The era of retail healthcare is upon us, visible in the growth of retail. Winning in the World of Retail 2.0. Health & Life Sciences

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1 Health & Life Sciences Winning in the World of Retail 2.0 The healthcare industry is moving rapidly to retail. But the retail world has been undergoing a transformation of its own. As you plan your voyage, here s a look at your new destination. By Howard Lapsley and Tom Main Jane Doe is going shopping. But she doesn t reach for her car keys. It s her laptop she wants. She s in the market for a new car, so she logs into Facebook and uses a status update to ask her friends for advice, then browses Google for reviews. She s traveling soon, so she picks a ticket on Expedia and bids on a hotel room through Priceline. Then it s on to Amazon, to check what other readers have said about a new book the site auto-recommended to her. Next, a very important purchase: health insurance... The era of retail healthcare is upon us, visible in the growth of retail clinics, Web brokers, brick-and-mortar health insurance stores, and nontraditional delivery channels such as telemedicine. Consumer advertising has become an essential part of marketing everything from prescription drugs to Medicare Advantage plans. And now, thanks to U.S. healthcare reform and the crisis of healthcare affordability, the trend is about to accelerate dramatically in the world of health insurance. As the Patient Protection and Affordable Care Act (PPACA) phases in, tens of millions of previously uninsured consumers will flood into the exchanges mandated by the law. They will be joined there by tens of millions of consumers whose employers have opted out of conventional insurance and shifted to vouchers or definedcontribution programs. By 2020, Oliver Wyman expects to see the emergence of a new retail health insurance market of as many as 100 million shoppers wielding $500 billion of purchasing power.

2 Few health plans are ready to compete in the new retail world and have little expertise in the skills that matter consumeroriented product design, segmentation, and branding. The PPACA-mandated exchanges will be key in creating that market, and they will remain its focal point for consumers receiving federal subsidies. It will be critical for health plans to comply with exchange rules and regulations. But we believe that compliance will ultimately be straightforward, and health plans should devote much of their attention to the larger challenge of turning themselves into true customer-facing retail organizations. To do this, they must first face some sobering realities: 1. Few health plans are ready to compete in the new retail world. Their traditional competencies underwriting and risk management will be worth significantly less post-reform. And they have little expertise in the skills that will matter consumer-oriented product design, segmentation, and branding. Today s wholesale approach must give way to a mind-set where the consumer is king, new channels appear overnight, and innovation rules. To date, few insurers appreciate how great a change that will be. 2. As the exchanges come online, they will profoundly change the healthcare playing field by creating an expectation of transparency, price competition, and the ability to easily compare products head-to-head. 3. The rules of retail have changed radically in the last decade or so. Companies used to dominate communication about their brands with advertising and public relations. Today, communities of consumers increasingly conduct their own conversation about products and companies, using Web sites, search engines, social networking platforms, and mobile applications to share their opinions. The process of creating affiliation and trust has become Healthcare in Retail 2.0 Advertising Channel management Customer segmentation Promotion Sellers Plans Providers Retailers Information Companies Strategic Partnerships Innovative Offerings Strategic Partnerships Traditional Marketing Traditional Channels Public & Private Exchanges the Commerce Center Traditional Channels Engaged to Save Busy Families Personal Needs and Preferences Want to Be Healthier Additional Segments Consumers Individual Small Employers Large Employers Where traditional marketing consisted of pushing through the distribution channel and pulling through advertising and other demand-building strategies, the new world of retail is more complex. Traditional brand building will continue to play a role, but consumers will increasingly rely on each other for information and advice. New Media Demand Creation Viral marketing Social network Blogging Social communities 2 Oliver Wyman

3 Feeling the Squeeze A key driver of the healthcare business post-reform: margin compression. PPACA s limits on medical loss ratios will leave virtually every insurer scrambling to preserve profits. There are plays to cut costs, and broker reimbursement will be a major focus for many. But overall, expect an unprecedented competition, as health plans battle to build volume to make up for lost margin. The new reality: Grow or lose. exponentially more complex; Facebook and Twitter are the new normal of brand building. Plans that fail to adapt to the new retail market will miss the wave of new opportunity created by reform. In an evolving, confusing marketplace, it is essential to take a fresh look at the fundamentals understanding channels and connectors, as well as seller and buyer roles in the market. All three elements are critical, and by understanding how they work together health plans can exert maximum influence and develop the integrated marketing strategies needed to win. The Commerce Center: Connectors and Channels Exchanges will be the central driving force of the retail healthcare marketplace but by no means the only game in town. Oliver Wyman expects traditional channels to survive and private exchanges to emerge to address the unmet needs of small- and large-group employers and consumers ineligible for subsidies. But the exchanges, and other provisions of PPACA, will have a major impact on how these channels operate and how customers select and purchase products. Perhaps the greatest effect of the exchanges will be on the transparency of healthcare buying and selling. On the exchanges consumers will be able to easily compare benefit plans and base their choices on a factual assessment of value. This is not to say that traditional branding and marketing will become irrelevant; we expect that many buying decisions will be all but locked in before customers find their way to an exchange. Rather, companies will have to meet rising demands for information and customers who increasingly understand their choices. Not all customers are eager for this new transparency; some will find it bewildering. And so we expect some consumers (and employers) will rely on the assistance of brokers. The problem is that PPACA s limitations on medical loss ratio (MLR) will make it difficult or impossible to pay brokers at current levels at least if the broker s fee is counted as part of the premium. Several national carriers have already reduced first-year commissions on individual health insurance from 20 percent to less than 8 percent effective in Some companies have announced plans to list broker fees separately from premiums. Nonetheless, brokers will likely have to look for new ways to earn money from health insurance or reengineer their businesses to recast healthcare as a loss leader. In the meantime, payers can look for ways to help brokers become more efficient and cut costs for example, by setting up Skype-enabled Q&A sessions that can complement kitchen table conversations. Winning in the World of Retail 2.0 3

