The Fit for Growth journey for health plans: A strategic framework for winning a two-front war

In the post-reform era, payors must formulate strategies and invest in new capabilities to grow. To win in this environment, payors should consider a Fit for Growth regime that fuels strategic growth, nurtures essential capabilities, and ensures cost competitiveness.

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The Fit for Growth journey for health plans A strategic framework for winning a two-front war

Contacts

Chicago Mike Connolly Senior Partner +1-312-578-4580 mike.connolly @strategyand.pwc.com Anil Kaul Partner +1-312-578-4738 anil.kaul @strategyand.pwc.com Pier Noventa Partner +1-312-578-4877 pier.noventa @strategyand.pwc.com

New York Gil Irwin Senior Partner +1-212-551-6548 gil.irwin @strategyand.pwc.com Frank Ribeiro Partner +1-973-410-7667 frank.ribeiro @strategyand.pwc.com

San Francisco Thom Bales Partner +1-415-627-3371 thom.bales @strategyand.pwc.com

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About the authors

Thom Bales is a partner with Strategy& based in San Francisco. He specializes in operations, technology, and transformation strategy in the healthcare industry. Anil Kaul is a partner with Strategy& based in Chicago. His areas of expertise are organizational design, performance measurement, process design, cost analysis, implementation of business process outsourcing/ offshoring, and shared services. Pier Noventa is a partner with Strategy& based in Chicago. He specializes in operating model transformation, lean operations, and technology strategy in the healthcare industry. Frank Ribeiro is a partner with Strategy& based in New York. He focuses on overall corporate transformation and associated capabilitybuilding programs to increase an organization’s effectiveness and efficiency.

This report was originally published by Booz & Company in 2013.

Chase McCann, Preetha Sekharan, and Neeharika Vinod also contributed to this report.

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Executive summary

U.S. health insurers are facing a structural change in the dynamics of their industry, which has embroiled many of them in a two-front war: Payors must formulate strategies and invest in new capabilities to grow in the new and restructured markets of the post-reform era, and at the same time, they must contain costs — not only to cope with unprecedented margin pressure, but also to fund and support growth. To win in this environment, payors should consider a Fit for Growth* regime that fuels strategic growth, nurtures essential capabilities, and ensures cost competitiveness. No matter how payors choose to differentiate themselves from their competitors in the coming years, they can prepare for growth by fostering strategic clarity, identifying the organizational capabilities that will be required to execute the strategy, aligning resources in order to transform the cost structure and generate investment capital, and building the supportive organization required to create sustainable change, align management, and mobilize staff. Strategy& analysis shows that payors that adopt and utilize such an approach can win a two-front war in the marketplace.

* Fit for Growth is a registered service mark of PwC Strategy& Inc. in the United States.

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A two-front war

Changing conditions have precipitated a structural break in healthcare that has rendered many payors’ business models obsolete. Top-line growth is being constrained by a number of factors, including a softening in the secular inflation in medical costs, anemic investment yields, and rising numbers of coverage buy-downs and self-insurers. Further, payors’ near-term and long-term outlooks are being disrupted by a host of forces, including an aging member base, rising levels of chronic disease, emerging consumerism, and the mandates of reform. In response to these conditions, payors are rightly searching out new growth opportunities, which boil down to two main options: expansion into new markets, such as insurance exchanges, and the delivery of differentiated value in existing markets (via accountable care organizations, for example). Often, these opportunities require that payors revamp their value propositions — that is, their way to play — to differentiate themselves in the marketplace. They will need to build new capabilities systems — the three to six interlocking capabilities required to execute a strategy. And they will need to create new operating models — redesigning their front office, middle office, back office, and corporate operations to properly align with their strategies and position payors to successfully compete in the market. Pursuing new value propositions, and putting into place the new capabilities and operating models that will be required to execute them, calls for levels of investment that can be sustained in the long term only by transforming the cost structure. Many payors are already pursuing cost efficiencies, but in a time when the need for capital investment in the industry is reaching historical peaks, they will have to maximize the returns generated by their cost initiatives and ensure that they can sustain lean operations going forward. In short, payors will need to fight a two-front war: successfully positioning themselves to grow in their chosen markets through substantial capability development efforts and simultaneously pursuing step changes in the cost base and capital generation.

