Obamacare’s “My Bad” moment
You could hardly be surprised when news came out earlier this month that the Obama administration was considering replacing the incumbent HealthCare.gov vendor – CGI Group – with Accenture. By now, the rollout of Obamacare’s (or the Affordable Care Act) much-touted flagship health insurance exchange website, HealthCare.gov, has entrenched itself as a case study in how NOT to implement a large-scale IT system.
With costs incurred inching northwards of US$400 million (at last count) and multi-faceted complications resulting from the ambitious launch across 36 states, the harsh media and public spotlight has laid bare various problems beset the program. Despite having an array of veritable IT service partners (including the likes of Booz Allen Hamilton, CGI Group, and, later on, UnitedHealth Group), the website was plagued by frequent crashes, error messages, delays, and other glitches, frustrating consumers who looked to sign up for a health insurance policy.
Live and learn
Now that the initial hyperventilation and brouhaha over the episode has settled, it is time to evaluate the lessons for service providers and buyers alike. As is the case for any major IT engagement, one can never hold a single stakeholder to take the fall when things go south. Here, there were a wide range of missteps, including disagreements over project leadership, lack of communication between vendors and administration, inadequate testing, underestimation of web traffic, divergence of political ambitions regarding IT imperatives, murky ownership, and an absence of a clear problem-mitigation strategy, which in totality led to the mess the administration finds itself.
As one would expect in a scenario like this, there is no one-size-fits-all strategy. However, to distill the key learning for a large-scale IT project involving various stakeholders with divergent viewpoints, it is essential to:
There is an overarching necessity to identify the operational challenges beforehand in order to mitigate post-implementation complexities. With federal IT spending expected to increase, it is essential that service providers and buyers gear up to inculcate predictive thought leadership as the silver bullet to avoid messy reactive measures.
The road ahead
Accenture would seem like the ideal fit for a project of such magnitude, given its proven expertise in the domain – it led the construction of California’s state health insurance exchange, which received positive feedback from stakeholders. Also, this type of a large-scale systems integration engagement is right up its alley, and plays to its strengths. This is reflected in Accenture‘s positioning as a leader across Everest Group’s PEAK matrix for healthcare and life sciences ITO. That said, the company will be under increased scrutiny and immense pressure to deliver given the attention the project has garnered.
For more perspective on ITO trends, buyer imperatives, and market opportunities in each of the payer, provider, and life sciences market segments, read Everest Group’s complimentary report on State of the Healthcare & Life Sciences ITO Market: 2014. The report also looks at how the Healthcare and Life Sciences ITO opportunity will pan out in 2014, and provides projections on its growth and market size going into 2020.
Will the troubles of Obamacare upend the robust growth that we have been experiencing in services in the healthcare space? It’s an interesting question, given that Obamacare’s march toward the looming January 1, 2014, launch date resembles a complicated traffic snarl with a lot of cars wrecked and not drivable.
Let’s look at the situation from three perspectives.
First, there is a possible so-called “nuclear option” in which Congress would repeal the Affordable Care Act, better known as Obamacare. The fact is the underlying reforms necessary for healthcare providers (hospitals, physicians) and payers will further churn an uncertain market and drive more change into the market. So the impact from Obamacare would be even more growth for the services businesses.
Second, it is highly unlikely that the healthcare industry’s new commitment to evidenced-based medicine and data-driven health plans will diminish. Although the business models and supporting processes may eventually take a different form, the commitment of both industry and government for the underlying changes will continue whether or not the government implements Obamacare. Again, the massive industry-wide changes will drive growth for service providers.
A third perspective involves the life sciences space. Here the industry is at the brink of a patent cliff with patents expiring on blockbuster drugs. This dilemma will cause life sciences companies to either restructure to accommodate a lower revenue base or to change their business models. As the patent expirations will continue unabated, the need for services providers to support business change will continue without regard to what happens with Obamacare.
So we believe it’s clear that Obamacare has a strong pulse and is no lightweight when it comes to impacting the healthcare services; it may actually provide a big bounce to services providers’ revenue.
Despite the bumpy, uncertain road Obamacare is traveling on, its failure or success will not change the trajectory of the growth in the healthcare services industry. The necessary changes to business processes and models in the healthcare provider and payer space will continue under any scenario that happens with Obamacare.
