It's all in the contract - part 2

by Torsten Bernewitz

Tweet

Yesterday I wrote about checks and balances in the contracting negotiation between health plans and manufacturers, and asked the question what strengths a health plan can leverage in this process (http://payer-strategies.blogspot.com/2011/10/its-all-in-contract-how-payers-are.html).

For medical devices, this is a complex and difficult question. First: who do we actually negotiate with – providers, manufacturers, or both? Second: what do we negotiate for - reimbursement rates or rebates (or both)?

Contracting scenarios

With whom to negotiate, and what to negotiate for, depends on the money flows, and on the type of device under consideration, and the contracting scenarios can be very different.

In many cases, the provider will purchase the device from the manufacturer and seek reimbursement from the payer. Provider reimbursement is the common model in the hospital setting, and typically includes products like implants or pacemakers. Payers and providers can contract for inclusive payment for certain procedures (i.e. including the cost of the device in a case based lump sum), or separate payments for the device and the intervention.

Separate payment - although less common today - may be the smarter choice for the payer, as will be discussed below.

In other cases, the provider is not involved in the money flow, and the payer reimburses the patient directly. Patient reimbursement is most common in outpatient settings and home care, typical products in this category include insulin pumps, glucose monitors, nebulizers or negative pressure wound therapy. Here, success factors and strategies and very similar to negotiations with pharmaceutical manufacturers.

Unbundling can be an effective way to obtain better leverage

If the payment is inclusive, it may seem that the payer does not need to worry about the cost of the device too much; this question is then more a concern for the provider’s financial officers, and the contract they have with the manufacturer. However, payers still need to keep close tabs on device costs to make sure that they are not paying too much when the provider uses cost increases as an argument to ask for fee increases. And anyway, it is generally a good idea to understand the individual cost components of the procedure to estimate provider margins and estimate the resulting room for negotiation of reimbursement rates.

If the device payment is separate, payers will aim to contain provider reimbursement rates. In particular, they will try to squeeze out potential provider margins on the device (i.e. reimbursement should be very close to the net amount the provider pays to the device manufacturer). Alternatively (or in addition), the payer may go to the manufacturer and negotiate a rebate. Rebating to the payer may be beneficial to the manufacturer as well. If there is more room for reimbursement to the provider, utilization controls may be less restrictive, and the manufacturer’s market penetration can increase.

Unbundling - moving from inclusive payments to separate payments - is probably in the interest of payers, at least as long as the fee-for-service model prevails. This strategy is similar to the moves payers are making to shift specialty pharmaceuticals – the big drug spending headache – from the buy-and-bill model under the medical benefit to the pharmacy benefit, which can be better controlled.

The model for patient reimbursement is equivalent to contracting for pharmaceuticals. Payers and manufacturers negotiate rebates for “market access”. There are different dynamics at play in this environment - more about that in a subsequent post.

________________________

Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

It’s all in the contract – how payers are tackling the increasing costs of medical devices

by Torsten Bernewitz

Tweet

Rising costs for medical devices remain a big headache for health plans and their sponsors, as well as patients who will have to share the burden in some way. Although lately the growth of expenditures may have slowed a bit, the driver has not been better prices, but the postponing (or avoiding) of elective procedures in the light of the economic troubles, as well as some payer pushback based on studies that suggested that a significant number of implants may have questionable medical benefit.

The reprieve may thus be short term. The underlying factors for cost growth, the aging population on one hand and a stream of technical innovations on the other, are still there, and will continue to drive costs perhaps as much as 10% annually, in particular if the economy improves and when more people join the system by 2014.

Unless, that is, if this growth can be capped. And healthcare payers are looking for ways to do just this.

One way of doing this is through more effective contracting, both with providers and manufacturers. And although it may appear at first counterintuitive, manufacturers may benefit as well.

Healthcare checks and balances

Manufacturers, of course, are trying to maximize sales and profits for their products. This is legitimate and provides the incentive to keep innovations flowing. It is a necessary component of an efficient healthcare resource allocation process.

The payer provides the necessary checks and balances in this process. What is the product or service really worth? What is the net benefit of the procedure on health outcomes and patient experience? How much are employers and patients willing to pay, with the health plan as the intermediary to facilitate these choices.

Some payers simply peg reimbursement rates at some percentage of Medicare. But that is not negotiation, that is side-stepping the issue. It may leave money on the table that smarter negotiations could obtain.

Two strong negotiation partners make a better contract in the long term than a strong and a weak one. The manufacturer’s potential strengths - and thus sources of value - are the importance of the disease and the efficacy, safety and uniqueness of the product or service.

So what are the strengths that a health plan can leverage to create an effective counter balance?

I am planning to provide some thoughts about this question over the coming days.

________________________

Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

Payer-manufacturer collaboration – a sequel

by Torsten Bernewitz

Tweet

Yesterday we saw another example of payers and pharmaceutical manufacturers collaborating in new ways. The bug of creating new partnerships seems to be catching on as the different healthcare stakeholders realize that each of them are holding different pieces of the healthcare puzzle, and that they can really solve it only by putting them together in joint efforts.

Now it’s Pfizer partnering with prescription benefits manager Medco (http://www.thestreet.com/story/11289938/1/pfizer-establishes-precision-medicine-research-collaboration-with-medco.html).

Sanofi entered a similar collaboration with Medco in the summer, and of course a few days ago we had Pfizer-Humana and earlier in the year AstraZeneca-WellPoint. I shared more details about these examples in an earlier post (http://payer-strategies.blogspot.com/2011/10/adversaries-becoming-friends-payers-and.html).


And on the provider-payer side there is also a lot more love (http://payer-strategies.blogspot.com/2011/10/love-is-in-air-take-aways-from-ahip.html).