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The Fit for Growth* journey

The major challenge for payors in this two-front war is aligning their strategic goals and their cost structures. They will need to channel investment to the handful of capabilities that truly differentiate the company in the marketplace and support its strategy, perform tablestakes functions as efficiently as possible, and reduce or eliminate all other expenses. In short, a payor’s resources must flow to “good” costs — those that differentiate the company — and away from “bad” costs. The result is a leaner, stronger, more strategically focused organization with improved financial performance. A recent analysis by Strategy& of leading national and regional health insurers revealed a correlation between a payor’s Fit for Growth Index Score and its total shareholder return (see Exhibit 1, next page).1 What drives this performance? Payors that have followed a Fit for Growth journey reap substantial benefits. Applying a capabilities-based perspective can yield new insights that are not clear through traditional lenses, such as product, customer, and geographic views. They also have the opportunity to transform their operating models and use those models to enable and sustain change. Moreover, they can implement changes that stick by articulating an explicit link between growth and cost structure (which creates a positive rationale for cost cutting and reduces organizational resistance from Day One of the Fit for Growth process). To ascertain whether they are ready for growth, payors should step back from the fray and ask themselves three questions: 1. Do we have clear growth priorities that drive investments? 2. Are resources and costs deployed toward those priorities efficiently and effectively? 3. Are the requisite organizational elements in place to achieve those priorities?
* Fit for Growth is a registered service mark of PwC Strategy& Inc. in the United States.

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Exhibit 1 Payors with high Fit for Growth Index scores enjoy superior financial performance
100.0 90.0 80.0 70.0 60.0 Normalized total shareholder return (TSR) score 50.0 40.0 30.0 20.0 10.0 0.0 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 5.0 Fit for Growth Index score R2=.51

Source: Strategy&

These questions correspond to the three building blocks of organizational fitness: strategic clarity, resource alignment, and a supportive organization (see Exhibit 2, next page). Building block 1: Strategic clarity To properly align costs with the strategic priorities of the business and optimize results, payors must first attain strategic clarity. Strategic clarity requires that a payor either tailor its ways to play to different businesses (if sufficient resources are available) or focus on a single way to play.

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Exhibit 2 The Fit for Growth framework

Company’s way to play
- Articulates how the business creates differentiated value for customers Supported by Supported by Supported by

Strategic clarity - Creates an explicit link between growth and costs—reinvesting in the business is a clear objective and is tracked, unlike traditional cost-cutting programs - Adopts a capabilities lens for a fresh perspective, identifying new insights that are not clear through traditional lenses, such as product, customer, and geographic views - Identifies transformational opportunities to change the operating model (e.g., digitization) - Establishes leadership alignment with strategic priorities throughout the organization

Resource alignment - Uses the company’s operating model to enable and sustain changes - Identifies misaligned investment and overinvestment - Fosters capability alignment across functional boundaries and processes - Creates investment discipline through “capability blueprints” that outline what’s different and what’s required for each differentiating capability

Supportive organization - Aligns organization structures, jobs, and incentives to enable differentiating capabilities - Establishes clear decision rights and governance mechanisms to enable work across silos - Fosters and rewards a culture of ownership and continuous improvement - Makes change stick by harnessing the informal networks within the organization

Source: Strategy&

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For example, one national plan recently faced a set of challenges that will be familiar to many payors: increased pressure to be as lean as possible, the need to stand up new models of care delivery and reimbursement, and a significant shift to retail business. In response, the plan’s senior leaders articulated a strategy that called for expansion into the fast-growing small-group and individual segments, international markets, and new businesses, including integrated care delivery and health IT. To support these strategic thrusts, they made a deliberate choice to invest in new differentiating capabilities, such as consumer engagement and population health management. Strategic clarity begins at the enterprise level, but must be extended to segment or business unit levels when they require different strategic emphases. For example, the leaders of the national plan decided to pursue a low-cost platform to win in the small-group and individual market segments. Then they defined a specific capabilities system for this business that included a tiered broker compensation plan bolstered by self-service channels and robust CRM capabilities, a streamlined quote-to-card process, narrow provider networks, and agile, lean service channels. There is a greater risk that strategic clarity will become muddled when a payor attempts to pursue multiple ways to play simultaneously — for instance, when a large payor enters several unrelated businesses. Success requires a different capabilities system and business model for each, yet a payor may try to pursue them all with one capabilities system and operating model, sacrificing effectiveness for operating efficiencies. Another issue is that this approach divides the organization’s focus and resources, which may not be sufficient to support multiple ways to play. Choosing only one way to play requires courage and conviction on the part of the senior leaders and typically entails an opportunity cost. However, companies that adopt a single, properly differentiated way to play usually outperform their industries and their less focused peers. In either case, a company must adopt a rigorous approach to identifying and weaving together the organizational capabilities required to successfully execute its way (or ways) to play. Objective appraisal is critical to a payor’s success at identifying the capabilities needed to create a distinctive advantage and ascertaining the organization’s ability to establish and develop those capabilities. To this end, payors should categorize their existing and required capabilities as follows (in ascending order of resource priority):

Companies that adopt a single, properly differentiated way to play usually outperform their industries.