On June 28, 2012, the United States Supreme Court provided its much awaited ruling on the Patient Protection and Affordable Care Act. In what is considered a surprise judgment by many quarters, the Court upheld almost all provisions of the law passed in 2010.
Here is how the court ruled on the two key provisions that generated the most debate – the “individual mandate” and the challenge by the states for the expansion of Medicaid program:
So, what impact will the Supreme Court ruling have on the outsourcing / global sourcing activity in the healthcare vertical? Will we see a surge in demand and see activity accelerate now that the uncertainty surrounding the law is now over? Three reasons why we believe that the Supreme Court ruling does not suggest any short-term (i.e., in 2012) acceleration in outsourcing activity in the healthcare vertical:
The above is not to suggest that outsourcing / technology innovation activity in the healthcare vertical has reached its peak. If President Obama wins the election, we are likely to see a surge of activity as companies prepare for the 2014 initiatives. Even a number of current bystanders will jump in the fray to ensure compliance with regulatory reform. On the other hand, a repeal could significantly alter outsourcing activity and potentially even jeopardize existing initiatives if Mitt Romney is successful!
As it pertains to uncertainty in the healthcare markets, is this the beginning of the end, or the end of the beginning? Only time, and the results of the presidential election will tell….
Before the economic crisis began in 2008, some ambitious forecasts predicted that by now due to industry consolidation less than 50 large health plans would comprise the entire market. Economies of scale were so attractive in the health insurance industry that even such an aggressive consolidation scenario didn’t sound unrealistic. Obviously, it didn’t happen.
The question is, why? Was there some type of intervention that disrupted the natural evolution path of the health insurance industry and prevented the “presumably inevitable” consolidation, just as human intervention kept the Leaning Tower of Pisa from toppling? Before we address that question, let’s briefly talk about the fundamental premises for consolidation.
There are multiple benefits to being a big player in the U.S. health insurance industry. First, you gain access to the most lucrative client segment in this industry, the Fortune 1000 companies, as it procures health coverage for its employees in a single national chunk, rather than location by location. The Fortune 1000 target category is also the most attractive client segment because of the fixed cost associated with each sales pursuit, which can be spread across a much higher number of beneficiaries, as opposed to closing a deal with a “Mom & Pop” shop. Obviously, to be able to serve such mega clients on the national level, medium-sized firms were expected to close the gaps in their geographic footprint, and selectively acquire niche/state level players.
Second, locking down a large number of beneficiaries allows health insurance companies to exert pricing pressure on providers of medical services, while simultaneously withstanding pricing pressures from more consolidated adjacent healthcare verticals such as pharma and medical device manufacturers. Essentially, large insurance firms are discouraging their customers from consuming out-of-network services, while demanding from in-network providers extremely favorable pricing, frequently in the form of low-priced, fixed monthly payments independent of the actual volume of patients (“capitated contracts”).
Third, due to the very high level of regulation on the federal, state and local levels, as well as quite complicated value chain processes, for every industry player there is an almost mandatory cost category associated with various compliance measures, proactive legal support, and lobbying. Obviously, the bigger you are the more you can afford to spend in this direction (or the less this expense item contributes to your overall cost structure percentage-wise). This is especially true for those firms that deal with Medicare and Medicaid programs, where reimbursement requirements are changing almost on a monthly basis, and staying compliant requires an enormous effort.
With these strong driving forces, why did the expected consolidation trend de-accelerate? Several credible sources point to the recent financial crisis as a primary inhibitor, but I personally don’t think it played any major role in this situation.
I think we should mainly look at President Obama’s healthcare reform. It impacted the operating model of the industry in many ways – the medical loss ratio (MLR) requirement, preexisting conditions, individual buyers, and new coverage limits, to name just a few. Basically, healthcare reform brought so many changes to the fundamental operating principles of the industry that adapting to them requires a significant change management effort. Moreover, as reform impacts not only health insurance but also the entire healthcare industry, some secondary implications from the adjacent verticals are yet to fully cascade throughout the value chain. Just judging from the level of involvement of and extensive guidance from the National Association of Insurance Commissioners (NAIC) in interpreting various Patient Protection and Affordable Care Act (PPACA) provisions, it is quite clear that it will take some time for the industry to adapt to the newly imposed rules of the game. All in all, the healthcare ecosystem is not yet fully balanced, and in a time of ambiguity, it is difficult to make aggressive acquisition bets.