Interesting times!

________________________

Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

Love is all you need? Well, not quite: common elements and success factors of Alternative Delivery and Payment Models

by Torsten Bernewitz

Tweet

Yesterday I summarized some of the take-aways of the AHIP Shared Responsibility Summit in Washington (http://payer-strategies.blogspot.com/2011/10/love-is-in-air-take-aways-from-ahip.html). The conference showcased innovative two-way (provider-payer) partnerships, and even three-way alliances (provider-payer-employer), all built on the spirit of shared objectives, collaboration, and trust.

While “love was all around us”, the examples that were presented also pointed to the critical factors to make these relationships work and a win-win for all stakeholders, and highlighted the challenges that must to be addressed. I briefly mentioned these common elements and success factors yesterday; here are some more detailed observations:

1. Alternative models must focus on network performance, not on a particular provider group. Experiences with alternative delivery and payment models that engaged only one stakeholder group, for example primary care, have shown disappointing results. With hindsight, this is perhaps not so surprising. If we engage only one stakeholder group in an alternative model, the only real options are a) to drive down unit costs and b) to hope that favorable outcomes will translate into long-term savings. However, driving down unit costs is not a sustainable strategy, and payer-provider goals are misaligned anyway on this dimension - a likely recipe for failure. Better outcomes at the stakeholder level will likely come at short-term cost increases, or, like squeezing a balloon, will lead to cost shifting through patient selection. The two most important drivers of quality and costs are when and where to refer, and to leverage this dimensions, payers must engage the overall system.
2. New approaches need to accommodate the fee-for-service model, at least a little while longer. There is widespread agreement that the currently predominant fee-for-service model creates incentives for overuse, and consequently the alternative models aim to replace it with pay-for-performance and global payment approaches. However, from a pragmatic perspective, fully replacing fee-for-service will not be feasible in the near-term. First of all, CMS is forced by its statute to continue with fee-for-service. Secondly, on state level there are frequently significant regulatory barriers that would need to be overcome to move to bundles payment models on a broader basis. This is the case in many states, and the constraints vary across states. So if fee-for-service remains a fact of life in the foreseeable time, alternative models need to find workarounds. An approach that seems to work reasonably well is to create a “shadow capitation budget” (with all the bells and whistles of risk adjustment, trending, inflation adjustment etc.), still pay fee-for-service, but then calculate savings vs. the “shadow budget” and share any such savings with providers. Provided these incentives are significant enough, this appears to be very attractive to provider organizations.
3. Success can be achieved through the right focus and targeting. Across health plans, about 20% of the members generate 80% of the costs. Similar relationships exist across diseases, and most other areas of healthcare. The Pareto principle offers the opportunity to focus on the right areas for interventions to improve processes, outcomes and costs. It is no secret that healthcare costs increase exponentially across the wellness spectrum from healthy, to at risk, high risk, early symptoms and active disease stages. To manage costs, we need to identify and engage individuals before they move to the next higher cost cohort. This requires a holistic view and engagement of plan members, not just the “patient” subgroup.
4. Data sharing is a critical element to drive change and measure performance. A key feature of all alternative delivery and payment models is the pooling of data and analytics from payer and provider sources to create joint dashboards to identify trends, outliers and areas of focus, to establish goals, and to track performance. Many of the metrics on these scorecards provide stakeholders with a new perspective of the healthcare process, showing components that were previously obscured, or not shown together in combination. “You can only manage what you measure, and what is measured, gets done” – this statement can certainly be confirmed in healthcare, where a data driven, scientific approach is a hallmark of the culture.
5. Upfront payer investment is needed to get things started. All alternative delivery and payment models presented highlighted the need for initial payer investment and support to set the process in motion. Even provider systems that are already well organized, like Geisinger when they entered such an ADPM program, have to make significant changes to the way they work, and in particular the processes and systems managing data and money flows. Payer support can be in the form of supplemental fees – for example Cigna’s Initial Coordination Fee – and/or support though services and personnel. Of course, these incremental costs need to be offset in the mid to long term, and should be part of the considerations when cost savings are shared.
6. Effective governance is a key enabler for a smooth implementation. The leadership in both the provider and payer organizations needs to support the new model and give permission to get the initiative started – and then “get out of the way” to allow execution. Good governance and project management are key to success. It is important to involve all key stakeholders, however without making the process unwieldy and slow. This takes careful planning how stakeholder interests are represented in the various workstreams. We need to be very clear who is in charge of what. Legal needs to have a prominent place at the table. Alternative models touch on many regulatory issues – data sharing and bundled payments to name but two – and it is important to incorporate the legal perspective early in the process to avoid discovering later that certain model components are infeasible.
7. We must align goals and rewards between payers and providers, across the network, and between organizations and the individual. One of the flaws of the current fee-for-service model is that it sets the wrong incentives by encouraging overuse. To support working together on improving quality and costs, all stakeholders must share the same priorities and share in the gains in a meaningful way. Without this alignment the initiative will fail, merely shift costs around, or lead to suboptimal trade-offs. The best practice is to set concrete goals and targets (looking at relative performance vs. peers does not resonate well with physicians, but a clinically relevant target does). The financial upside opportunity must be significant to get the attention.
8. Alternative models require a culture and values of transparency and accountability. And in most cases, this will mean a significant cultural shift. Working together in new ways, and sharing data and information in common dashboards and scorecards, requires getting over some of the attitudes and assumptions that may be informed by past experiences. For example, previously adversarial relationships may prompt us to continue playing our cards close to our vest, or we may still try to catch each other out in the contractual fine print. Openness and sharing is also not well aligned with a culture where risk containment is deeply ingrained. Both partners need to abandon such notions, and this requires strong change management efforts.
9. Change management is therefore a key success factor. Moving to alternative delivery and payment models is not easy, it takes a long time, and in addition to technical challenges, significant emotional barriers need to be overcome. All payers and providers who have tried the new approaches report they encountered bumps on the road. To make the approach work, physicians need to buy-in and embrace it. Achieving this is at the same time the most important and the most difficult task. The new approach calls for standardization (not a good concept to win physicians), measurement and accountability (physicians are not used to being measured, at least not once they have left medical school), and the incorporation of costs in the evaluation (reminding physicians of their frustrations with managed care in the 90s). In addition, many physicians suffer from “change fatigue” through the many initiatives that are calling for their attention. However, while change can be very hard, it can be successful if we put the right conditions in place. This includes careful planning what and how to communicate, and finding and addressing the right emotional triggers that find positive physician response.

