Is the Insurance Industry Ready for U.S. Health Care Reform?

Is the Insurance Industry Ready for U.S. Health Care Reform?

          
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Is the Insurance Industry Ready for U.S. Health Care Reform?

An Interview with BCG’s Martin B. Silverstein, MD
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  • In This Interview
    Martin B. Silverstein, Alumnus

    Career Highlights

    Martin B. Silverstein, MD, is a senior partner and managing director in the Boston office of The Boston Consulting Group.



    He is a coauthor of How Health Care Reform Will Change the Insurance Landscape: Innovation, Diversification, and a Focus on Fundamentals, which was based on a comprehensive survey of the U.S. health-insurance industry.

     

    The Patient Protection and Affordable Care Act is shaping up to be a mixed blessing for the U.S. health-insurance industry. Millions of new customers will enter the market as a direct result of the law, but the industry’s profit margin is set to decline sharply. In March and April 2011, The Boston Consulting Group canvassed the payer industry to understand what insurers were doing to capture the upside of the changes while minimizing the pressure on profitability. Simon Targett, BCG’s editor in chief, talks with Martin B. Silverstein, MD, a senior partner and managing director in the firm’s Boston office and coauthor of the study, about the industry’s response.

    Simon Targett: You surveyed a broad range of insurers about their strategies for dealing with the Affordable Care Act. Will the industry be prepared for reform by 2014, when the main provisions kick in?

    Martin Silverstein: Despite all the uncertainty surrounding reform, which comes from both the lack of detail in the law as well as the unpredictable political forces at play, insurers simply cannot afford to assume it won’t happen. The insurers we surveyed are taking decisive steps to succeed if and when the key elements of reform come into effect. In many cases, they are being more aggressive—and inventive—in tackling perennial issues such as costs and are also angling to capitalize on the surge of new customers. Their stance marks a sharp departure from their guarded outlook in the months after reform was passed, when many executives were questioning the actual viability of the health insurance sector.

    Are all insurers following the same path?

    There were a few common themes among the payers we surveyed. Most, for example, were focused on “the basics”—controlling administrative and medical costs—albeit with a renewed sense of urgency. They are, in the words of one executive, doing things they should have done all along, but they’re doing them faster. Still, our findings showed that the pathway will vary widely among national plans, Blues, regionals, and those that are focused on a specific region or customer segment such as Medicaid. This will have profound implications for the shape of the industry. Scale will continue to matter—probably more than ever. This will give an edge to national players, especially if they can build strong local positions. At the same time, payers that are focused on narrow customer segments or specific regions will benefit from some of the changes being ushered in by reform, including the importance of collaborating with providers and leveraging trusted brands.

    Most payers seem to be trying to collaborate with providers to manage medical costs. They’ve been down this road before—with mixed results. How is this time different?

    Despite years of talk about enhanced collaboration between payers and providers, we’re finally seeing real progress on this front. Very few plans are reinvesting in the well-worn managed-care tool kits that simply squeezed reimbursement and punished physicians for noncompliance. The spirit is much more about enabling providers and measuring and rewarding better outcomes. This won’t happen overnight, but it does feel different. People understand that managing medical costs is the key to bending the cost curve and that payer-provider collaboration, in turn, is critical to managing medical costs effectively. Meaningful progress will depend on how fast payers can build the capabilities that will enable doctors to improve patient outcomes.

    So from the payer’s perspective, is managing costs the key to success?

    Cost is a major theme of reform, but growth is critical as well. Most insurers are priming their businesses to capture new customers. Seventy-three percent of insurers are planning to increase their marketing and sales capabilities in the near term, with a particular focus on direct-to-consumer marketing. Many payers are also investing more in brand-building efforts. In the more retail-oriented environment that will be created by exchanges, marketing is likely to emerge as a critical source of competitive advantage, perhaps on a par with being a low-cost producer. In addition, payers are looking for opportunities to expand, often by diversifying their revenue mix. Smaller plans are diversifying into new customer segments and insurance products, while larger plans are looking beyond the core health-coverage business by selling information and medical management services, testing the waters in foreign markets, and acquiring providers.

    How are insurers dealing with the uncertainty surrounding exchanges?

    Nearly all the executives we interviewed cited exchanges as their biggest concern—mainly because of the latitude states have to develop their own solutions. It is difficult, if not impossible, for insurers to develop comprehensive strategies for participating in the exchanges without knowing more about how they will operate. Payers—and others in the industry—are likewise uncertain or even skeptical about the extent to which customers will embrace these marketplaces. But exchanges are impossible to ignore. Most payers have already begun to develop basic strategies. Nationals, for example, are planning to leverage their low-cost operating models to develop affordable products geared specifically to exchanges. Some are reverse-engineering their existing products with explicit price points in mind in an effort to capture price-sensitive customers. Blues and regionals are planning to leverage their local knowledge and established brands to capture exchange customers.

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