Beyond Health Reform A Coherent Approach for Payors

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1 Perspective Sundar Subramanian Minoo Javanmardian Ashish Kaura Nate Holobinko Beyond Health Reform A Coherent Approach for Payors

2 Contact Information Chicago Minoo Javanmardian Partner Ashish Kaura Partner Igor Belokrinitsky Principal New York Carl Dumont Partner Sundar Subramanian Principal Nate Holobinko Senior Associate Josh Swartz Senior Associate San Francisco Deepak Goyal Principal Vivek Sharma Senior Associate The authors would like to thank Igor Belokrinitsky, Carl Dumont, Deepak Goyal, Vivek Sharma, and Josh Swartz for their valuable contributions to this Perspective. Booz & Company

3 EXECUTIVE SUMMARY The entire healthcare industry faces major disruption in the post-reform era, as lines of business diverge, upending traditional business models. In response, health plans will have to focus hard on targeted customer segments and develop new strategic approaches based on world-class capabilities. Payors that develop their capabilities as a coherent, interlocking system rather than as discrete activities achieve better results than competitors that do not. Booz & Company has developed a model that suggests the emergence of two centers of gravity for health plans. One center is oriented toward direct consumer-focused markets Medicare, Medicaid, and individuals and state exchanges where the member is the primary decision maker. The other is dominated by large national and regional groups. Plans can successfully span the two centers if they take a disciplined approach to selecting lines of business that match up with their capabilities. Eventually, we see payors adopting one of three strategic approaches, taking into account their capabilities, the scale of their operations, and the diversity of segments they serve. A focused segment approach targets select business lines and is best suited for lower-scale plans or new participants in the market. A coherent multi-segment approach requires discipline to manage several lines of business with targeted capabilities. For plans with large scale, a portfolio approach based on broad capabilities, such as overall excellence in medical informatics and efficient shared IT services, is an option. Meanwhile, as reform continues to take shape, all plans should take no regrets actions to enhance medical value and customer engagement while also lowering administrative costs to establish a strong foundation and compete successfully in the future. Booz & Company 1

4 HIGHLIGHTS In the post-reform environment, plans will no longer be able to drift across lines of business with a hodgepodge of capabilities. Booz & Company analysis of publicly traded health plans found that companies with the most coherent systems of capabilities were more profitable and returned more shareholder value. Plans will need to structure their businesses around two centers of gravity, with one focused on individual, or consumer-focused, segments and the other oriented toward large national and regional group sales. Current diversity of business lines and scale are important factors in designing coherent capabilities systems. We predict that ultimately three end states for plans will develop: segment-specific, coherent multi-segment, and portfolio. As the post-reform era continues to evolve, plans should take no regrets actions now to enhance medical value and customer engagement while also cutting administrative costs. THE CASE FOR COHERENCE Health plans have historically served mostly as a financing arm of the healthcare system. Relying on a few successful business models, payors differentiate themselves by either building local brand recognition or establishing significant scale. They spread their business capabilities across a range of customer segments, or lines of business, majoring in some, minoring in others. Within those broad strategies, the most coherent plans purposefully develop and share a distinct set of capabilities across those lines of business in pursuit of an explicit overall strategy. As a result, they tend to perform better financially than competitors. A Booz & Company analysis of publicly traded health plans found that companies with the most coherent systems of capabilities were also the most profitable and returned the most shareholder value (see Exhibit 1). Coherent payors get better results because they consistently deliver and improve on what they do best. They make investments that fit a strong strategic focus and support only the capabilities that will extend a competitive lead. These plans are not distracted by quick sales in a new market if they are not properly equipped to serve those customers. In a highly coherent organization, everyone has a clear understanding of what matters most, allowing these plans to steer a straight and sustainable course even in difficult times. In a prior Perspective, 1 we explored key trends emerging since the passage of the Patient Protection and Affordable Care Act that will challenge traditional payor business 2 Booz & Company

