By Russell Benaroya
Competing on price is a privilege awarded to the lowest cost producer where a competitive advantage exists. Think Walmart’s supply chain, Costco’s bulk buying, or McDonald’s volume purchasing. Where price can sustainably differentiate in the market, it’s a good strategy (even if for some period of time).
Unfortunately, that doesn’t exist in health insurance. It could even result in disaster. Obamacare created the health insurance exchanges to enable millions of Americans to purchase health insurance and about 20 million Americans have already taken the government up on that offer. Health plans that have wanted to win business are doing so on price and yes, they are getting a fair share of members. But their business is getting hammered. Here is what the innovators are doing:
- NOT selling insurance at a negative gross margin and trying to make it up on volume J . Remember buy.com or pets.com in the go go 90’s? These companies sold products for less than it cost the company. You don’t make it up on volume. Many health plans are selling insurance for less than their cost of sales (as defined by a medical loss ratio) and volume is only going to exacerbate the problem. That’s why certain health plans have stopped taking enrollees into their higher costs programs.
- Narrowing their networks and avoiding the PPO death spiral. Preferred Provider Organizations that give individuals a lot of flexibility on physicians and services are a major Achilles heel for the health plan. It’s like leaving your kids at home with a marshmallow sitting in front of them, telling them not to eat it. You can’t expect people to adhere to boundaries if you don’t create them. So now we’re back to the HMO (Health Maintenance Organization) model where cost boundaries can be better put in place.
- Not expecting anything from the government. As we saw back in October, the Feds would only be in a position to pay 12.6% of what health plans were owedunder the risk corridor arrangement. So much for the government as a savior as half of the Co-ops failed along with some commercial plans. The government isn’t saving the health plans and in an election year, no one is touching this topic.
- Attacking risk adjustment and member engagement. Historically, health plans could manage risk primarily on pricing passed thru to the employer. Here that’s not possible so the levers for managing risk really come down to two areas: risk adjustment and member activation. Risk adjustment is about getting paid for the risk that is being assumed, which can be accomplished by a physician coding a member to certain health conditions. Activating the member is about having them do things to improve their health. Whether that’s diabetes prevention, med adherence, screenings, wellness, or using quality services like telehealth, the point is that members have to be engaged.
- Focusing on retention. Retention, lifetime value, reducing churn – whatever you want to call it – health plans want to create switching cost. Why join and stick with a health plan? Retention represents the benefits, the technology, the customer service, the incentives, the personalization, and yes…the price. But you can’t build a differentiator around price, so magnify what makes you special and make it compelling to stick around through open enrollment.
Innovative health plans are going to make a mark and are in a great position to change the healthcare landscape for the better. Yes, there will be bumps and bruises along the way, but they must stay their course. And that course is not paved with driving down prices.
Posted on April 6, 2016 05:58 PM