________________________

Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

Love is in the air - take-aways from the AHIP Shared Responsibility Summit

by Torsten Bernewitz

Tweet

A couple of week ago I mentioned examples how payers and drug manufacturers – typically on opposite sides of the negotiating table - are trying new ways of working together as partners instead of adversaries (http://payer-strategies.blogspot.com/2011/10/adversaries-becoming-friends-payers-and.html).

The love bug seems to contagious, as witnessed last week in Washington at the AHIP Shared Responsibility Summit that showcased an outbreak of new alliances between health plans and healthcare providers – stakeholders that usually eye each other with some suspicion. Ten case studies were presented, each highlighting some unique aspects of new partnerships between payers and provider groups and hospitals that are aimed at bending the cost curve and at the same time improving outcomes and patient experiences.

These new collaborations are still very much in their try-out stages. But while no dominant approach is emerging yet, there are some common insights into success factors and remaining challenges.

Two major shifts in thinking

The case studies highlighted two major shifts in thinking in the industry:

1. Containing healthcare costs and providing high quality care are no longer regarded as mutually exclusive objectives. In fact, the first experiences with alternative models show that cost savings are achieved through different (better and more efficient) healthcare delivery. This is a significant shift in the fundamental assumptions about the dynamics of healthcare systems, and it has a dramatic impact on payer strategy!
   It is perhaps interesting that a similar dramatic paradigm shift was forced on another large industry more than 25 years ago, when US car makers had to discover - almost at their peril - that the fundamental basis of their strategies was deeply flawed. When conventional wisdom seemed to suggest that you could either produce high quality but expensive, or cheaper but lower quality vehicles, their Japanese competitors outflanked them with inexpensive cars with superior quality (and better customer service on top).
   Fortunately (or sadly, if we think of the overall value of healthcare), there is no foreign competitor accelerating the momentum to make such a switch. But the discovery that better delivery can lower costs suggests that there may be an early mover advantage for payers who can get this right and turn it into a competitive advantage with their customers.
2. Payers and providers need to work jointly - as true partners - to achieve both objectives of better healthcare delivery at lower costs. This requires a new mindset – shifting the payer-provider relationship from the currently predominantly negotiation driven, and at times adversarial perspective to one of shared objectives, collaboration, and trust.
   Partnerships also require a longer-term commitment: alternative contracting initiatives typically run for about 5 years, compared to the 1-3 year duration of conventional contracts. Joint working recognizes that each partner holds different pieces of the puzzle, and brings different capabilities to the table that complement each other.
   Providers have the expertise in diagnosis and treatment choices that determine the clinical outcomes and the patient’s journey and experience along the way. Payers have extensive data about utilization, outcomes and costs. They can see their members in a holistic way, can track them from before they show up as a patient, follow their paths through the provider network, and monitor what happens to them afterwards. They have wellness programs and can work with employers.

Looking across the different examples that were presented, it appears that there are a number of common elements and success factors of Alternative Delivery and Payment Models:

1. Alternative models must focus on network performance, not on a particular provider group.
2. New approaches need to accommodate the fee-for-service model, at least a little while longer.
3. Success can be achieved through the right focus and targeting.
4. Data sharing is a critical element to drive change and measure performance.
5. Upfront payer investment is needed to get things started.
6. Effective governance is a key enabler for a smooth implementation.
7. We must align goals and rewards between payers and providers, across the network, and between organizations and the individual.
8. Alternative models require a culture and values of transparency and accountability.
9. Change management is a key success factor.

It is probably worthwhile to examine each of these elements in more detail (I will attempt this in future posts).

While the presenters showed nice improvements in both cost containment and quality, there are still at least three issues that remain challenging before these new models can be scaled up to a much larger scale.

1. Changing patient behavior remains a key challenge. Provider accountability and incentives, which are key components of the alternative delivery and payment models, do not change patient behavior. Engaging patients and families is hard, but if successful, tremendously valuable. To enhance success, alternative delivery and payment models should be linked to other payer strategies that aim at becoming more “consumer centric”, including patient messaging leveraging mobile technologies and social media, customizing services to specific consumer profiles and needs (for example consumers with low literacy and numeracy skills), and making the customer experience simple and transparent. Although the payer industry still has a long way to go to become really good at this, effective patient/consumer engagement is a key capability that payers can bring to the partnership table.
2. Standardization and accommodating the multi-payer perspective is still a largely unsolved issue. Perhaps with the exception of one payer dominating a local market, providers need to work with several payers. Alternative delivery and payment models require new metrics – on outcomes, quality, patient experience etc., and that creates a significant challenge. BCBSMA, for example, has 64 quality metrics in their Alternative Quality Contracting (AQC) model, a global payment model that uses a budget-based methodology, combining a fixed per-patient payment with performance incentive payments. CMS has 65 metrics, which seems like a close enough number, but unfortunately they are not the same. It is impossible for providers to deal with multiple sets of competing metrics. Standardization is a must, but this remains an unsolved problem. But the challenge may also create a first mover advantage: payers who can get their metrics footprint on a provider organization can influence how this organization thinks and, indirectly through what is measured and how, acts.
3. Sustaining success and momentum in the long-term is an ongoing concern. The experience with alternative care and delivery models has shown that in many cases cost savings and quality improvements could be achieved relatively quickly and easily. These encouraging results could be achieved through going after the low hanging fruit: leveraging provider cost differences across the network, and targeting the obvious inefficiencies and outliers in practice variations. While establishing an early success record is important to sustain momentum of the movement to ADPM, it also creates high expectations on the employer side that this trend will continue. It will be harder, and may take more time, to meet these expectations when payers and providers go after the next areas. BCBSMA’s Alternative Quality Contracting, for example, achieved savings in the first year mostly through price reductions, rather than use reduction. Efforts to drive further savings may have diminishing returns.