5 models. These changes include a shift to more retail-oriented markets, the need to demonstrate medical value and become lean, and the ability to diversify core capabilities into new health-related or insurance offerings. We also predicted that diverging lines of business, combined with the challenges of reform, would shatter the coherence of current models, making it impossible to survive by standing in place. In this environment, plans will no longer be able to drift across business lines with a hodgepodge of capabilities. In the future, strategic focus will be crucial. Competition will be intense, and the pressure to contain costs will be unrelenting. Exhibit 1 Performance Correlates with Capability Coherence COHERENCE VS. EBIT MARGIN (PUBLICLY TRADED PAYORS) COHERENCE VS. TOTAL SHAREHOLDER RETURN (PUBLICLY TRADED PAYORS) EBIT Margin 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% R 2 = 0.30 UnitedHealth Group Coventry Cigna Health Net -35% Coherence Score WellPoint Humana Aetna Coherence measures the extent to which capabilities systems are shared between the different segments/services that a health plan participates in and are aligned to an overall business model. Plans should target segments where they have a right to win and can capitalize on coherent capabilities systems. 3-Year TSR 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% Size of Bubble = Revenue R 2 = 0.45 S&P 500 (-6.9%) Managed Care Index (-13.2%) Coventry Health Net Cigna Coherence Score WellPoint UnitedHealth Group Humana Aetna Source: Booz & Company Booz & Company 3

6 THE PATH TO COHERENCE To succeed, health plans need to build coherent, forward-looking strategies that are consistent with the future needs of customer segments. Creating a company-level model will require tough choices on whether to participate in certain businesses, along with a clear approach to chosen segments. Building on existing strengths, companies must identify and focus investments on capabilities systems that can be applied across the targeted lines of business. Building Blocks: Success at the Segment Level Booz & Company has identified 38 key capabilities that underpin the health insurance industry. We then combined them with customer needs and market trends in a model that shows which capabilities are most important for the five main customer segments. National: To successfully serve this segment, comprising large employersponsored groups, payors need both a national footprint that provides members with easy access to care anywhere and the ability to customize benefits and administrative services to meet groups diverse needs. They also require business-to-business sales capabilities and a high-touch sales force that is responsive to often complex sales processes required by plan administrators and third-party administrators (TPAs). High-touch customer service is necessary to meet the needs of both plan administrators and members with high expectations. Medical and wellness management programs are needed to help groups control benefit costs. Regional: To serve the small to large regional groups, payors need strong branding and marketing capabilities, along with a deep regional network that gives members easy access to care within a given area. Payors must offer moderately priced, moderately customized benefits and administrative services. They also need a hightouch sales force that is responsive to complex sales processes required by plan administrators and TPAs. Like national payors, regional organizations need to help groups control benefit costs with medical and wellness management programs. Individual: To serve this segment individuals buying insurance on their own, increasingly through exchanges payors need to deliver lower prices to these price-sensitive purchasers. To do this, they need strong medical management capabilities and low total administrative costs, driven by effective automation and customer self-service capabilities to help manage the high volume of transactions associated with individual 4 Booz & Company

7 customers. They also need strong regional branding and consumer marketing capabilities, and a direct-toconsumer sales model with traditional and online channels that support individual purchases and the subsequent enrollment process. And they need a deep understanding of market dynamics to optimally assess the risk of various patient populations. Medicare: Payors can best serve this segment by honing their individual and direct-to-consumer sales capabilities, building regional brand awareness, establishing expertise in medical management of elderly patients, and enforcing low administrative and medical costs. Key capabilities for plans choosing this segment also include traditional customer service and expertise in Centers for Medicare & Medicaid Services (CMS) regulatory compliance. Customer service and support channels must suit the needs of a senior customer base (such as a higher level of voice support compared with online). Serving the Medicare segment also requires targeted medical and care management programs for the elderly, including those who are eligible for both Medicare and Medicaid. Medicaid: In addition to Medicaid beneficiaries, this segment includes individuals who will receive subsidies to participate in postreform exchanges and will require coordinated, integrated care (medical, prescription, community, behavioral health). To optimally serve this segment, payors must above all else deliver plans at significantly lower cost than commercial or even Medicare segments. This will require extensive capabilities in medical management of high-risk patients leveraging advanced informatics, and lean operating models to contain administrative costs. Additionally, payors will need local market understanding and the ability to comply with state regulations. Piecing It Together: Combining Business Lines and Sharing Capabilities Companies will be able to successfully target several segments if they knit the right capabilities into a coherent system. Our research model indicates that certain lines of business tend to require similar capabilities and, hence, may be combined (see Exhibit 2). We see the emergence of two centers of gravity for capabilities. One center is oriented toward the individual, or Exhibit 2 Combined Lines of Business and Similar Capabilities HIGHEST AND LOWEST COHERENCE SCORES Example Business Models Key Synergistic Capabilities 70% 75% 80% 85% 90% 95% 100% Single-Segment Play 100% - Individual sales - B2C marketing - Medical management - Market rating - Wellness offerings Individual, Medicaid National, Regional 93% 95% - Group sales - B2B marketing - Group underwriting - National network access - High-touch customer service Medicare, Medicaid Individual, Medicare 88% 91% - Individual sales - B2C marketing - Medical management - Regional brand awareness - Customer service Individual, Medicare, Medicaid Medicare, National, Individual Medicaid, National, Individual National, Medicaid 74% 74% 74% 88% The least coherent models share few common capabilities - Individual sales - B2C marketing - Medical management - Individual sales - B2C marketing - Medical management - Market rating - Regional brand awareness - Market rating - Informatics National, Individual 73% Single Segment Most Coherent Models Least Coherent Models Source: Booz & Company Booz & Company 5

