How Health Care Reform Will Change the Insurance Landscape

How Health Care Reform Will Change the Insurance Landscape

          
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How Health Care Reform Will Change the Insurance Landscape

Innovation, Diversification, and a Focus on Fundamentals
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  • More than a year after it was signed into law, the Patient Protection and Affordable Care Act is shaping up to be a mixed blessing for the health insurance industry. From 2011 to 2019, an estimated 26 million new customers will enter the market as a direct result of the law. Over the same period, the profit margins of insurers (taking into account a new premium fee but excluding all other taxes) could decline by more than 40 percent.

    The change will be made all the more disruptive by the uncertainty surrounding the law. Many of the most significant rules have yet to be written. In addition, the act gives states tremendous latitude to develop their own strategies for ensuring that residents have access to “high-quality, affordable health care.” Insurers are likely to wind up dealing with radically different mandates from state to state. Muddying the picture further are the various state-led experiments to rein in Medicaid costs, along with the political forces and judicial reviews that could change how the act is implemented.

    According to a recent BCG study, however, health insurers are looking past the uncertainty and moving ahead with initiatives designed to capture the upside of the changes while minimizing the pressure on profitability. (For more on the study, which was based on a comprehensive survey of U.S. health insurers, see “Canvassing the Payer Industry,” below.) Most companies are responding to the law by redoubling their efforts to improve business fundamentals, primarily by managing medical costs, curbing administrative costs, and capturing new customers. The act has also given them license to experiment with new and unconventional ways of addressing these perennial issues, while prompting some to diversify beyond the core.

    Canvassing the Payer Industry

    In March and April 2011, BCG surveyed or interviewed about 120 health-insurance executives. The executives represented 48 of the largest payers, including 9 national plans, 21 Blues, 9 regionals, and 9 other plans, most of which were focused-segment and integrated models. A focused-segment payer typically concentrates on just one or two customer segments, such as Medicaid or Medicare. An integrated model is based on the vertical integration of payer and provider.

    The payers we surveyed provide health benefits to more than 160 million individuals, or about 65 percent of the total lives covered in the U.S. The survey was complemented by in-depth interviews on a variety of reform-related issues. We interviewed a broad range of executives, including CEOs and medical directors, as well as heads of marketing, IT, and operations.

    Despite their proactive stance, payers still have significant hurdles to clear. Among other imperatives, they will need to transition from what has historically been a business-to-business model to a business-to-consumer model. The playing field will tilt steeply in favor of insurers that can provide low-cost products to retail customers. To achieve a cost position that can support such products, most insurers will need to shift from an adversarial to a collaborative relationship with providers, which is arguably the only way to change the trajectory of health care costs (for the better). Even then, however, the pressure on margins will be so great that almost all payers will need to continue searching for new revenue streams.

    What will the rise of a low-cost, retail-oriented marketplace mean for the payer industry as a whole? The answer can be found not by looking at these companies as a monolithic group, but rather by understanding how each type of payer will respond to these imperatives given its relative strengths and capabilities.

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