Thus, it seems, the first battles have been won, but a lot of work is still ahead to achieve overall victory.

________________________

Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

Adversaries becoming friends – payers and big pharma are pooling capabilities to tackle healthcare inefficiencies

by Torsten Bernewitz

Tweet

The relationships between pharmaceutical companies and health plans are usually not easy. They are parties sitting on opposite sides of the negotiating table, and frequently regard each other with suspicion.

But some change may be coming our way. If we want to stem the tide of ever rising healthcare costs, we need to get better at leveraging clinical evidence and comparative effectiveness data to steer the appropriate care, medications and services to the right patients, at the right time.

The different stakeholders in healthcare each hold different pieces of this puzzle. Payers have extensive data about healthcare utilization, outcomes and costs. Providers have the expertise in diagnosis and treatment protocols that determine the patient’s journey and experience along the way. Medical manufacturers have strong market research capabilities to understand provider and patient needs, attitudes and behaviors, the marketing skills to influence change, and the research and development capabilities to create new pharmaceuticals and devices to provide new solutions. Bringing all of this to the same table can be a win-win for everyone involved, including the patient.

This year we have already seen two prominent examples of different stakeholders working together in new ways.

Yesterday, Humana and Pfizer announced that they join forces in a five-year research partnership. The goal is to explore new ideas and ways to improve the quality, outcomes and costs of the healthcare delivery system, in particular for senior citizens.

Both organizations will bring together researchers and healthcare experts to study key issues and deliver interventions to reduce inefficiencies in the management of chronic conditions such as pain, cardiovascular disease and Alzheimer’s.

Humana expects to get from this collaboration a deeper understanding of their members’ needs, their behaviors, and the underlying drivers for health and well-being. The results could shape how Humana designs benefit and coverage plans, and what programs will be developed to influence how patients take their medications.

For Pfizer, the research will provide important pointers to influence pipeline strategy decisions. And of course they will get a better appreciation of how payers think and make decisions.

Earlier this year, AstraZeneca and WellPoint entered into as similar partnership to determine the most effective and economical treatments for chronic illnesses and other diseases.

In this collaboration, which is expected to run over the next four years, WellPoint and AstraZeneca will share and analyze electronic medical records, claims information and patient surveys from people insured by WellPoint and several regional Blue Cross Blue Shield plans.

The research will include prospective and retrospective observational studies on disease states as well as comparative effectiveness research of multiple treatment options. It will also highlight new therapies most needed for treating and preventing disease.

The companies plan to make their findings publicly available and to expand their partnership to include hospitals and other organizations.

These partnerships bear all the hallmarks of value-based relationships. They are significantly different from the key account management (KAM) and contracting strategies that usually characterize the approach of pharma companies when they interact with payer organizations.

This is not about selling products and/or services. It is not about pricing and rebating for access. Instead, it means bringing capabilities from both partners to the table to solve a problem or develop solutions together.

________________________

Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

Only half of the story – why payers should focus more on the consumer, but not at the expense of their attention to employers

by Torsten Bernewitz

Tweet

Since the Affordable Care Act was signed into law last year, there has been a lot of discussion that the health insurance industry will shift from a business-to-business market to a business-to-consumer model.

The reason is that consumers are expected to take a much more prominent role in health insurance choices. More individuals will enter the market through the individual mandate of the law. They will be better informed and they will have a market place that facilitates comparison-shopping.  Engaging consumers effectively will also be critical in influencing behaviors to help manage outcomes, which in turn is an important element in containing medical costs.

Consequently, industry analysts and consulting firms (e.g., BCG), investment groups (e.g., Psilos) and service providers (e.g., Connecture) talk about the “imperative” of sweeping changes in channels, technology, and partnership strategies to move to toward consumer-oriented business models.

They are probably right – healthcare “consumers” are becoming more important, and it will be necessary to find better ways to engage with them. In fact, better interactions with the end-customer might have served the industry well all along, even before the new law. However, they are only half right, and risk missing the other part of the story, which is just as important. We shouldn’t give up on employers as key customers just yet. Here’s why:

First of all, the numbers do not really support the hypothesis of a full transformation to a business-to-consumer approach. Today, about 145 million people in the US enjoy employer-sponsored health coverage, which is 56% of all insured, and 89% of the non-government market. Even in the very aggressive scenario that 30-40% of the people currently covered by ESI would move to the individual market, this would still leave between 90 and 100 million people insured through their employers, probably more if we factor in population and payroll growth. This is still 60% of the non-government market.

In the perhaps more likely scenario that only up to 10% of ESI covered people move to the exchanges, 130 million will be in the employer market – 80% of the non-government market and still a segment that is larger than Medicare and Medicaid taken together.