8 consumer-focused, lines of business, the other toward group plans (see Exhibit 3). Each center of gravity revolves around different sets of capabilities. Plans can successfully reach customers in both centers; however, they must maintain a sharp focus on the capabilities needed for each line of business. Operating models that span segments must be built around only the organization s strongest capabilities and those that are shared among target segments. The End Game: Strategic, Company-Wide Approaches In the past, health plans developed capabilities systems as they grew in size, diversity of products, geographic coverage. Looking ahead, plans need to develop a competitive position that starts with an assessment of their capabilities while also taking into account the scale of their operations and the diversity of the segments they serve. Taking all three of these critically important dimensions into account, we see three strategic operating models emerging (see Exhibit 4). Health plans are already staking out positions that fall within these three positions in the emerging landscape. Segment-specific model: Coherence stems from focus on a single geographic market or target segment. This is the best option for small-scale payors to compete in select markets. The decision about which segments to serve will then guide capabilities development and investment. New plans are likely to start here in targeted lines of business. Gateway Health Plan in Pennsylvania is an example of a low-scale, segment- specific plan. Concentrated in a geographic area, the plan caters exclusively to the Medicaid and the dual-eligible Medicare Assured segments. Gateway has recently received national accolades for the quality of its health plan. Despite its small scale, the plan has succeeded by maintaining a tight focus on its business without putting excessive demands on its operating model. Coherent multi-segment model: Coherence stems from a focus on particular geographic regions or lines of business with products that make the best use of the company s strongest capabilities. This model offers competitive advantage to moderatesized payors that are able to take a disciplined approach to targeting regions or segments matched with strong internal capabilities. Exhibit 3 Health Plan Centers of Gravity Capabilities Required to Serve 1 Consumer marketing Key Capability Overlaps Mapped to Customer Segments 2 Product innovation & pricing 3 Product & service customization 4 Sophisticated B2B marketing 5 Group setup 6 Utilization management 7 Care management marketing 8 Care management high risk 9 Eligibility/claims 10 Lean administration 11 Compliance/quality local, moderate 12 Compliance/quality national, high 13 Info & analytics 11 Individual Medicaid Medicare First Center of Gravity Small Regional Group National Midsized to Large Regional Group Second Center of Gravity Source: Booz & Company 6 Booz & Company

9 Cigna has historically adopted an operating model that is most in line with a coherent multi-segment position. Rather than pursuing all lines of business equally, Cigna has concentrated on the national and regional group markets. As a result, it could take advantage of the similar capabilities required to serve each while resisting the pull to stretch its operating model across diverse positioning to gain sales that might prove to be unsustainable. However, Cigna s new strategy, Go Deep, Go Global, and Go Individual, indicates that the company is preparing to adopt a greater portfolio orientation to its business in line with the portfolio operating model described below. Portfolio model: This approach builds on broad capabilities, such as capital management, medical informatics, or shared IT services. This model is a viable option for large plans with scale across many segments. Portfolio companies can operate in both centers of gravity, with highly developed portfolio capabilities that allow them to compete across geographies and diverse segments. UnitedHealth Group (UHG) is an example of a payor that has developed a true portfolio-based operating model. With significant scale of more than 75 million members across all products, UHG is able to take advantage of economies of scale and support multiple diverse business units with a corporate core of shared services. It operates in all health lines of business and has leveraged its portfolio model to expand into ancillary lines of business such as behavioral health, vision, and health IT services. Exhibit 4 Post-Reform Health Plan Landscape Segment/LOB Diversity* High 1 2 Segment-Specific Model 3 Coherent Multi- Segmenty Model Aetna Horizon BCBS of MA Kaiser Permanente HPHC (MA) Humana Neighborhood Health Net Health Plan Molina (MA) WellCare Gateway Centene 4 Cigna Portfolio Model UnitedHealth Group WellPoint Future Payor Competitive Landscapes Three coherent types of operating models will dominate the future competitive landscape: The segment-specific model will emerge as the best option for low-scale payors to effectively compete in select markets Achieving high LOB diversity at low scale will cease to be a viable competitive position The coherent multi-segment model will offer competitive advantage to moderate-scale payors thoughtfully targeting two or three lines of business The portfolio model will become the most successful (if not the only viable) option for diverse health plays at scale Low Low Scale (number of members) High Possible Models Unlikely/Impossible Models *Line-of-business diversity is measured by the concentration of membership across LOBs for a given payor. Higher diversity is indicative of membership spread more evenly across multiple LOBs. Source: Booz & Company Booz & Company 7

