, model, and regulation all in a simultaneous volley. The exchanges target groups hitherto of marginal interest to the carriers, and yet they make the young and healthy subscribers among them of paramount importance to recruit. Through “community rating” and other legal obligations, carriers must accept sick patients and charge them relatively modest sums for coverage, making it essential to balance those patients in the risk pool with healthier subscribers.The ACA may also lead employers to either push their staff to the public exchanges or to establish private exchanges in which staff can choose from a handful of plans vetted by the HR department. Either way, employers may become less important or lucrative customers than before.With these pressures, carriers must innovate on three fronts — to address the cost issues among sick patients, build the loyalty of employers to the health insurer, and attract the well. This will be hard. If carriers cannot accomplish the second and third imperatives, then they will be stuck focusing on the first — an important but somewhat dispiriting mission. To go further, they will need to think in imaginative ways, going beyond traditional conceptions of their industry to build relevance and relationships that matter and that customers — whether they are employers or consumers — will wish to sustain.
For further analysis on this innovation challenge, see our recent piece for Forbes on the topic.
Story by Steve Wunker.