Thus, the employer market will continue to matter, and falling head-over-heels in love with the consumer – if it is at the expense the employers segment - would be a strategic mistake.

This does not mean, however, that the employers business will remain at the status quo (there is more discussion of the potential changes in the employers market in this post: http://payer-strategies.blogspot.com/2011/10/to-drop-or-not-to-drop-that-is-not.html).

Employers are rethinking their health benefit strategies. Depending on specific conditions like size, hiring and retention goals, labor market conditions etc., employers’ priorities and benefit strategies will change and diverge significantly.  Health insurers must keep the pulse on their evolving needs, create stronger differentiation through products and services, tailor their offering, and become more impactful in bringing the value proposition across. In many cases this means that insurers must get much closer to employers than they currently are.

________________________

Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

Coming through – facing the new market access hurdle in Germany, AZ receives encouraging news for Brilique

by Torsten Bernewitz

Tweet

A few weeks ago, I mentioned that the U.S. are not the only country working on healthcare reforms. I was referring to a new law in Germany that appears to have an effect on curtailing healthcare costs, in particular regarding pharmaceuticals (http://payer-strategies.blogspot.com/2011/09/reversing-rising-costs-for.html).

This new Germany healthcare law mandates early evaluation of the additional benefit of the drug in comparison to a corresponding established therapy, creating an additional hurdle pharmaceutical manufacturers have to take when they bring new products to the market. Savings are expected to reach the healthcare system 2 billion euros (~$2.7 billion) annually.

Shortly after regulatory approval of a new drug, a Joint Federal Committee (Gemeinsamer Bundesausschuss G-BA; self-governing body of physicians, dentists, hospitals and health insurance companies) rates new drugs on a range from 1 (“major additional benefit”) to 6 (“less benefit than comparator”).

While the new law has already created some casualties - the withdrawal in Germany of Novartis’ Rasilamlo and the decision by Boehringer Ingelheim and Eli Lilly not to launch Trajenta in Germany - a preliminary assessment report regarding the medical benefit of AstraZeneca’s clot buster Brilique/Brilinta (ticagrelor) for acute coronary syndromes (ACS), seems to be reasonably positive, at least for the more significant part of the market(http://www.worldpharmanews.com/astrazeneca/1815-brilique-receives-a-positive-preliminary-medical-benefit-assessment).

For patients with NSTEMI/UA (Non ST-Elevation Myocardial Infarction/Unstable Angina), which represents over 70% of the ACS patient population in Germany, a rating of 2 - “important additional benefit” - was assigned versus comparator Clopidogrel + aspirin.

For the smaller patient sub-populations with STEMI/PCS (ST-Elevation Myocardial Infarction/Percutaneous Coronary Intervention), however, the rating was 5 - “no additional benefit proven” versus comparators Prasugrel +aspirin and aspirin in monotherapy.

AstraZeneca will now respond to the G-BA regarding the initial assessment, after which the final benefit assessment will be performed by the GKV-SV (Federal Association of Statutory Health Insurance Funds). The decision is expected in 2012 (in the meantime, the product s already available in Germany).

________________________

Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

To drop or not to drop - that is NOT the question

by Torsten Bernewitz

Tweet

As most people in the industry are aware, there are diverging opinions about how the Patient Protection and Affordable Care Act (PPACA) may affect the market for employer sponsored insurance (ESI), which currently represents over 70% of the non-elderly uninsured, or close to 150 million people in the US.

In particular, the discussion has focused on the question if - and how many - employers may stop offering ESI. Answers to this question seem highly explosive from a political perspective, going at the heart of what the law wants to achieve and its chance to achieve it.

However, from the perspective of health insurers and payers (as well as other stakeholders in healthcare), this may be the wrong question to ask, may in fact be a red herring that could lead to serious strategic mistakes.

In this post, I want first to summarize the different positions, and then discuss why the black and white perspective is limiting and what might be better questions to ask.

When the PPACA was signed into law in 2010, the Congressional Budget Office regarded its effect on ESI as minimal, estimating that about 7 percent of employees who currently enjoy health insurance through their employer would have to move to the exchanges in 2014.

In June 2011, management consulting firm McKinsey made waves with the bold claim that this estimate was far too conservative. Based on an employer survey they had conducted earlier in the year, the firm concluded that the law would trigger a radical restructuring of employer-sponsored health benefits. 30 percent of employers – potentially even more once everybody fully grasped the implications of employer mandate, the new insurance exchanges, and the law’s system of penalties and subsidies - would “probably” or “definitely” stop offering health coverage to employees after 2014, pushing them to the individual market instead.

However, two further studies published around the same time challenged this view again. Both the Urban Institute and the Robert Wood Johnson Foundation identified health care cost savings to firms with fewer than 50 workers, as well as a small increase in the number of people covered by their employer-sponsored plans, indicating a stabilizing influence of the Affordable Care Act on small firm coverage, which has been eroding over the last decade.

A similar view was shared in another survey, this time conducted by consulting firm Mercer in July 2011. Although employers voiced concerns about rising costs, most said they remained committed to offering ESI. Only 8% of survey respondents were “very likely” or “likely” to stop offering medical plans after the insurance exchanges become available.

Finally, while the above surveys and studies are speculative and based on modeling assumptions and stated stakeholder intentions, there is one real data point: Massachusetts introduced an individual mandate and penalty structures similar to those of the PPACA in mid-2007, and experienced a subsequent increase in ESI coverage. Of course, there is also a debate whether the Massachusetts case is a representative indicator for the national level.

