Several hundred health networks will become payors
Providers are struggling with the implications of healthcare reform, yet an increasingly viable option is for them to assume the role of payors. Such a move reflects their ability to improve care management, their need for improved margins, and their direct relationship with patients.
Several hundred health networks will become payors
k:e VKaJ eYer \ p\ EaOO a KeaOtK SOan KitV to XV an $&2 Kere a EXnGOe e [SeriPent tKere :e Zere naiYe to EeOieYe tKat a VerieV oI Moint YentXreV ZoXOG reVXOt in VoPe neZ .aiVer Per Panente 0a\Ee it
V tiPe Ze taNe tKe SOXnJe anG EeFoPe an inVXrer oXrVeOYeV $I ter aOO Ze noZ KaYe OeVV tKan SerFent oI oXr YoOXPe at riVN anG Ze NnoZ it neeGV to Ee XSZarG oI SerFent oYer tiPey — Health system CFO This quote — from an actual CFO — neatly sums up the current stance of most healthcare providers. They are struggling mightily with the exploding implications of reform, which is leading to new segments, new channels, and changing economics. Pricing pressure is now the dominant trend in the healthcare world, as accountable care organizations (ACOs), public and private exchanges, and Medicare and Medicaid expansions continue to squeeze provider margins. Some providers addressed this challenge a decade or more ago. Kaiser Permanente fully integrated across both payor and provider sectors, and large integrated delivery networks (IDNs) with regional and national pull, such as Mayo Clinic, Geisinger Health System, and Sentara Healthcare, established their own successful HMOs. Most larger IDNs are now developing ACOs, but with limited prospects for at-risk arrangements to account for more than 10 percent of their revenue in the short term. That is simply not enough to meet increasing pressures on providers to better manage care. The balance is further skewed by the rise of retail and consumerism, putting providers on the front lines of customer service. A further shift in the balance of risk and reward among payors and providers is the new concept of bundles. In their strongest form, bundles are end-to-end, intensively managed care protocols that are oĈered at a oxed price with outcome warranties. Our surveys show that the demand side is ready for bundles — with consumers and employers receptive to and even eager about the concept. On the supply side, early results suggest savings of 20 percent or more, especially when high-cost, high-volume procedures are implemented orst. Although payors are often willing participants, providers are leading the charge into bundled care. Yet in the traditional healthcare model, payors would reap the lion’s share of the gains from year to year. In a world with declining real prices, the opportunity for providers is signiocant, and the question is this: How will the gains from care management (versus global underwriting) be distributed? In the current environment, we believe that many IDNs will respond by taking on the role of payors, repecting their ability to improve care management, their need for improved margins, and their direct relationship with consumers. Reportedly, some 50 percent of U.S. health systems have applied — or intend to apply — for an insurance Contacts
Gary Ahlquist Senior Partner +1-312-578-4708 gary.ahlquist @strategyand.pwc.com Minoo Javanmardian, Ph.D. Senior Partner +1-312-578-4712 minoo.javanmardian @strategyand.pwc.com
Strategy& senior associate Amika Porwal and former Strategy& partner Phil Lathrop contributed to this report. .
license. These IDNs will eĈectively shift from kprice takersy in a traditional fee-for-service model to krisk takers,y allowing them to better capture value (Vee ([KiEit ). We estimate that 300 to 400 of the nation’s IDNs are in a position to consider exploiting risk-based opportunities. In each of the largest metropolitan markets, three to ove provider networks would have the necessary shares and brand awareness to explore risk-taking arrangements — all of which, combined with pricing pressure, will drive further consolidation. In moderately sized markets, only one or two IDNs may have such strengths. Many of these IDNs have already developed ACOs, but typically with very modest risk- and gain-sharing features. While ACO-like programs may succeed in putting about 10 percent of revenues at risk, the potential beneot of having 50 percent or more of revenues in play is enormous. Local brand strength will be key to going to market with an increasingly retail state of mind. While service, quality, and pricing advantages from bundles and other initiatives will likely drive some market share gains, the name of the game in healthcare is likely to change from seeking larger volumes — or kgrowth from new servicesy — to focusing on margins and total operating surpluses, particularly as ambulatory care procedures continue to grow faster than inpatient services. Reducing utilization (frequency of care, modalities, and sites), managing care at the bedside, and customer service are imperatives.