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• Non-required capabilities: unessential to the organization, and often left over from previous business models • Lights-on capabilities: required for any company to function, regardless of industry (HR, real estate, tax reporting, etc.) • Table-stakes capabilities: required to compete in the industry • Differentiating capabilities: the three to six capabilities that are essential for executing the payor’s way to play Building block 2: Resource alignment Once a payor has identified its way to play and the capabilities system needed to support it, its leaders will need a vehicle for making optimal decisions as to how to prioritize and spend the company’s resources. Such a vehicle enables leadership teams to confidently undertake a transformational redesign of the organization’s cost structure in a way that will not only fund growth, but also eliminate low-productivity investments. This begins by asking what costs are required to achieve the organizational strategy before savings targets are identified. Consider a regional payor seeking to differentiate itself in its markets through a combination of consumer engagement and high-quality care delivery. It transformed its cost structure using three levers: capabilities, operating model, and operational excellence. In terms of capabilities, the payor adopted a segmented consumer model better matched to member needs. It also shifted work to providers by digitizing medical management functions that offered them added value, such as clinical pathways and evidence-based protocols. Last, it reduced its focus and cut costs on its lights-on and table-stakes capabilities, such as claims processing and other back-office functions. In terms of operating model choices, the payor consolidated duplicative support functions within its business units and market teams into common shared services. It consolidated its internal sales force. It also simplified its offerings, reducing complexity by aligning products, processes, and platforms end-to-end for priority offerings and shutting down high-cost, unprofitable products. Finally, in terms of operational excellence, the payor migrated to lowcost benefit plans that feature less complexity and more digital, selfservice interaction. It also shifted routine, commoditized work to locations with lower labor costs and adopted work-at-home policies.

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As this example suggests, payors should begin by identifying the root causes of costs and then determine whether they are related to differentiating capabilities that support the company’s way to play. Non-required capabilities and the costs associated with them — including lights-on and table-stakes capabilities — need to be challenged and targeted for elimination. At a minimum, payors can increase their efficiency in these areas, through outsourcing and other levers. At the same time, companies should invest in differentiating capabilities in order to establish best-in-class service levels that are difficult for competitors to match. Toward this end, payors should do the following: • Establish clear criteria within the company to determine which investments enable differentiating capabilities and which investments are linked to table-stakes capabilities. • Focus investments on truly differentiating capabilities in pursuit of best-in-class service levels. • Calibrate table-stakes and lights-on capabilities to avoid overinvestment and achieve best-in-class cost levels. Resource alignment is very different from the cost-cutting initiatives that are traditionally undertaken in the industry. Conventional cost cutting usually devolves into austerity programs that carve out costs with broad, indiscriminate strokes. It cripples growth initiatives in the quest to capture savings, demoralizes employees and stimulates resistance, and pursues short-term solutions that cannot be sustained over the long term. By contrast, resource alignment embraces the strategic context of the enterprise, invests in growth, and leaves the organization stronger in its wake. Building block 3: Supportive organization The final building block in a Fit for Growth regime is the creation of an organization that supports the payor’s way to play, its capabilities system, and a strategically aligned, lean cost structure — that is, a supportive organization. A supportive organization facilitates and sustains transformative cost reduction. It enables and maintains investment in differentiating capabilities. It encourages and empowers employees to act like owners. And it is capable of change — able to thrive in a state of continuous transformation.

Resource alignment embraces the strategic context of the enterprise, invests in growth, and leaves the organization stronger.

