Healthcare Payors Reshuffle Their Priorities in Light of Healthcare Reform and Will Look to BPO
Unlike medical product manufacturer and pharmaceutical companies’ industries, healthcare reform will absolutely transform the healthcare payor industry. Mandated medical loss ratios, state-run insurance exchanges, guaranteed coverage, and required purchase requirements will restructure the payors' business models. The trickle-down impact on operations will be significant, shifting priorities in a manner that will eventually impact outsourcing priorities. While there is much left to be written in this area, read on for an understanding of the changes and possible impact on the outsourcing industry.
Healthcare Reform – The Big Changes
Few people understand the healthcare reform laws signed by President Obama. While the laws are lengthy, the list of major changes is not:
- Consumers must purchase insurance and companies with more than 50 employees must provide insurance. Those who fail to do so will be subject to fairly substantial fines.
- Insurance companies cannot deny coverage or price individual policies based on prior medical conditions.
- State-run exchanges will be created to directly offer individual policies.
- Federal electronic enrollment protocol standards will be developed to allow consumers to enroll, view and manage their enrollment in insurance.
- Healthcare companies have mandated medical loss ratios (MLRs) of 85% for large groups of more than 100 and 80% for small groups and individuals. If payors manage to generate lower MLRs, they must refund the difference to enrollees.
What Does This Mean to the Healthcare Payor Industry?
The changes are fairly substantial:
- First, payors can expect to compete for more than 30 million new enrollees that are required to purchase insurance. While some of this business will be generated by small groups that previously did not provide insurance to employees, the bulk of the 30 million new enrollees will come through individual insurance. As witnessed by the payors go-to-market implementation of Medicare Part D, the enormous spike of sales and new customers requires significant planning and operational bandwidth. This impacts sales and customer service activities, requiring substantial investment in customer service teams, technology readiness and enrollment processes.
Second, transactional workflow associated with individual enrollment will need to be completely reengineered. Prior to reform, transactions flowed through underwriting groups who priced each individual plan. With the advent of state-run exchanges, insurance plans will be codified in just four basic formulas (Platinum, Gold, Silver, and Bronze) and offered through online exchanges. There will no longer be a need for underwriting to review enrollments for pricing or previous medical conditions. Furthermore, the implementation of federal standards for electronic enrollment transactions will require investment in transaction gateways and internet portals.
Third, state exchanges will likely greatly reduce the role of the middle men – the insurance brokers. Individual will be able to browse available rates and compare products online – and then purchase plans directly from payors. Without the ability to incentivize brokers on the profitability of different enrollees, broker compensation models will change dramatically. However, the need for payors to compete directly changes their consumer sales operations significantly. Expect more direct marketing investment, greater focus on churn management, and larger investments in direct and indirect sales operations.
Fourth, the implementation of state-run exchanges will also incentivize payors to invest in competitive intelligence systems to track competitive activity, similar to the investment of the airline industry to track similarly complex airfare changes and offerings.
Fifth, the implementation of compulsory MLRs will cause a seismic shift in the industry. Regardless of how the Department of Health and Human Services defines the calculation (due in late 2010), expect small payors with limited leverage to negotiate providers’ rates to simply exit the market because they will not be competitive. Some will fold, others will be purchased. It is important to note that MLRs vary widely from state-to-state, so smaller payors with less geographic diversity (such as many of the not-for-profit Blue Cross Blue Shield companies) could be significantly impacted. The Outsourcing Buyers Should Brace for Strategic Changes
Outsourcing governance organizations will need to reassess existing relationships and the scope of potential opportunities. Here is some initial advice as to where they should begin:
- Prepare for Significant Change Orders and Terminations – One way or another, the law is going to impact existing operations. It will change how enrollment occurs, at a minimum. It may materially change the size of your programs, causing a need to change locations. Existing inbound customer service suppliers may be needed to provide inbound sales support duties. Margin pressures may create opportunities to renegotiate contracts. Regardless, use these changes to your strategic advantage – map the planned changes comprehensively and prepare you negotiation strategies in advance.
- Review Existing Contracts for “Change of Law” Clauses – Depending on how your contract is written, changes caused by health care reform laws could be the buyer or the service provider’s burden or could create unplanned termination options for either party. Ensure you understand the your contract’s specific handling of changes in law.
- Brace for January 1, 2014’s High Volumes and Low Predictability – New market entry of 30 million new members plus the high likelihood that all existing individual policyholders will change policies will create the need to support sales, enrollment and backoffice transaction processing operations. How much marketshare your company will win is uncertain – witness the Medicare Part D free-for-all which was accompanied by substantial marketing efforts. Supplier governance teams will need to develop plans to handle the uncertain volumes, recognizing execution failures could lead to acquisition shortfalls and member churn.
- Get Comfortable with Federal and State Outsourcing Compliance Processes – CMS leverages offshore subcontacting attestations filed by all payors with a subcontractor (or a subcontractor’s subcontractor, etc.) operating outside of the 50 states or US territories. You need to seek guidance from Federal and State regulators as to how they will review offshore outsourcing, especially given the difficult economic climate and the negative public attention politicians could attract. Develop a comprehensive public affairs strategy and leverage your current public affairs and state regulatory relations infrastructures.
- Reassess Outsourcing Opportunities – Payors have been largely shielded from economic drivers of outsourcing resulting in limited outsourcing of core operations and shared services. Furthermore, the complexity of payors’ claims processing systems means that few companies have entered into comprehensive, transformational application development and maintenance contracts. Given fixed MLRs and what is expected to be a highly competitive marketplace, payors should comprehensively reassess outsourcing opportunities in operations, shared services and IT. Manage transitions in advance of 2014 to ensure success – you have about three years from today to assess, select service providers, negotiate contracts, transition, and stabilize operations. That isn’t much time, especially in critical medical management outsourcing to disease management vendors and direct sales support operations.
- Understand Your Service Provider’s Industry Intelligence – Across the industry, service providers are salivating at the perceived impact healthcare reform will cause on outsourcing deals. New service providers will develop capabilities and existing service providers will need to improve the robustness of their operations. Develop strong relationships with your service providers and seek to understand their strategies, as well as what they are hearing from your competitors.
What Outsourcing Service Providers Need to Know
While the payors are trying to orient themselves to a new, rapidly changing, highly-politicized world, service providers are strongly anticipating the perceived opportunities healthcare reform will create:
- Growth, Growth, Growth – State exchanges’ competition will influence payors’ new cost consciousness and 30 million new members means millions of additional transactions to support. Payors will outsource more core operations and shared services, need substantial IT support for pre-2014 activities, and they will need strong partners for the highly competitive 2014 open enrollment period’s gold rush. Expect substantial growth in terms of organic growth and new outsourcing deals.
- Watch-Out If You Already Support Individual or Small Group Operations – Changes in law, state regulators and competitive realities are going to impact service providers who currently support individual and small group operations. Expect substantial change orders, higher price sensitivity and potential consolidation of service providers as buyers streamline and reengineer operations.
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