However, the above represents just short-term implications of healthcare reform. Its long-term consequences are quite the opposite. The PPACA made an already regulated industry even more regulated. With so many operating constraints and requirements, it is inevitable that small players that are teetering on the edge of solvency will either get out of the business or be acquired by the bigger firms. Moreover, our government recently introduced another strong incentive for operating on a mega-large scale, when being “too big to fail” serves as indemnification for taking a little extra risk under expectations of getting bailed out if something goes wrong.
All this makes me believe the consolidation trend will reaccelerate, and that within the next couple of years, we will see a number of intriguing M&A announcements. However, the potential M&A activity may not stay limited to horizontal consolidation with mergers of like companies, but also to vertical integration. In this respect, Kaiser’s model (payer/provider) seems to be quite a controversial example for replication because of the multiple pros and cons associated with such a business paradigm. But I’ll save that subject for a separate blog.
We recently met in our offices with a practicing physician leader for a major healthcare organization selected to direct development of an Accountable Care Organization (ACO) and a regional Health Information Exchange (HIE). The mission he is embarking on is highly complex, and managing it effectively will require cooperation from competing internal and external constituencies.
Our discussion focused, from a physician’s viewpoint, on the intricacies and hurdles that will need to be bridged before the new organizations can be launched. For example:
Here’s the follow-up summary I sent to the Everest Group team members who participated in the meeting:
As we heard – confirming what we already knew – the complexities Any Hospital System will face in its effort to address healthcare reform with the development of Accountable Care Organizations and Health Information Exchanges are tremendous. The political nature of dealing with multiple stakeholders can be daunting to say the least.
To be successful, executive leadership at Any Hospital System must commit to defining a plan with a top-down approach that clearly identifies an end state and the steps required to achieve its goals. Finding the right entry point will be difficult because of the political implications, the individual ambitions of the stakeholders, and their lack of leadership.
IDNs nationwide will face similar hurdles. Finding that entry point where commitment can be obtained will be a significant challenge. Defining the point of view for the company and taking it to the C-suite will be a necessary step. It will become clear along the way which organizations are not prepared to make the commitment, and where leadership changes will need to occur before we invest in the effort. Part of that change will be a direct result of how reform plays out for the development, or not, of ACOs, HIEs, and other key components of the healthcare reform effort. There is clearly uncertainty in the political landscape that will cause delays in commitment to organizational development and the accompanying procurement of services.
Our physician friend is a primary example of the frustrations physicians encounter and the increasing pressures they face not only in practicing medicine but also in changing the way they operate their own business and deliver care. The implications of this reality will eventually cause a shortage of physicians, clinicians, and care givers as regulatory compliance becomes more complex. The existing professionals will opt out (retire) and there will be fewer trained experts to take their place.
We’ll be speaking again with our physician contact in two weeks. The purpose of the meeting is to discuss how Any Hospital System can move forward in establishing a plan and committing to an organized, structured approach to this IDN initiative. Best, Gary.”
The development of a point of view for the complex issues IDNs will face due to federal healthcare mandates has created this scenario nationwide. Developing a strategy for and the ultimate provision of necessary services are complex tasks that will challenge the industry to reach viable solutions. There is clearly a need for the development of a strategic direction that not only allows mandates to be met but also fits healthcare organizations’ needs for a sustainable model.
“The old are in second childhood” – Aristophanes
Although the benefits outsourcing market (BAO) – one of HRO’s oldest – may seem passé, it’s currently displaying the kind of dynamism typically associated with a younger market. Indeed, in the last year it has continued to innovate and evolve, driven in large part by the U.S. healthcare reform.
More than a year back, President Barrack Obama announced the Patient Protection and Affordable Health Care Act (PPACA). Against the backdrop of the act’s first anniversary, the market still seeks answers to impending questions: Has the market changed? Are buyers still skeptical? Do they now fully understand the implication of these changes? How has service providers responded to the reform?
Everest Group’s just published BAO Annual Report provides a comprehensive view of the BAO market and the impact the reform is having on all parties. So let’s take a quick look.
The study showed that the BAO market grew at a healthy rate in 2011. A closer look at this market reveals that the health and welfare (H&W) market is growing at a much faster rate, albeit on a smaller base, compared to the pension administration market. As the healthcare reform is the main driver behind the growth of H&W outsourcing, this truly indicates the extent to which the healthcare reform is fueling the growth of the overall BAO market.
