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by Andrew nygArd

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SummAryHealthcare Reform is underway in the United States. The rapid pace of this overhaul, compounded by complex and unpredictable economic and societal trends, creates inevitable changes to how healthcare insurance products are designed, marketed and sold in the U.S., not to mention how healthcare providers deliver services to the public.

To better understand the potential impact of market change on the industry, Kalypso conducted a survey of healthcare companies to identify the major drivers of the need to innovate. The survey found that the large number of market issues impacting innovation, coupled with the impending deadlines imposed by the Healthcare Reform Act and uncertainties driven by legal contestation of the Act, is creating a competitive environment in which healthcare payors that focus on and invest in agility, innovation and product development competencies will emerge with a significant advantages.

The SurveyWorking with product professionals in four organizations (a national integrated care management company, a regional health plan, a regional hospital management company and a regional industry consortium), 16 major trends / issues were identified for consideration. While respondents were also given the opportunity to enter additional trends or issues, no additional issues were highlighted.

Survey participants were presented with a list of market issues that drive healthcare innovation and asked to identify their top three concerns for product development. The responses can be categorized into three tiers:

Tier one – (shown in yellow below) greater than 40 percent cited as a major concern.

Tier two – (shown in green below) between 30 and 40 percent of respondents identified these as a concern.

Tier three – (shown in red below) less than 30 percent of respondents cited the market issue as a key driver of the need to innovate

Survey FindingSChart one below summarizes the top issues, organized in priority order, facing healthcare providers participating in the Kalypso survey. Further discussion of the tier one and tier two issues follows.

ChArT One – mArkeT iSSueS driving heAlThCAre innOvATiOn

Tier One mArkeT iSSueSMore than 40 percent of respondents identified the following two challenges as among the top market issues they anticipate driving innovation and product development in the immediate future.

reTAil exChAngeS This was the number one market issue identified with 58 percent of respondents citing this as a top three market issue. Mandated by healthcare reform, retail

Written By Andrew Nygard

Senior Manager at Kalypso

Andrew Nygard has over 30 years of experience working with services-based businesses to drive change at the executive and operational levels, instituting program and portfolio management systems, and re-architecting organizational decision making systems. With the healthcare services industry as a major focus, Andrew works with organizations on innovation, portfolio and process management, and the application of technology to meet the developing competitive rigors of this market sector.

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exchanges will define base product designs for participating plans. This means more complexity for healthcare payors as they rush to meet mandated plan requirements from design, network and administrative standpoints.

Regional plans appear to be the most concerned about this market issue (83 percent) as opposed to single-state plans (50 percent). National plans rated this as a lesser concern with 20 percent of responses. These responses seem to indicate that:

1. Regional plans anticipate facing a significantly more complex environment and lack the scale of operations to address these new requirements. At 83 percent this was the highest impact issue identified by any group.

2. While single-state plans rated this high it was ranked second behind Accountable Care Organizations and on par with three other market issues. Single-state plans anticipate struggling to meet emergent exchange requirements but are not as concerned as regional plans.

3. National plans indicate they believe they have the scale of operations and have made sufficient investments in upgrading administrative systems (e.g. member management, claims and network management) to handle the demands of retail exchanges.

reTAil exChAngeS

To alleviate retail exchange concerns, regional and single-state plans can position themselves to compete in this emerging marketplace by setting a development strategy based on:

1. Aligning their decision makers on the changing demographics and channel implications for products offered through these exchanges

2. Working with developing state or regional exchanges in the definition of based and premium product offerings 3. Designing product platforms to simplify administrative execution across multiple states / regions

4. Pursuing a structured development of plan offerings targeted at achieving certification by the mandated October 2012 date

ACCOunTAble CAre OrgAnizATiOnSAccountable Care Organizations (ACOs) have the potential to radically alter the service delivery model for healthcare. By integrating all parties’ (Independent Physician Associations (IPAs), facilities, labs etc.) activities and financial compensation around a patient’s outcomes, they have a tremendous potential to improve patient care as well as reduce costs.

However as NPR noted earlier this year “ACOs have been compared to the elusive unicorn: everyone seems to know what it looks like, but no one has actually seen one.” This uncertainty, coupled with the enormous implications ACOs hold for network management, billing systems and contracting, makes this the number two issue product development professionals are tracking with 45 percent of all respondents listing it as one of their top three issues.

This is likely due to corporate product development

1. http://www.npr.org/2011/04/01/132937232/accountable-care-organizations-explained

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Organizations with centralized corporate product development organizations (as opposed to federated development models aligned directly with geography or market segment) were much less likely to cite ACOs as a top 3 issue (29 percent vs. 45 percent.)

organizations enjoying access to scale economies in addressing system and contracting issues rather than being limited by the fragmented abilities of federated organizations.

Harnessing the potential for coordinated care delivery across the major parties will be a major task requiring the focus and collaboration of parts of payor organizations that traditionally have been managed in silos including medical management, product development, network management and claims and billing.

To be successful in addressing the potential and challenges of ACOs, payors will need to focus on:

• Developing shared market targets, product concepts and supporting development roadmaps across internal constituents

• Integrating the emerging potential of electronic health records

• Remaining agile enough to adapt to new business models as they emerge from the provider community

Tier TwO mArkeT iSSueSTier two market issues ranged from 30 percent to 40 percent of respondents identifying them as one of their top three market issues they anticipate driving innovation product development in the immediate future. The top three of these issues are:

TrAnSpArenCy TO COST And QuAliTyThirty-five percent of respondents were concerned with improving transparency to cost and quality in order to drive better decision making and enable greater accountability for personal care.