4 Perhaps the greatest effect of the exchanges will be on the transparency of healthcare buying and selling. It is difficult to forecast the role of private exchanges, because they will have to comply with as-yet-unwritten regulations. But the possibilities are intriguing: Private exchanges could take the form of singlecompany boutiques. Alternatively, beloved brands or membership organizations could create seal of approval exchanges for selected products, using their credibility to steer their constituents to highvalue options. Off-exchange sales may prove particularly valuable if the states permit bundling health and non-health benefits, allowing health plans to expand their relationships with customers and offset limited profitability in the health business with additional products. Seller Side: Going Retail Many healthcare analysts believe PPACA and the exchanges it mandates will lead to commoditization: multiple brands with identical benefits and similar provider networks, all competing on price, price, and price. But this scenario strikes us as unlikely. Consumers won t tolerate it, and we believe sellers will develop innovative solutions at a variety of value (and price) points. Many health plans are already developing accountable care organizations (ACOs), patient-centered medical homes, and new consumer engagement models to change the value proposition for consumers. To create winning products that meet consumers needs, health plans must adopt a new approach: Start from the consumers point of view. Plans need to know not just the number, demographics, and health status of their retail consumers, but also their needs and attitudes, what they dislike about the current system, and what they really want from healthcare products. Armed with this information, health plans can target specific consumer needs and segment consumers into buying groups. Oliver Wyman recently completed a comprehensive survey of the consumers most likely to buy through the exchanges. Our final results will be published in an upcoming article, but early analysis reveals a series of interesting consumer insights: More than three-quarters of respondents said they will participate in the insurance market and buy insurance on the exchange. More than half of those buying will select bronze-level products Income, rather than health status, is the best predictor of what level of coverage consumers will buy. Consumers will look beyond benefit design to determine value and make buying decisions. Forty percent of our respondents said they would pay an extra $50 a month to have access to doctors who 4 Oliver Wyman

5 provided the best care and service; more than one-third would pay for round-the-clock access. Innovate products to exceed consumer expectations. While the Department of Health and Human Services will play a large role determining benefit design, there will be plenty of opportunity for health plans to innovate to meet consumer needs. Some consumers may value a patient-centered medical home, while others may respond to 24/7 healthcare access or an online chronic disease community. Innovators have a valuable advantage in the current market: Consumers have come to accept an extraordinary degree of inefficiency and inconvenience in accessing healthcare. Their expectations are low good news for companies that plan to exceed them. (See Solving the Hassle Map at left.) Solving the Hassle Map What do today s most dynamic companies have in common? Players like Apple, Sony, and Google have found ways to create customer value by focusing on integration of products and services and solving customer hassles. The hassle map of healthcare rife with duplication, scheduling problems, inconvenience, and poor access is ripe for the same sort of approaches. In a recent OW survey, potential retail healthcare customers said they would be willing to pay extra for round-the-clock access or a single source for care coordination. The reward that awaits companies that solve healthcare s cost problems is the ability to compete on value and convenience in what promises to be a robust new marketplace. Consider a new approach to branding and strategic partnerships. The new world of retail does not eliminate the need for conventional branding, and our research suggests that even the best-known brands in health insurance will need to work aggressively to win in the exchanges. But health plans need not limit themselves to exploiting their own brands. The enormous opportunities of the new retail healthcare market will attract an array of new players including compelling brands in consumer goods, over-the-counter health products, pharmaceuticals, and pharmacy. These potential competitors are also potential partners for health plans. Humana and Wal-Mart have already partnered on Medicare Part D drugs. It is easy to imagine a health plan offering coverage under the brand of Procter & Gamble or Mayo Clinic or partnering with a company like Nike to bundle healthcare with a wellness/fitness program. The Buyer Side: Going Viral The growth of online retail has not been just a matter of conducting transactions on the Web. Rather, the rise of the Web has provoked a dramatic transformation of almost every aspect of retail, from how customers learn about products to how competition is carried out. Sites like LendingTree, ebay, Amazon, Progressive, Geico, or ebags all represent different kinds of exchanges with sophisticated consumer interfaces. For example, LendingTree links customers, who request a loan on the site, with lenders, who submit quotes. ebay acts as a classic auction, with extensive customer feedback mechanisms to identify good and bad vendors. Amazon mines its own data to provide recommendations to repeat customers and hosts catalog information not just for its own stock but for a broad network of additional retailers some of whom offer better prices than Amazon itself. The vendor s monopoly on information has been broken, as consumers make use of online tools and sites to generate their own communication about features, benefits, quality, and brand. Winning in the World of Retail 2.0 5

