Regulatory
reform and IT advances are accelerating the “clockspeed” in healthcare. To
compete, insurers will need to focus on three key areas.
The healthcare industry in the U.S. is on the
brink of unprecedented change. Wide-scale reform, a response to soaring costs
and increasing demand, is forcing healthcare providers and insurers to rethink
their value propositions and business models. It is also stimulating an equally
unprecedented investment in IT. The health IT market is expected to experience
a compound annual growth rate of 24 percent through 2014, according to RNCOS, a
market research company. This overdue investment in IT is aimed squarely at the
construction of a long-anticipated information backbone that will support
improved care quality and cost reduction through enhanced connectivity and data
analysis. (For more on improving healthcare, see “Health Reform by the
Numbers,” by GE Healthcare CEO John Dineen, s+b, Spring 2012.)
The developing health IT infrastructure, with
its host of new applications, is ushering in the most intensely competitive era
in the healthcare industry’s history, by sharply accelerating the industry’s clockspeed.
Charles H. Fine of MIT’s Sloan School of Management used the term to describe
the pace of business evolution within industries. He found that industries with
faster clockspeeds, such as computers and entertainment, had higher levels of
market experimentation, more competition, and increasingly frequent waves of
innovation. This will be challenging for the healthcare industry, and for
insurers in particular, who are used to a much slower pace of change. To
succeed, they’ll need to look outside their sector for effective business
models, and build new capabilities that support rapid product development, a
consumer product mind-set, and expansion into adjacent markets.
Healthcare’s
Challenge
The leading healthcare insurers will find that
IT modernization will either expand their role as information aggregators —
making them the primary engine for higher-quality, more cost-effective care —
or enable new competitors to supplant them. Historically, insurers have not
needed a strategy for responding in a fast-paced environment. Repeated waves of
consolidation (which oriented insurers toward scale rather than innovation),
complex regulatory requirements that varied by market, the competing incentives
and targets of multiple stakeholders, and the slow adoption of information
standards have created speed bumps that impeded innovation. The ambiguity in
healthcare reform’s implementation may seem yet another reason for insurers to
assume that the historical pace of the industry will continue.
However, as health IT becomes more connected,
precise, and prevalent, many companies will have to race to realize its
potential. Insurers’ products have already begun to be seen as commodities in
the more consumer-driven post-reform marketplace, where health-insurance
exchanges, bundled offerings, greater transparency, easy comparison of
features, and lower switching costs will soon be commonplace. Add in the
conditions typical in fast-clockspeed industries, and incumbents and even first
movers could suffer competitive erosion, especially when new players and fast
followers with deeper capabilities and more flexibility enter their markets.
For instance, greater granularity in claims
data and significant investments in electronic health records (EHRs) will
provide the raw material for improved analytics and will presumably lead to
better medical outcomes. And these data sources are only part of the picture:
More sophisticated medical devices and the ubiquity of social media and
smartphones will enable faster, more comprehensive data collection and more
effective interventions. Existing competitors and new entrants will create
real-time decision support tools to help providers and patients better manage
care. Microsoft, for example, is exploring virtual care delivery, and medical
device manufacturer Medtronic has developed Wi-Fi-enabled cardiac devices that
allow doctors to remotely monitor and assist patients. Insurers, who currently
control claims data and the valuable insights contained therein, will face a
crucial point of reinvention as these advances and the companies that field
them engage consumers, influence medical utilization, and seek a proportional
share of the healthcare dollar.
The
Amazon Way
Health insurers looking for guidance on how to
compete in a fast-paced environment won’t find many examples within their own
industry. But they can look to industries where the clockspeed has long been
fast and furious, such as online retailing. One excellent model for them to
study is Amazon.com Inc.
Amazon has built a full-service, seamless
vertical approach — including order fulfillment, recommendations, and customer
service — around its core retail business over the past decade. Simultaneously,
it has staked out beachheads in key horizontal platforms, becoming a partner to
other vendors through Amazon Marketplace, e-commerce hosting, and Web services
(home of its much-ballyhooed cloud computing business). These businesses
generate additional revenues that are funneled back into R&D for Amazon’s
core business.
This kind of approach could translate very
well for healthcare insurers today, but to make it work, they will have to
establish the proper balance between vertical and horizontal integration, and
between control and speed. They will need a vertically integrated approach that
keeps critical components under proprietary control to create differentiation.