However the black and white perspective on ESI – whether “to drop or not to drop” – is perhaps missing the point. It may also lead to strategic mistakes. Those who conclude that ESI will not change dramatically may be tempted to call off the alarm and continue business as usual. Those who conclude that ESI will be dropped left, right and center, may shift too much of their attention away from one of their core (and very profitable) customer groups, the employers. Both groups will miss opportunities.

The fact remains that offering employer sponsoring insurance is very expensive, and that employers need to tackle this problem to maintain ESI as a meaningful and valuable benefit for employees. According to consulting firm Hewitt Associates, healthcare premiums have more than doubled over the last ten years, growing more than five times as fast as the median household income in the US during the same time.

The 2011 Milliman Medical Index shows that the cost of PPO coverage for a typical family of four has now reached $19,393, of which the employer pays almost 60%, or $11,385, and the employee covers $8,000+ in contributions and out-of-pocket costs. This is significant if we consider that the average household income in the US in 2010 was just about $50,000.

If the underlying costs continue to grow - and it is not clear how they will be stopped - employers will need to rethink their health benefits strategies. Employers offer health benefits primarily to recruit and retain employees. How much can they ask employees to share in the increasing burden through higher co-payments, co-insurance or deductibles without seriously damaging the value recruits and employees put on the offering? Especially, if potentially more competitive coverage options become available on the exchanges?

Employers, in particular large ones, may still feel “morally obligated” to offer health insurance coverage, or see health benefits as a way to signal prestige and industry leadership. So they will likely offer something. The question is thus not whether, but what to offer.

Very likely these benefit offering will not be the same as today. Instead, they will include wellness programs, employee incentives, rewards and perhaps also penalties based on biometric outcomes. There will be more choice. And more options will create more diversified employer as well as employee segments.

It is also probable that, as the exchanges evolve, the relative value of coverage that can be obtained on the individual market - compared to ESI - will change through the effects of economies of scale and stronger competition. Employers will watch this evolution closely, and continue to adapt their ESI strategies.

The key question for health insurers and payers is therefore: how can we get as close as possible to employers to help them navigate their health benefit strategies and leverage opportunities to cross-sell new insurance products, new services like health IT and data solutions, or medical and wellness management?
________________________

Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

Stakeholder alignment - difficult but necessary

by Torsten Bernewitz

Payers who want to get closer to their end-customers must become excellent on four dimensions: consumer insights, consumer engagement, simplicity and openness and stakeholder alignment.

I discussed consumer insights, consumer engagement and simplicity and openness in more detail here:

http://payer-strategies.blogspot.com/2011/09/inside-consumer-insight.html
http://payer-strategies.blogspot.com/2011/09/consumer-engagement-making-difference.html
http://payer-strategies.blogspot.com/2011/09/simple-is-not-easy.html

Here are some observations about the fourth success factor: stakeholder alignment.

The experiences of many healthcare companies who are practicing it show that consumer marketing in healthcare is particularly complicated. There are many more stakeholders and influencers than in most other industries, and they don’t always align. In fact they may actively work against each other. 

In a recent study we were mapping the stakeholder and influencer impacts across the multi-decade diabetes patient experience (i.e., from at-risk to death). We found that patient journeys and stakeholder relationships were exceedingly complex, resulting often in conflicting and confusing experiences for patients, and likely poor outcomes as well.

It is important for health insurers to appreciate this complexity. The focus on consumers (or for that matter any other stakeholder in the healthcare supply chain ranging from providers over employers to the government) is not independent from the way we engage with the other stakeholders, and the way that they perceive us.

Pharmaceutical manufacturers had to learn this lesson the hard way, when they “circumnavigated” physicians and started to communicate directly to patients. Many physicians did not really appreciate patients questioning their decisions or asking for specific therapies because of something they had seen on TV.

Payers can experience these conflicts today, when patients redeem co-pay cards they received from their physicians, who got them from drug manufacturers. Payers are not thrilled by the distortions this creates to their benefit designs.

As health insurers move closer to the consumer, they need to take care to synchronize their consumer activities and communication with those to the other stakeholders in the healthcare chain.

For example, Cigna’s consumer engagement program includes mobile applications that locate the nearest pharmacies and emergency rooms and decision-support tools that compare quality and medical costs. Cigna also provides access to health coaches for chronic conditions like diabetes. This will only work well if providers are well aligned with the same protocols and priorities.

How easy will it be to create this alignment?

In fact it may be very hard. According to a recent study by the American Medical Association, nearly two-thirds of U.S. cities are dominated by two health insurers, and nearly half of all metro areas are controlled by one. In 60% of the 359 largest metro areas, the two largest carriers have a combined market share of 70% or more, and in almost half (48%) of cities, one insurer had a market share of 50% or more. Local market domination is critical to influence practices of healthcare delivery through contracting terms, guidelines, etc. For example, it helps to introduce new payment models to replace traditional fee-for-service contracts.

Of course the dominant players in these markets are not always the same. For the individual insurer, engaging providers may therefore be easier in some areas than in others. We will continue to see disparities in medical practices, protocols etc., and this will make consumer engagement, which requires overall consistency, potentially very challenging. This may be one of the reasons why companies like Cigna limit their push into the individual market only to select markets, where they think they can build a strong presence - in Cigna’s case currently only 10 states.
________________________

Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

Simple is not easy

by Torsten Bernewitz

In recent posts I proposed that to embrace the direct-to-consumer marketing model, payers must become excellent on four dimensions: consumer insights, consumer engagement, simplicity/openness and stakeholder alignment.

I discussed consumer insights and consumer engagement in more detail here:

http://payer-strategies.blogspot.com/2011/09/inside-consumer-insight.html
http://payer-strategies.blogspot.com/2011/09/consumer-engagement-making-difference.html

Here are some observations about the third success factor: simplicity and openness.