6 Marketing in a socially networked world is not all about technology. Rather, it s about influencing behavior. As health plans move to the exchanges and the Web, they will provoke a cascade of reactions from online sites and from consumers. The hundreds of millions of people in social networking communities will shape the perception of healthcare brands. Players like Facebook will build a front end to the exchanges and arm consumers with information about players and providers to create cultural commerce in healthcare and look to own consumer decision making. Meanwhile, app developers and consumer technology companies will build virtual marketplaces for health services that bridge the entertainment, health/wellness, and lifestyle markets. Marketing in a socially networked world is not all about technology, however. Rather, it s about influencing behavior through a network of threads that derive their power from technology innovations and the Web. It is still important to have high-profile, segmentrelevant spokespeople. It is still good for the brand (and a help at the statehouse) to be active in the community sponsoring education programs, working with foundations, playing a role in school nutrition programs such as Fitness Forward or other public get fit campaigns. But as these activities move online, they change, and the tools companies use to reach out and create buzz must change as well. In the digital era, traditional advertising and PR need to be joined by education, participation, and the creation of tools for consumers. A marketing portfolio in the socially networked retail world might include: YouTube education blitzes Pre-exchange applications to help consumers narrow their choices A personal navigator or avatar to help consumers assess their needs and shop effectively on the exchange A transparency strategy that builds trust by providing reliable performance information, such as consumer feedback, cost data, outcomes, and physician performance If the exchange rules permit it, Web links from product offerings to social network sites where consumers share their opinions of the health plan or a specific new product A gaming application that can create a baseline health status. When a consumer signs up for a specific plan, the game begins and the customer becomes eligible for rewards such as enhanced benefits At a minimum, health plans must anticipate how networked consumers will use existing resources like Facebook to guide exchange-based decision making. This insight will enable them 6 Oliver Wyman

7 to innovate new marketing tactics an essential in a continually evolving marketplace. The shift to retail healthcare is the greatest opportunity the industry has seen in many years. Playing to Win The new retail market will make or break many existing and new players in the healthcare ecosystem. Market structure boundaries are changing as players like Wal-Mart and CVS enter the game. And price controls along with regulated MLRs will compress margins making it more important than ever for health plans to grow membership. In a nutshell, here are five imperatives for winning in the new retail marketplace. 1) Truly understand consumer needs. 2) Build brand familiarity and trust before the consumers arrive at the exchange voting booth. 3) Anticipate exchange-based competition, the push toward commoditization, and side-by-side product comparisons. Establish a transparency strategy. 4) Innovate products to exceed consumer needs and avoid the commodity trap. Consider product and services bundles while exploring ACOs, narrow networks, and patient centered medical homes, for example. 5) Launch your own Web-based buyer side strategies participate in the online nation or risk being controlled by it And what of our fictional friend Jane Doe? Let s picture her shopping for insurance just a few years hence: She s eligible for the exchange, but not for a subsidy, which means she has a wide range of choices. Her online searches have led her to several navigational sites. There she has used interactive tools to assess her needs and received steers to specific insurance products. Meanwhile, she s been fielding recommendations from her Facebook friends (and watching a useful YouTube video from Blue Cross that explains how to save money on insurance). She s attracted to a PCMH program offered by the Mayo Clinic in conjunction with CVS. But she hasn t ruled out a product she s seen discussed in her favorite fitness blog an insurance program that offers her personal coaching at her gym, and bonus services if she takes advantage of it. Which will she choose? More important, will she choose your offering? We won t know the outcome of Jane s shopping trip for several years. But her decision making process will be set in motion long before that. The shift to retail healthcare is the greatest opportunity the industry has seen in many years. And it will belong to the companies that embrace and innovate for the new market. Winning in the World of Retail 2.0 7

8 About Oliver Wyman With offices in 50+ cities across 25 countries, Oliver Wyman is an international management consulting firm that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation, and leadership development. The firm s 3,000 professionals help clients optimize their businesses, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is part of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit Oliver Wyman s Health & Life Science s practice serves clients in the pharmaceutical, biotechnology, medical devices, provider, and payer sectors with strategic, operational, and organizational advice. Deep healthcare knowledge and capabilities allow the practice to deliver fact-based solutions. About the authors Howard Lapsley, Partner, and Tom Main, Partner and U.S. Market Leader, are members of Oliver Wyman s Health and Life Sciences Practice. They can be reached at: howard.lapsley@oliverwyman.com tom.main@oliverwyman.com Copyright 2011 Oliver Wyman. All rights reserved.