10 CONCLUSION TAKING ACTION: FIRST STEPS FOR ALL PLANS Developing coherent capabilities systems that take customer segments, scale, diverse lines of business, and capabilities into account is a complicated process, especially as health reform remains in flux. Despite uncertainty, there are a few short-term no regrets actions that plans should take now that will serve them well no matter how reform ultimately plays out: Create medical value: Post-reform, plans will face pressure to improve quality and patient outcomes while holding down costs, but payors will not be able to drive structural industry changes alone. New ways of collaborating with providers will replace the often acrimonious, zero-sum negotiations that take place today. Payors and providers can jointly create medical value through a variety of models including targeted intervention, bundling services associated with care episodes into products, and comprehensive population care. 2 Enhance consumer engagement: Member satisfaction will become more important as states roll out health exchanges and transparency and choice expand through the healthcare system. Health plans ability to influence the member experience will be fundamental for customer attraction and retention. Consumer engagement includes understanding end-to-end customer touch points, features, and services that create value for members. Building capabilities systematically to enable and sustain the experience the plan aims to deliver is critical. Examples of consumer engagement include personalized service in contact centers and value-based benefit design. Reduce administrative costs: Health plans will come under severe pressure to reduce administrative and overhead costs. Given competition from new state exchanges and other channels, mandated pricing reductions, and medical loss ratio restrictions, plans will need to move toward a culture of lean. Self-service, automation, and operational best practices will be important tools to drive down costs. Straightforward no regrets actions are a way to at least get started in preparing for the turbulence ahead in the health insurance industry. Customer segments are diverging and will create competing demands for investment and management focus. Executives face hard choices: What segments should we target? How can we build operating models based on shared capabilities and coherence? How will our current scale and diversity of business lines shape those choices? We suggest a real, rapid, and soulsearching exercise to answer challenging questions with capability coherence as the guide. Take steps to ensure success in individual segments, and choose segments that share operating models around clusters of important future capabilities. Make tough decisions based on current positioning in the competitive landscape. No matter the final shape of health reform, the market is already undergoing deep, disruptive change. Plans have no choice but to respond with deliberate and highly coherent strategies. 8 Booz & Company

11 Endnotes 1 Post-Reform Calculus for Health Plans: Choosing a Business Model That Delivers the Right to Win, by Sundar Subramanian, Gil Irwin, and Curt Bailey (Booz & Company, 2011). com/media/uploads/boozco-post-reform-health-plan-business- Models.pdf 2 Reclaiming Lost Medical Value: Three Models for Healthcare Change, by Gary D. Ahlquist, Sanjay B. Saxena, MD, Brett Spencer, MD, and Abhishek Gopalka (Booz & Company, 2011). Medical-Value-Three-Models.pdf About the Authors Sundar Subramanian is a principal with Booz & Company based in New York. He specializes in operations strategy and transformations in the healthcare industry and leads the firm s effort to apply capabilities-driven strategy to the development of operating models for health plans. Minoo Javanmardian is a partner at Booz & Company based in Chicago. She works with global healthcare clients and focuses on strategy, strategy-based transformation, and innovation in healthcare services. Ashish Kaura is a partner at Booz & Company based in Chicago, specializing in growth strategies and business models for healthcare and health services companies. Nate Holobinko is a senior associate at Booz & Company based in New York. He specializes in strategy implementation and operating model transformation in the healthcare industry. Booz & Company 9

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