The consumer engagement strategy and tactics will be very different across segments, but two important guiding principles should never be violated. Unfortunately, both may require a significant attitude shift for health insurers, whose culture is strongly imprinted by actuarial and risk management considerations.

1. Simplify, simplify, then simplify some more. Consumers have been “trained” by other industries to expect a hassle free, easy and fast experience (think Amazon’s one-click shopping). In fact, health insurers may be well advised to study and emulate how successful consumer companies create these customer experiences. Enrollment, renewal and adjudication must become straightforward, fast and user friendly (with a particular focus on friendly) - today they are anything but “one-click”.
2. Keep everything transparent and easy to understand. Health insurance is complex, but consumers must not get lost in the maze, or they will check out. Helping the consumer navigate the healthcare decisions process, presenting the options in an honest and easy-to-follow way will go a long way in creating trust and building loyalty. The new insurance labels - the mandated standardized plan summaries or “food labels” for health insurance plans - may help, but they are probably just entry stakes to becoming more consumer-focused. Instead of looking at the usefulness of such labels with skepticism, health insurers who are serious about becoming consumer-centric should embrace the concept and push the envelope further. This is not a trivial task, and companies who excel at this can build a real source of differentiation and competitive advantage.

________________________
Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

Consumer engagement: making a difference through differentiation

by Torsten Bernewitz

In a recent post (http://payer-strategies.blogspot.com/2011/09/what-does-it-mean-to-become-consumer.html), I proposed that to embrace the direct-to-consumer marketing model, payers must become excellent on four dimensions: consumer insights, consumer engagement, simplicity/openness, and stakeholder alignment.

While another post (http://payer-strategies.blogspot.com/2011/09/inside-consumer-insight.html), probed deeper into the first dimension - gaining deep consumer insights - today I want to explore the second dimension: effective consumer engagement.

Once the consumer landscape has been well understood and mapped out, we need to make two important decisions: with which consumers do we want to build relationships, and how?

We need to tailor the offering, value proposition, messaging as well as the way how products and services are offered, to the specific needs and preferences of each segment. The “Goldilocks Principle” applies: don’t under- or over-serve a specific segment, get it “just right”.

The vast differences in consumer needs and preferences can perhaps be illustrated by two groups of consumers that are expected to join the health insurers market.

• The first group will join the market through the individual mandate provision of the Affordable Care Act. This group is young and healthy, currently uninsured but with disposable income, i.e., they are “good risks” and potentially a very profitable segment. This group is also used to online stores that serve and simplify all their needs, and it is unlikely that they are very keen on paper applications or brokers. They are quick at making judgments, and vocal - sharing experiences (and griping about bad ones) in real-time with their friends.
• The second group will join the market through Medicaid expansion, the federal subsidies above the 133% FPL cut-off, the guaranteed issue provision of the law, or from smaller employers who stop offering coverage. This group is generally older, in worse health, with larger families but fewer resources. It can be expected that they are less internet savvy and tech-gadget oriented. Some of them, if they are near the 133% FPL threshold, may flip-flop between Medicaid eligibility and the exchanges because of income changes.

The descriptions of the two groups above are just characterizations in big brush strokes. In reality, there will be significant differences within these groups as well, for example based on education, income, location, age etc., which require further customization of the engagement approach. One size, clearly, does not fit all.

It may be beneficial for health insurers to learn from the experiences of other players in the healthcare field who are making similar transitions to engage the consumer, for example manufacturers of medical devices. Blood glucose meters for diabetes are a classic example, and the medical device players in this space may have just as many marketing people focused on patients and channel marketing as they do on healthcare providers. Several companies have publicly declared "patient first" strategies and are talking a lot about "wellness" and "patient experience" – just like health insurers. They have been hiring marketers from traditional CPG companies to help develop effective consumer engagement approaches. They develop solutions that are customized to specific consumer profiles, for example products that are easier to use for consumers with low literacy and numeracy skills.
________________________

Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Health Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com

Inside consumer insight

by Torsten Bernewitz

With the implications of the Affordable Care Act, many payers are concluding that a key success factor for the health insurance industry is to create effective ways to win, retain and influence consumers, who for a long time have not enjoyed a lot of the payers' marketing attention. A number of companies have declared that they want to become "consumer-centric", but on average the industry has still a very long way to go to achieve such a vision.

What does it really mean to become "consumer-centric"? What new capabilities do we need to create? What can we learn from other industries that have a long history in engaging consumers effectively? What will be easy, what will be harder?

In a recent post (http://payer-strategies.blogspot.com/2011/09/what-does-it-mean-to-become-consumer.html), I proposed that to embrace the direct-to-consumer marketing model, payers must become excellent on four dimensions:

1. Consumer insights
2. Consumer engagement
3. Simplicity and openness
4. Stakeholder alignment

Today, I want to go deeper into the first dimension - gaining deep consumer insights:

If we want to engage consumers more effectively, we need to learn more about them first.

Deep insights about the consumer constitute the platform upon which we can build our customer relationships. They help prioritize the groups we want to target, and identify the leverage points we can use to attract and bind them to our offerings.

We need consumer insights to develop the right strategies to build the brand, develop and refine products and services, price them right and promote them effectively. We must understand the demographics, needs, resources, attitudes, choices and behaviors of different consumer groups. What are their channel preferences and service level expectations? How are they connected socially? How do they respond to different ways of interacting with them? How attractive is each segment for us, both in the short term and the long term? What will it take to identify, win and retain segment members?

Obtaining consumer insights - in particular insights that create competitive advantage - is much more than marketing research, more than “knowing the facts”.