At the same time, they will need strong horizontal capabilities that can be
deployed in fast and flexible ways to help master accelerating product cycles.
For example, insurers that decide to help
physicians use EHR data will need swift application-development capabilities.
That robust expertise could be deployed in multiple vehicles (such as
cloud-based computing to the physician’s desktop or to handheld devices) and
for multiple purposes (for example, health analysis or prevention campaigns).
New businesses like these could enable insurers to strengthen physician
relationships and create future revenue streams. Amazon’s example also suggests
that the most successful insurers will be those that continually engage their
customers through product design and nimbly capitalize on emerging
capabilities.
Three
Areas of Focus
To compete effectively in a faster environment,
insurers will need to develop capabilities that enable them to achieve the
following outcomes.
1.
Business systems designed for rapid product development. Insurers often serve several customer segments in different
regions and provider networks. This emphasis on breadth has contributed to an
abundance of uncoordinated technology strategies and a scattershot approach to
value chain design. Furthermore, speed-to-market has often been achieved via
custom development rather than via an architecture designed for rapid product
cycles. Over the long term, this hampers insurers’ efforts to be truly nimble.
Insurers need a coherent infrastructure that
can deliver over successive product cycles. This suggests that they should
adopt a business architecture that can be broken into simpler subsystems, that
uses modular and off-the-shelf components, that assumes technological
obsolescence, and that preserves future flexibility.
2.
A consumer product design mind-set. Insurers
have traditionally maintained market share by locking in networks of customers
and providers, and in many markets by relying on strong brand names. But they
may be ill-equipped to compete on product features in an environment with low
switching costs and intense competition.
To succeed in this emerging environment,
successful health plans will develop robust product ideation and iteration
capabilities. They will use these capabilities to better align demand with care
utilization, creating new products (such as one-price care bundles) and
designing incentives that shift care to less-expensive channels (such as
non-acute care facilities and preventive health programs). In addition, to
capture the expected growth in individual and small group markets, insurers
will need to sell directly to these groups, manage their experience, and
encourage healthy behaviors. This will require new retail capabilities in
customer engagement, including the support and provision of enhanced
interventions and self-care, as well as new service channels.
3.
Expertise in entering adjacent markets. Although
some insurers may decide to stick to their traditional strengths in core
administrative services to insulate them from the faster pace, they are likely
to discover that competing on transactions alone has drawbacks. The large-scale
system migrations required to significantly improve transaction speeds are both
costly and risky. Only a few insurers will achieve the necessary economies of
scale, and they will most likely become outsourcing partners for the rest of
the industry.
Instead, most insurers should be looking for
areas where there is headroom for growth, such as adjacent markets for care
delivery. Because clinical care delivery accounts for almost 80 cents of every
healthcare dollar spent in the U.S., products and services aimed at delivering
more effective outcomes at lower costs, solving ambiguous clinical problems,
and promoting virtual care delivery are rich areas of new opportunity for
health plans. Successful plans will consolidate a broad range of platforms,
including smartphones, cloud-based computing, and videoconferencing, to launch
care products that deliver greater value. They will also master the art of
relationship building and creative collaboration to overcome adversarial
provider relationships and consumer mistrust.
Keeping
Pace with Change
Insurers will succeed either by meeting
multiple needs within their chosen markets or by realizing the full breadth of
capabilities in their horizontal niches; over time, they may do both. In any of
these scenarios, however, health insurers will have to design value chains that
can deliver successive waves of innovation. They must be prepared to quickly
generate and launch new products and services, learn, adapt, and repeat the
process, if they hope to profitably retain fickle customers who traditionally
have not taken a great deal of responsibility for or control over their own
care. Clearly, existing players won’t be able to depend on their hard-won brand
equity. In other industries, established brand names have meant little when the
pace of innovation has accelerated (think of Encyclopedia Britannica, displaced
by Wikipedia’s open source model). As Charles Fine’s work on clockspeed
ultimately concluded, the only enduring competitive advantage is the ability to
continuously assess and build value chains that exploit current opportunities
and anticipate future ones.
Carl Dumont, Ashish Kaura, and Sundar
Subramanian
Strategy + Business
Business & Investment Opportunities
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