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Article
the basis of competition is changing—are you
ready?
By
Merit Smith
Vice President and Director, Health Care Practice
Understanding the impact of reform is a bit like watching mountains
emerge from the rain and fog: you don’t see the mountain all at
once. Perhaps you sense the form of the mountain from a larger patch
of gray, then catch a glimpse of it through the fog, then gradually
see the shape and, later, details emerge.
We have the reform law, a few
regulations, and some public pronouncements. But we don’t have key
regulations or details for the critical changes that will shape the
future of health carriers and the industry. By “critical changes,” I
mean the provisions and regulations that change the economic model
of health insurance—the
detailed definition of the medical loss ratio and the mechanics of
rebating premium.
Even without this critical
information, we can see the shape of the mountain through the fog.
We can tell that the basis of competition is changing. Let’s think
about the future competitive environment in terms of what we know
today.
Here are some things we can
anticipate about the future:
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Product features and benefit design will be less important. Why?
The government will move us toward standardized benefits. |
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Medical costs will be less important as a component of market
price. Why? The HHS will largely dictate the range of medical
prices, and mandated minimal medical loss ratio targets combined
with rebates will go a long way in reducing carrier incentives
to innovate and tightly manage this element of cost. |
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With standardized benefits and medical prices, what’s likely to
be the basis for competition? Service experience and
administrative costs. Of these two, which will be more
important? Administrative expense. Why? New buyers don’t have an
objective basis for evaluating service, and they don’t trust
carriers’ promises about service. But they can evaluate cost,
and they are increasingly price-sensitive. |
Will you be ready to compete when
your product is distributed via an exchange with a limited number—perhaps
five—of
health plans? Where will you compete on administrative cost? Aiming
to be close to the average of the peer group is old-style thinking
that will ensure that you become a non-competitor. Can you compete
in an environment where the marketplace sets your price point for
your administrative services?
What do you need to do to be ready?
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Understand today’s administrative cost structure in detail, with
more focus than you ever have. |
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Understand the sensitivity of your cost structure to differences
in revenue, units, and fixed and variable costs. Perhaps you
have done this but not with the detail, focus, and urgency you
will need. |
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Be prepared to simulate differences in your cost structure based
on differences in the ultimate definition of “medical loss
ratio.” |
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Begin to manage costs today. Of course, you have been doing this
as part of your response to the recession and slow-motion
recovery. But taking even more steps today to reshape costs will
be easier than doing it in the future. |
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Renegotiate any long-term contract (for space, systems, law
firms) you have. |
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Be prepared to simulate a number of market scenarios and expense
structures. |
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Understand that expenses are the shadows of management
decisions. You and your managers determine your expense
structure. How you do that will determine your future under
reform. |
Nolan has
developed a set of tools to help you with this analysis and
simulation. If you would like to learn more about how we can help
you reset your cost structure for a new environment, call me at
719-339-9803.
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