The healthcare reform surely brought greater access to healthcare for Americans but what for employers? For employers, the reform has created greater compliance requirements, increased administrative burden, and mandates better information delivery to employees. While in 2010, employers were in a wait-and-watch mindset, they have now taken a front seat and begun to analyze the implications and imperatives of the reform. In today’s uncertain economy, many employers are struggling to maintain a balance between new requirements and the soaring healthcare costs, which they believe will increase further due to the PAACA’s auto enrollment provision. Additionally, many employers are realizing they lack the in-house expertise to steer through the reform. All these concerns are spurring them to seek outside assistance to navigate through the complexities of the reform.
On the other hand, the PAACA has created a pool of opportunities for BAO service providers and they are making significant organic and inorganic investments in order to capitalize on them. First, service providers are enhancing their consulting capabilities to help employers align their benefits strategy with reform’s requirements. For example, Mercer acquired Mahoney & Associates and ADP established a strategic advisory services group. Second, service providers are making technology advancements to provide better employee communication, decision support tools, online/self-service tools, and so on. The high rate of M&A activities in 2010-2011 was a result of service provider’s efforts toward strengthening their H&W capabilities, ala ADP’s acquisition of Asparity Decision Solutions. Net-net, service providers are rapidly ramping up their H&W value proposition to appeal to buyers and “make hay when the sun shines.”
Although the market has responded well to the healthcare reform, some organizations believe that the 2012 election will have an impact on the reform, driving a wait and see stance. They will continue with their current benefits strategy until 2012, and focus on tactical ways to reduce healthcare costs, remain competitive, and provide better benefits services to their employees.
The clock is quickly ticking to 2014, the year in which PAACA will be in full swing. And of course we’ll be keeping you informed on how the regulations are affecting change in the BAO market, including whether the buyer will choose “play or pay.”
As the debates continue, the courts rule, and the American people become more educated on the true impact of “healthcare reform,” the question that begs for an answer is, “What, exactly, IS healthcare reform?” Read any article, tune into any top news organization, and listen to one of the political pundits or news anchors, but your view will change as soon as you hear another source. Even the politicians responsible for the legislation are confused!
The American people are speaking out like never before in gatherings and town hall meetings across the United States about healthcare reform’s cost impact on our system, especially in such a down economy. The reactions have been astonishing; but even more astonishing has been the opposite views from both sides of the issue with opposing explanations on whether traditional town hall meetings really represent the true feelings and will of the American people. New political explanations and themes are beginning to emerge. Instead of healthcare reform we now have “insurance reform.” The debate seems to be around identifying the bad guy. Is it insurance organizations, physicians, pharmaceutical companies, or government? Where is the “Bogey Man” in this?
Most of us in the healthcare technology market space agree that all this debate and posturing has caused a delay in the commitments to move healthcare industry technology forward. It has been a lean year for major providers of healthcare solutions and services to implement anything because healthcare provider organizations are confused over government mandates, stimulus and what that entails. It’s apparent, however, that whichever direction the debate moves, whatever is or is not deployed for healthcare reform, the resulting environment will require innovative technology solutions that can support access to the critical information necessary to comply to market demand and government mandates. It’s time to act on compliance demands rather than gamble that they will be moved out or go away. It’s time to plan for the next generation of services that will help healthcare organizations do more for less, rather than adding to already strained information technology budgets.
It’s not yet clear which organizations will step up to the plate and define the healthcare model for the future and the technologies that will drive that model. But what is abundantly clear is that next generation IT applied to mHealth, medical device integration, telehealth, and data center transitions will support and drive innovation that will support quality of care and wellness programs and make these affordable for consumers.
As we strive to understand what healthcare reform is, we cannot lose sight of the fact that healthcare is a costly issue, and we must make it affordable for all without consuming our national economy.
A client recently engaged Everest Group to analyze the U.S. health insurance industry and identify long-term trends and their implications. From the outset, I realized that due to the ongoing healthcare reform, this was an unusual case in which one couldn’t extrapolate existing industry dynamics into future periods. Trying to understand the implications of President Obama’s healthcare reform on overall industry profitability, I discovered many contradicting predictions. As a result, I conducted my own study of the most important elements, and unlike many analysts, concluded that the reform will not negatively affect the industry from a profitability standpoint.
