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.
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.
- To innovate, a company will benefit from integration across steps in the value chain. Insurance plans that own hospitals and physician practices have been noted innovators in their industry. In a rapidly changing industry with many steps in the value chain, intense competition among fragmented players may not lead to innovation, as those players will lack the scale to integrate across value chain steps to force change. Both Republicans and Democrats have claimed that competition in the insurance industry can lead to innovation, but they get it wrong -- until consolidation occurs, competition will lead only to rock-bottom pricing on uninteresting offerings.
- Focus on the toughest problems of an industry, because that is where serious money can be made from producing better solutions. Healthcare IT has long been horrendously complex, but it is a huge need.
- Be close to the customer. Hospitals and physician practices are in the cat-bird seat because they have the power to change the quality and cost of care. Health insurers interact with patients at arms length, and they lack the personal contact that is often essential to changing lifestyles and ensuring compliance with treatment regimens.
- Have scale in a niche. Marshfield Clinic is a modest-sized health insurer and physician practice group, but it is a giant in rural Wisconsin. It has had the scale in those small communities to invest in the health of the overall population and knit together tiny physician offices through world-class IT systems. By contrast, many health plans in California are far larger than Marshfield, but the market is keenly competitive and they have lacked the power to create change among many physician practices and hospitals.
This post was written by Steve Wunker. Click for more of New Markets' thinking on healthcare. Click to learn about the book Capturing New Markets: How Smart Companies Create Opportunities Others Don't