Traditionally, market research tries to find an answer to a specific question, or test a hypothesis in a structured way. It is usually pre-defined, granular, focused on reporting back responses. Building customer insights goes significantly beyond this – it is the process of turning observations and signals into revelations about the consumer that inspire ideas and action:

1. Consumer insights emerge from a holistic perspective and the integration of signals across a variety of sources.
2. They include unprompted signals and can be – in contrast to periodic, individual studies to answer a specific business question – “always on”.
3. Consumer insights search for the meaning of signals, and link them to a business decision and action.
4. They include “Eureka” moments, where we discover something about the consumer that we did not know before, challenging our current thinking, and inspiring new ideas.

Gaining superior, game-winning consumer insights means looking where others don’t look, finding what others don’t find. Marketing gurus like Philip Kotler and Mohan Sawhney view this type of “consumer insight” as critical for marketing success.

If we want to make the transition to become more consumer-centric, we have to master this second, parallel, shift: the move from traditional marketing research approaches to building capabilities allowing us to “fish for knowledge” in vast, unstructured “oceans” of data and information. We may have some caching up to do, and perhaps it is beneficial to look over the fence and learn from other industries that already have a long history in engaging consumers effectively.

Ubiquitous internet access, online shopping channels for virtually anything, social media, GPS-enabled smartphones and other devices etc., are already transforming many retail markets. There is no reason to expect that healthcare will be an exception – health issues already count among the most researched topics on the internet.

User generated content on social networks, blogs, forums, chat rooms etc. provides previously unavailable opportunities to “listen in” - in real time - to the consumer and observe social habits and behaviors without bias. New streams of cheap, previously unavailable data are filling up and enriching the oceans of consumer information. Not only does this emphasize the need for integration of many disparate sources and synthesis of meaning to fish for valuable insights, it also creates innovative opportunities to engage with consumers, as illustrated by the following four examples:

1. Geo-marketing: GPS enabled smartphones allow us not only to target the right consumer with the right messages, but now also at the right time and in the right location. A number of companies have begun using location based social networking services as a way to interact with consumers, offering discounts or other incentives to customers who “check-in” at their store (which means posting on a social networking site where they are). Last year retailer GAP attracted thousands of consumers into their stores through offering them the chance of winning a pair of jeans or receive a significant discount on any regularly priced item. Earlier this year, French automaker Peugeot started a campaign to target users when they are near one of their 400 dealers across France and invite them to make a small detour and test drive the Peugeot RCZ model. Geo-marketing could be an interesting opportunity for health insurers as well, for example enabling them to reach out to consumers with specific messages about adherence, coverage benefits, health maintenance questions etc. when they are near a pharmacy or “check-in” at a doctor’s office. It can also help to avoid sending messages when the time or place is not right, thus reducing the risk of annoying the consumer.
2. Field experimentation: Consumer companies like Capital One, EBay and Google regularly engage small fractions of their customers in field experiments to test new business concepts. Health insurers could make use of consumer field experiments as well to test how consumers respond to communications, service offerings etc. The advantage of these experiments is that they test the actual behavior of the participants, e.g., show what choices they make under different circumstances, allowing to observe, in a contained, “safe” environment, what consumers actually do, not what they say they will do.
3. Co-creation: Companies like P&G, Reebok and even Harley Davidson are taking consumer insights to the next level. These companies have created brand communities where they involve consumers in the creation of products and information. German cosmetics company Beiersdorf used co-creation with consumers to develop a new deodorant for its Nivea brand. Toymaker Lego has boosted sales significantly by recruiting fans to participate in its innovation effort. BMW calls their co-creation lab “a virtual meeting place for individuals interested in cars and all related topics, who want to share their ideas and opinions on tomorrow's automotive world”, and “invites people from all over the world to contribute their suggestions for specific topics and to connect with like-minded others.” This direct channel of two-way (or multi-way) communication provides immediate feedback, brings new ideas to the forefront, and creates a sense of consumer participation that goes a long way in building trust and loyalty. For health insurers, similar communities could significantly enhance the communication with and among consumers as well as healthcare providers.
4. Crowd-sourcing: On a similar line as co-creation, companies like 3M, IBM, Dell or Starbucks proactively solicit from consumers proposals for solutions to specific challenges or problems. This approach of “crowd-sourcing” is based on the observation that consumers, as a large group, have specialized and accurate knowledge about issues that concern them, knowledge which they are amazingly motivated to share when given the opportunity. Ice cream maker Ben & Jerry’s used crowd-sourcing to develop new flavors, and Coca Cola solicited consumer ideas in the development of a new vitamin water drink, and the graphics and labels to go with it. A large number of open innovation websites facilitate crowd-sourcing in many areas ranging from R&D, software development and design to marketing and branding, trend prediction and general problem solving. Crowd-sourcing could be an interesting approach to engage both providers and consumers in the quest for win-win solutions to healthcare challenges.

How can we build the capability to create valuable consumer insights?

First of all, investment in technology is required to acquire state-of-the-art data integration and “insights fishing” tools. Second, employees’ knowledge and analytic skills may need to be enhanced as well, and perhaps hiring of experts from CPG or technology oriented companies could accelerate the transition to become more consumer focused.

Third, the holistic approach demands an effective cross-functional approach across intra-organizational boundaries, e.g., marketing, analytics, product development, database management, and IT. It may also create the need for increasing reliance on vendors with highly specialized expertise, for example in data integration, web-analytics, social media listening, or geo-marketing.

Finally, we may need to align on a new way of thinking and a new vocabulary about business information. For example, what exactly defines a “consumer insight” and how is it different from other information? How is a small insight different from a large one, i.e. how do we prioritize and rate them? Where do we store our consumer insights and how do we make them available to the right stakeholders and decision makers?
________________________

Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

Contact: torsten.bernewitz@zsassociates.com