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Toward these ends, the organization is designed — that is, its parts are organized, linked, and staffed — to meet the company’s strategic objectives. And its culture — the predominant beliefs, behaviors, and practices that shape how work is done — is expressly established and nurtured to support the strategy. For example, a large payor created a supportive organization to bolster its transition from a highly centralized and hierarchical management model to a more customer-focused regional model. To achieve this, the payor pushed decision making further down into the organization. It also underwent a significant culture evolution initiative that built on the strengths of its organization and modified behaviors and practices that were counterproductive. This initiative identified and clearly specified the behaviors expected at each level of the organization, and it began at the C-suite level, where the company devoted significant time to aligning and driving action among senior leaders via a clear case for change. This investment in time and executive resources resulted in a viral network of leaders, who became responsible for understanding future-state expectations and who became instrumental in creating action plans and driving change across the organization. Supportive organizations have two main components: Design: In supportive organizations, the “greater good” of the organization’s strategy and the hierarchy of capabilities — from nonrequired to differentiating — always guide the decision-making process. Because these priorities trump the political desires of individual executives and the demands of functional silos, decisions are transparent. Operating mechanisms are deliberately structured in ways that support analysis, effective solutions, and sound decision making. They prompt the “right fights” instead of biased advocacy, along with the ability to access pertinent information in a timely manner and the early identification of both needs and concerns. The supportive organization also requires properly and clearly aligned structures, roles, and incentives. The formal definition of what gets done and how it is rewarded must be aligned to capabilities, to ensure that efforts are focused in the right areas. Additionally, understanding which roles enable differentiating capabilities provides the opportunity to place the best talent in positions that will have the greatest impact on performance and outcomes.

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Culture: The supportive organization features a tailored culture that flows from a payor’s strategy and is designed expressly to support it. This is accomplished by understanding and managing the formal and informal networks of people, norms, commitments, and mind-sets that shape how work is done in the company. • Networks include the relationships and levels of collaboration within the company. Payors with strong networks can bridge organizational boundaries and enable staff to come together and move quickly. • Norms are the values and standards of the organization. They should embrace innovation, thoughtful risk taking, and speed, while adhering to the dictates of compliance. • Commitments include shared visions, objectives, and accountability. They should endow employees with the drive to win and pride in their organization and work. • Mind-sets are the identity, shared language, and beliefs of the organization. They should enable people to see how their work is connected to the vision and strategy of the company. Culture change efforts often fail, but we find that these failures almost always stem from one or more of four causes: lack of leadership and leadership alignment; lack of preparation and support; lack of organizational alignment with change goals; and lack of change-related metrics and rewards. These pitfalls can be avoided and the outcomes of cultural change initiatives can be significantly improved by activating seven essential components of change (see Exhibit 3, next page).

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Exhibit 3 The essential components of sustainable change

Energizing approach

Create energy about the vision behind the changes, using top-down and viral methods

Leadership alignment

Align leaders around owning the vision, and mobilize them to model behavioral changes

Behavior focus

Focus on changing a few critical behaviors first, then mind-sets

Case for change

Drive commitment by pulling both rational and emotional levers

Driving change internally

Monitor and manage the transformation by putting in place ongoing reinforcing mechanisms

Organizational culture

Leverage existing culture as well as the formal and informal to change behavior

Talent requirements

Integrate people requirements and help close capability gaps

Source: Strategy&

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Unleash growth

Although a Fit for Growth regime requires all three building blocks, payors can choose to pursue them in several different ways. The most ambitious approach begins with an enterprise-level strategic assessment, in which the focus is on overall financial performance improvement and operating model transformation. This option seeks to create a “big ticket” capability blueprint and drive the development of a capabilities system. A second alternative, which can be used when a payor already has a clear sense of its way to play and differentiating capabilities, begins with a targeted strategic assessment by line of business or functional domain. A third option, often chosen when a company needs to quickly capture cost savings, is an abbreviated strategic assessment that moves immediately to capture cost savings without harming a payor’s differentiating capabilities and most promising growth initiatives. No matter which Fit for Growth approach is used, when a health plan puts the three building blocks into place successfully, it unleashes its growth potential and improves financial performance. The plan’s strategic intent becomes clear; it aligns resources to strategy and eliminates waste; and its organizational structure and culture fully support its capabilities system. This is the only proven means of winning the two-front war currently facing the payor industry.

Endnote
A payor’s Fit for Growth Index Score is based on its rankings in 10 dimensions across the three Fit for Growth building blocks. The building blocks are weighted as follows: strategic clarity (50 percent), resource alignment (30 percent), and supportive organization (20 percent).
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This report was originally published by Booz & Company in 2013.

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