As High Deductible Health Plans (HDHPs) have increased in popularity, rising from 17.5 percent in 2007 to 24.9 percent in 2010 of all insured lives , the need to provide consumers access to cost and quality of care to aide decision making has increased dramatically.

A major assumption in the design of these products is that consumers incentivized to minimize costs and information about the costs and quality of the services they purchase will make better decisions and lower overall healthcare costs as a result. However, to date consumers have experienced a shortage of information upon which to make these decisions.

Developing and presenting cost and quality information to consumers is a daunting task in terms of its underlying complexity (e.g. how to easily portray the inherent trade-offs between price and nebulous and often contentious quality indicators) and technical difficulty (e.g. database and website design). This practice also challenges entrenched industry norms around pricing secrecy - viewed as “trade secrets”-and physician quality.

Given these issues payors may struggle with creating and publishing meaningful and actionable information for HDHP consumers. One strategy that appears to be getting traction is to work with large self-insured groups, or groups of groups, directly in developing and publishing costs and employee satisfaction indices based on their own data, rather than exposing contractual information or developing independent and challengeable quality indices.

AlTernATive CAre delivery mOdelSAlternative care delivery models represent potential game changers in terms of access, cost and quality of care. As Clayton Christenson details in The Innovators Prescription, emergent business models such as retail clinics or specialized practices (also known as Centers of Excellence) are increasingly disrupting traditional care delivery models such as IPAs or “large box” facilities. By providing lower cost, often 24/7 delivery for simple acute care (i.e. retail clinics), or by carving out a specialized practice (e.g. angioplasty), these emerging delivery

ACCOunTAble CAre OrgAnizATiOnS

hdhp perCenT OF inured

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models are delivering care in a more accessible, higher quality and lower cost way.

Thirty-five percent of all respondents cited alternative care delivery models as a top three concern. Expectedly, significantly more providers (60 percent) listed this as a primary concern, as compared to 19 percent of payors.

Alternative care delivery models represent a clear threat to traditional providers, who will need to innovate to adapt or compete. Payors will need to incorporate access and incentives to use these new care delivery providers into product designs.

ASO / ASC – inCreASed demAnd FOr And / Or COmplexiTy OF relATiOnShipSThirty-two percent of respondents cited increasing demand for Administrative Services Organizations / Administrative Services Contracts (ASO/ASC) and/or complexity of relationships as one of their top three issues. Health plans effectively lease out their proprietary networks and provide billing and/or customer support services through contracts with large, self-insured employers through these relationships, and underlying market trends make this an increasingly important issue.

In 2008, 55 percent of workers with health insurance were covered by a self-insured plan offered by their employer and the percentage continues to grow as employers increasingly seek to manage their own healthcare risks to reduce cost. The impacts of healthcare costs are becoming more evident to self-insured employers, and therefore are tracked more closely. As a result, self-insured employers are asking health plans to share the risk and create more innovative service designs. They are also demanding healthcare cost reduction and quality improvements from payors as conditions to engage their services.

Because of this, an additional major driver of competitiveness and/or profitability of self-insured business for payors is back office delivery efficiency (e.g. claims processing, customer support, etc.), rather than the traditional sources of profitability of fully under-written relationships such as Medical Loss Ratio management. To compete in this market, payors must focus on operational efficiency to drive cost structures down and build or maintain competitive position in the marketplace.

Not surprisingly , single state and regional organizations more frequently cited ASO / ASC as top three concern, likely due in part to:

1. National players already having dealt with this issue with the larger, national accounts and having scale economies in back office operations often not available to smaller players

2. Increasing book of business turning to self-insured risk pools as ever smaller organizations adopt the practice

One set of successful strategies in addressing these increasing demands for cost containment, especially for smaller plans lacking the scale economies of national player, is to couple traditional agreements for administrative services with targeted medical management, health and wellness, and price / quality transparency of products. By increasing the perceived value received by group administrators by addressing core medical cost trend and employee presenteeism issues, price relief on core administrative cost structures can be achieved. A key success factor in delivering these options will be designing scalable and templated options that can be used by group sales management on a repeatable basis.

As our study showed, a large number of market issues impacting innovation are driving an increased need to innovate in the healthcare marketplace. This, coupled with market uncertainty of the scope and timing of Healthcare Reform Act mandated changes, is driving the need for payor organizations to become simultaneously more agile as well as better structured in harnessing their organizational potential for innovation. Organizations will be well positioned for success by:

• Managing organizational innovation across market and business model changes

• Aligning product innovation and development to corporate strategy

• Improving the ability to adjust course as corporate outlook and strategy change

• Developing strong internal competencies, processes and supporting infrastructure for product development

AlTernATive CAre delivery mOdelS

ASO/ASC

1. http://www.npr.org/2011/04/01/132937232/accountable-care-organizations-explained2. Martinez ME, Cohen RA. Health insurance coverage: Early release of estimates from the National Health Interview Survey, January–September 2010. National Center for Health Statistics. March 2011. Available from: http://www.cdc.gov/nchs/nhis.htm.3. http://www.ebri.org/pdf/FFE114.11Feb09.Final.pdf