SOURCE: The Boston Consulting Group

The Boston Consulting Group

August 23, 2011 10:00 ET

U.S. Health Insurers Offer Preview of Industry's Evolution in a Post-Health Care Reform Marketplace

Boston Consulting Group Report Reveals How Payers Are Making Big Bets in Preparation for New Low-Cost, Retail-Oriented Competition

BOSTON, MA--(Marketwire - Aug 23, 2011) - A new report by The Boston Consulting Group (BCG) offers insights into how health insurers are gearing up for the emergence of a new low-cost, retail-oriented marketplace in the post-health care reform landscape, placing bold bets on divergent strategies.

Once fully implemented, the Patient Protection and Affordable Care Act (ACA) of 2010 will dramatically change the U.S. health care system and transform the health insurance industry into a more consumer-centric marketplace. The new report, Innovation, Diversification, and a Focus on Fundamentals: How Health Care Reform Will Change the Insurance Landscape, is based on a spring 2011 survey of approximately 120 insurance executives from nearly 50 of the largest U.S. health insurers. The report reveals that payers are looking past the uncertainty surrounding aspects of reform and moving ahead with new initiatives designed to reach consumers, rein in costs, and diversify into new areas.

"It's not surprising that the implementation phase of the ACA is shaping up to be a mixed blessing for the health insurance industry," said Martin B. Silverstein, M.D., a BCG senior partner and coauthor of the report. "Across the board, insurers are taking decisive steps to participate in the surge of growth while minimizing the pressure on profitability."

Together, the companies surveyed provide health benefits to more than 160 million individuals, or about two-thirds of those who are currently insured. The survey revealed a wide variation in how different kinds of insurers are responding to health care reform, but all types of insurers cited managing medical costs as a top priority.

"To control medical costs, insurers are relying on initiatives that revolve around the quality of care and patient outcomes," Silverstein continued. "Payers had been talking about outcomes-based initiatives for years, but now, for the first time, these efforts are front and center in the medical management agenda for a majority of payers. There is growing recognition that these approaches represent the best chance to bend the cost curve."

"Beyond cost, innovation will be vital as insurers seek to build a sustainable position in a more competitive, retail-oriented marketplace," said Giridhar N. Rao, BCG partner and report coauthor. "Most payers are gearing up for the new environment with a mix of cost and growth initiatives, and making investments in key areas to enhance their capabilities."

Some additional key findings and report conclusions:

Evolving Health Insurance Industry

  • The industry will assume a more sharply divided, barbell-shaped profile, with large plans thriving at one end, owing to their scale, and smaller, niche plans prospering at the other, by focusing on specific segments or markets.
  • Innovation will become more critical to success. Payers will need to develop new products that appeal to the retail customer, along with new revenue streams and new kinds of relationships with providers.

Preparing for a New Consumer Playing Field

  • The exchange-driven retail environment will propel the industry from a business-to-business to a business-to-consumer model, tilting the playing field steeply in favor of insurers that can provide low-cost products and the right experience to serve retail customers. Nearly 75 percent of insurers are planning to invest in their marketing and sales capabilities in the near term, with a particular focus on direct-to-consumer marketing.
  • While virtually all plans are preparing to participate in exchanges, their approaches differ widely. Blue Cross Blue Shield plans and regional plans see their local share and brand as natural advantages, for example, whereas nationals will participate more selectively.
  • At the same time, however, most surveyed insurers cited exchanges as their biggest concern, mainly because of the latitude that states have to develop their solutions. It is difficult, if not impossible, for insurers to develop comprehensive strategies for participating in exchanges without knowing more about how particular exchanges will operate.

Controlling Costs Emphasized

  • More than 90 percent of surveyed insurers cited managing medical costs as a top priority. More than ever, insurers are experimenting with initiatives that reward providers for quality of care and patient outcomes. Blues and regional plans are relying on their deep provider relationships and strong local market position to pursue collaborative arrangements with providers, mainly via medical homes and Accountable Care Organizations.
  • Most insurers are also taking aggressive steps to curb administrative costs through alliances and outsourcing or by designing low-cost products for retail customers.

Diversifying into Innovative New Areas

  • Nearly 60 percent of nationals are interested in diversifying beyond the core health coverage business -- for example, by selling information and medical management services to providers, acquiring providers, offering ancillary products, and testing the waters in foreign markets.
  • Many plans, not just nationals, are designing holistic health and wellness services in order to become "health management" companies. Nearly 40 percent of Blues and more than 30 percent of regionals and nationals also cited wellness initiatives as one of their top three priorities for responding to reform.
  • Some insurers are planning to expand geographically within the U.S. One-third of the focused-segment plans (e.g., Medicaid-only insurers) want to expand into new states, for example.

Forecasting the Impact on Industry Economics
In addition to the insurer survey, the report draws on a BCG analysis of the ACA's likely impact on the health insurance business. Among the key findings:

  • From 2011 to 2019, when all the elements of the ACA have gone into effect, the total number of insured is expected to increase by 49 million. Much of this growth -- about 26 million people -- will come as a direct result of the law.
  • The industry's revenues are expected to more than double from 2011 to 2019, to $1.2 trillion. Over the same period, however, the industry's profit margin (excluding all taxes other than a new premium fee) could decline from nearly 5 percent today to slightly below 3 percent -- a drop of more than 40 percent in the industry's net profit. Most of this decline -- over two-thirds -- will come as a direct result of the new premium fee, which is expected to rise to 1.5 percent of premiums by 2019.

To download a copy of the report, please click here.

About The Boston Consulting Group
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