/oFaO EranG VtrenJtK ZiOO Ee Ne\
([KiEit Value captured by price takers versus risk takers
Price takers (traditional health system model) $
Risk takers (future health system model) $
Real price Cost of care
Cost of care
Care management gain
Pricing pressure continues; health system margins continue to decline
; , however, health Pricing pressure continues; system improves costs in sustainable way through better care management (even though the cost of care may vary due to risk)
Source: Strategy& analysis
Of course, kbecoming a payor y involves far more than hiring a bunch of actuaries and ponying up some reserve capital. The list of needed capabilities is long and daunting, including detailed plan design, claims processing, adjudication, customer service/relations, marketing, and sales, among others (Vee ([KiEit ). There are many potential ways for providers to participate in the risk pool without simply replicating the functions of today’s payors. Each segment of the value chain and underlying capability is a candidate for a make/lease/buy decision. These analyses (and discussions with local payors) will likely be rather ad hoc in the early stages, depending heavily on local brand strength, cost position, and any existing inhouse capabilities. The critical balancing act will be the right degree of risk sharing (from 0 to 100 percent), and will include not only rewards and penalties for day-to-day performance, but also the appropriate level of reserve capital and recourse. Although today’s insurers may seem the likeliest partners, so far third-party administrators and other specialist orms are mostly olling this role because they are not viewed as future competitors. However, if momentum continues to build for kprovider as payor y schemes, national turnkey solutions may appear, perhaps oĈered by spin-oĈs of large national insurers, which develop and sell a menu of administrative services and capabilities.
([KiEit Spectrum of risk (and capabilities required)
Today Future Increasing coordination, commitment, and risk for providers 5 6
Capitation Full risk insurance Care management risk Medical advances/technological risk Selection risk Overall health status risk
Sufficient cash on balance sheet
Fee for service
Fee for service with incentives
Prospectively paid bundles
plus: - Health/wellness management - Investment management
Sample required payor-like capabilities
- Care referrals and transitions - Identification of appropriate care setting
plus: - Primary care access - Care coordination - Follow-up and monitoring
plus: plus: - Sales and - Population health marketing - Product development - Actuarial/ underwriting - Pricing/profitability/ tracking - Customer engagement - Customer enrollment - Customer service - Claims/revenue management - Reporting/billing/ coding
Source: Strategy& analysis
In addition, once the technical issues of plan design and eĉcacy are settled, many questions will arise as to how these provider-as-payor entities will go to market. Should they be co-branded with payor partners? Should existing ACOs be rolled up into the new product oĈering? Should they be oĈered exclusively as the only way to receive preferred pricing from the IDN? Should they be sold as one option in a portfolio of insurance products that sales forces oĈer to local employers? What pricing strategy will move the most volume to the most prootable products? Are the products amenable to both public and private exchanges as sales platforms? Today’s payors need not view with alarm the possibility that leading IDNs will step into deeper parts of the insurance risk pool, though. Virtually all such new entities will need a robust set of support services that they must either buy or lease — kmakingy is not a realistic option, especially for those wanting to be orst to market. Furthermore, most sizable employers are already self-insured and present limited opportunities for major underwriting gains. Fundamentally, payors must appreciate the inexorable advance of consumerism and the growing retail mind-set in the healthcare market, and hone capabilities that mesh with the needs of provider brands in selling and managing. Today’s largest and most successful payors will need to ond prootable means to collaborate with and serve provider brands or risk losing signiocant pieces of their current businesses. Some will almost certainly fail, likely causing another round of consolidation (particularly among the Blues). For providers, the stakes are even higher. As they evolve their operating models to assume greater risk and restructure themselves into new provider-payor entities, many will fail. Yet they have little choice — they must change or die. Moreover, providers that build the right capabilities and deliver care in a way that resonates with consumers will succeed, indelibly changing the U.S. healthcare landscape.
7Ke e[iVtentiaO TXeVtion oYer tKe next 10 years; Sayor or not"
Strategy& is a global team of practical strategists committed to helping you seize essential advantage. We do that by working alongside you to solve your toughest problems and helping you capture your greatest opportunities. These are complex and high-stakes undertakings—often game-changing transformations. We bring 100 years of strategy consulting experience and the unrivaled industry and functional capabilities of the PwC network to the task. Whether you’re charting your corporate strategy, transforming a function or business unit, or building critical capabilities, we’ll help you create the value you’re looking for with speed, conodence, and impact. We are a member of the PwC network of orms in 157 countries with more than 184,000 people committed to delivering quality in assurance, tax, and advisory services. Tell us what matters to you and ond out more by visiting us at strategyand.pwc.com.
¬ 2014 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member orms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Disclaimer: This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.