For decades, healthcare payors have relied on aging technology platforms to deliver products and services to their customers. While this reliance may have provided adequate results in the static market that has persisted since the rise of the HMO, it will not provide the innovation required by an increasingly demanding and savvy consumer.
New and innovative benefits plan offerings, high quality customer service, and information transparency--about both the financial and clinical aspects of care--are now emerging as mainstream requirements. Health plans without the technology infrastructure to provide this innovation and quality are already beginning to lose ground.
The health insurance industry stands in stark contrast to other sectors, where classic "crossing the chasm" cycles of innovation are the norm. Most industries tend to periodically embrace innovation in product offerings, internal business processes and technology. This drives new or expanded markets, increased value to consumers, and increased market share and profits for innovators.
Banking is a great example of this sort of consumer-oriented innovation. Technologies such as ATMs and Internet banking were driven by early adopters and then quickly embraced by the entire industry. Once proven successful, they fundamentally changed the way that consumers interact with banks and created drastic reductions in administrative costs for the banks.
The technology infrastructure was then leveraged to provide additional premium services, such as bill payment and centralized access to brokerage and other financial accounts, driving additional revenues and customer loyalty. Today, banking is looking toward emerging technologies such as mobile banking as the next wave.
FORCES OF "UNNOVATION"
Healthcare payors have pursued relatively little technology-driven innovation in the last decade, especially with respect to their core administration systems. Underlying this inertia is the fundamental impairment of a normal market dynamic in which competition for consumers' dollars drives price down and quality and innovation up.
The health-plan member has little awareness of the price of goods and services or of the premiums that ultimately pay for them.
The doctor or hospital is not paid by the consumer, but rather by a third-party payor whose interest is purely financial. The incentive for the payor to become more efficient and to price coverage more competitively is lacking, as long as the employer continues to bear the burden of increasing rates. Recent moves toward a consumer-centric, technology-enabled healthcare marketplace are rightly aimed at the reintroduction of natural market dynamics.
In the world of healthcare payors, it is not uncommon for 60 cents to 70 cents of every dollar of profit to go to administrative overhead. Cigna's selling, general and administrative expenses account for 91 percent of gross profit, Aetna's for 70 percent and United Health's for 57 percent, according to public financial records.
One just need look at the trend in HMO median medical expense ratios to see the effects. Medical expense ratios measure total medical expenses versus total revenue, or total investment revenue. The results unveil the percentage of the HMO's premium revenue that goes toward actual healthcare expenses. The difference, then, is what is profit--and what's spent on administrative expenses. This amount has not budged much over the last decade. If anything, medical expenses have gone down and profits/administrative costs have gone up.
Clearly, there are opportunities for greater efficiency in the health insurance industry.
Why has innovation been stalled in the health insurance arena? One large factor has been the consolidation of health plans and the technology vendors that supply them. As the payor industry has consolidated, three things have happened to slow innovation in the plans.
One, they have achieved significant growth and efficiency gains by eliminating organizational redundancies and, as a result, are under less pressure to find additional improvement elsewhere. Secondly, mergers and acquisitions have created significant work in the integration of acquired companies and their respective products and technologies, sidelining innovation. And lastly, they have added significant complexity to their operational and technical infrastructures, which in turn increases the complexity and fear associated with the implementation of new technologies.
On the vendor side, mergers and acquisitions have also been rampant, with the number of vendors supplying core administrative systems shrinking from more than 10 in the mid-'90s, to just three major players today. These large players have acquired new vendors, either to eliminate them as competition or to add the new technology to their existing portfolios, often as a less favored solution inside the new organization.
Nearly 30 years of stagnation have made a significant impact on the industry. Most notably, a lack of flexibility in the existing systems has severely limited the variety of health benefits products that can be offered. Healthcare payors have settled for limited variation of the same basic product elements, premiums, deductibles, copayments, formularies and covered services.
Even this relatively small amount of variation has created major challenges due to the severe limitations of core administrative systems based on "green screen" mainframe technology, written in inflexible, nonobject-oriented languages like COBOL and C and continually patched to attempt to comply with new market demands like Web-based interaction and service-oriented architecture. The recent wave of "consumer-driven" health plan products, like high-deductible, health savings account-qualified plans, has caused huge operational headaches for payors even though these offerings do not differ in any fundamental way from existing products.
FORCES FOR CHANGE NOW
As competition in the market continues to intensify and opportunities to grow through acquisition decrease, payors are finally feeling the need to modernize. Many, especially the more agile regional players seeking ways to combat their resource-rich national competition, have begun to invest in next-generation technologies that promise to improve efficiency and allow rapid design and deployment of much more innovative and cost-effective products.
The move toward cutting-edge technology comes at a time when consumers are becoming progressively more used to products and services that give them flexible, reliable and affordable access to customized resources. This consumerism is having a dramatic impact on payors trying to figure out what to do with the broader palette of options made available to them by these new systems. The member who can log into his 401(k) anytime from anywhere, adjust his risk profile, and move in and out of individual stocks increasingly expects similar benefits from his health plan--and will likely switch plans to get them.
So what will these emerging health insurance products look like once more state-of-the-art technologies finally penetrate the industry and payors begin to offer more consumer-centric plans? Three areas of focus will likely be personalization, flexibility and access.
--Personalization: Payors will soon be able to efficiently design, sell and manage a much wider variety of products, so we will soon see plans tailored for age groups, gender, lifestyle, disease state and perhaps even genetic profiles.
--Flexibility: Imagine a world where you don't wait for your enrollment period to change from "Platinum Plus" to "Silver Advantage." Instead, you modify multiple parameters of your coverage anytime for any reason. A member who turns 50 may decide that paying an additional premium out of her own pocket for the "100 percent cardiac prevention/care" plan is important. The coverage is altered without penalties or waiting, and now the member has a whole new benefits structure and set of preferred providers, covered services and formulary.
--Access: Just as the consumer-directed health movement made coverage more affordable, especially for healthy young members who rarely need expensive care, the new levels of efficiency, sophistication of analytics and flexibility of product design promise to make care more available to groups with low income or existing conditions that are underserved in today's environment.
Innovation in payor technology has set a glacial pace in recent years, but that is changing fast. Technologies--like highly configurable product design, real-time data warehouses, cutting-edge analytics, service-oriented architectures and standardized platforms that can leverage clusters of low-cost computers--have been standard in other industries for years and are finally coming to the health insurance industry.
First adopters will have a huge advantage over laggards still bogged down by inflexible technology and processes, and new players will undoubtedly rise to prominence as the balance of power in the industry shifts. Consumers will win with an industry much more attuned and able to meet the their needs. The entire economy will, in fact, benefit as significant slack gets taken up in the cost-of-care equation, resulting in significant savings for employers, states and the federal government.
CEO of healthcare software company HealthEdge, has more than 25 years experience building companies and architecting and delivering software products and solutions to a variety of markets.
October 15, 2007
Copyright 2007© LRP Publications