Pre-Existing Condition Threat Demystified
The biggest perceived threat to industry profitability is the legal provision that prevents insurers from refusing to provide, limit, or drop coverage, but this provision alone is expected to add more than 30 million members to the insurance rolls! Granted, pre-existing conditions and other issues will preclude this customer segment from being the most profitable, but the provision will drastically increase overall insurance premium revenues with very little impact to the SG&A cost structure, which will just be leveraged for incremental volumes due to economies of scale.
Benefits from Increased Bargaining Power
The U.S. health insurance industry already achieved a sufficient level of consolidation, driven in large part by an appetite for increased bargaining power. With substantially greater membership, all major industry players will possess even more negotiating clout with medical services providers. Moreover, health insurance providers’ intermediary role in the overall healthcare value chain has been continuously helping the industry to maintain its profitability, as constant increases in providers’ rates have always been successfully passed on to the end-users. Traditionally, the industry operated under a cost plus mentality wherein every year health insurance providers estimated the expected increase in medical costs (hospitals, physicians, and prescription drugs) and factored this increase into their renewal rates. It is not unlikely that, driven by expanded membership, insurance firms’ increased bargaining power will manifest not only on the provider side but also on the buyer side via higher rates for enterprise clients.
Additional Regulatory Pressure on End Users
Government also indirectly contributed to the shift in bargaining power from buyers to insurance providers by establishing a mandatory requirement for employers to provide coverage for their employees with associated tax breaks and penalties for non-compliance. The impact of the latter provision may be partially offset by the proposed monitoring of insurance rate increases on the state level and the quarter billion dollars of funding available to the states, via the PPACA, to establish the necessary monitoring capabilities. But these days the bulk of commercial coverage is sold to large enterprises that purchase benefits on the national level for all geographies in which they have employees, so control on the state level may become irrelevant.
Ambiguity of Medical Loss Ratio Requirement
Another potential impact to profitability arises from newly imposed limits on medical loss ratio (MLR) –the percentage of insurance premium actually spent on medical services – at 80 percent for small groups and 85 percent for large group plans. However, legislation is not very prescriptive in terms of what does/doesn’t go to the numerator and denominator. The National Association of Insurance Commissioners already released an industry-wide clarification allowing exclusion of state and federal taxes from insurance revenues in the denominator. What SG&A costs can be included in the numerator is still an open question. Keeping in mind the “too big to fail” concept employed by the current administration, it is very unlikely that the government will attempt to tighten up the MLR definitions, as doing so would put the solvency of the whole industry at risk.
Health Insurance Exchanges
There is a lot of hype around the provision in the healthcare act calling for the establishment of health insurance “exchanges,” where otherwise uninsured individuals can shop for insurance plans. Some experts believe this kind of “priceline-dot-com” health insurance will essentially drive transparency, intensifying price competition. I am skeptical about the potential of such an outcome. First, wholesale purchases will still comprise a dominant segment of the overall market. Second – just as in the auto insurance industry – it is nearly impossible to conduct an apples-to-apples evaluation of rates. In health insurance, the law still allows substantial differences based on an individual’s risk profile (three to one based on age, three to two based on tobacco use, etc.), which means that even two people purchasing identical medical coverage from the same insurance provider cannot accurately check the rate competiveness.
Aggressive Cost Takeout
Finally, it is quite clear that the industry is undertaking many cost takeout and improved efficiency efforts. Nearly all large healthcare players have initiated different care management programs in an attempt to preemptively address the most expensive items in their cost structure. Along the same lines, all insurance companies have achieved substantial progress in risk management analytics and fraud detection/prevention measures.
It is quite interesting that stock market performance demonstrates investors’ optimism about the future of the health insurance industry. More than a year after the PPACA was signed into law the S&P Managed Health Care Stock Index demonstrates strong performance, and is constantly outperforming not only the S&P 1500 but also the S&P Composite Health Care Index.
The most challenging part of all this is estimating the impact from the second degree of implications, as healthcare reform is not limited just to the health insurance sector. The law brings many regulatory changes to the provider side, and these will quickly cascade through the entire value chain, forcing healthcare providers to make corresponding adjustments to their delivery models. Despite remaining ambiguity around different regulatory nuances, I do believe that under healthcare reform the industry will maintain its profitability.