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AHIP Institute: The Convergence of the Payer and Provider Markets

Managing Partner, Health & Life Sciences, and Global Chair for I&D, Oliver Wyman
Head of Health & Life Sciences, North America, Oliver Wyman
Key Takeaway
In a more consumer-driven healthcare marketplace, convenience will move a lot of the market - @OliverWyman

During an afternoon session at the America’s Health Insurance Plans Institute 2015 yesterday, Oliver Wyman’s Health & Life Sciences Managing Partner Terry Stone and Health Services lead Todd Van Tol shared vertical integration strategies for health plans. They explored how the market continues to respond to rising healthcare costs, quality improvement efforts, and the Affordable Care Act (ACA) and discussed collaboration efforts and best practices to optimize outcomes from both the payer and provider perspective to manage costs, provide value-based payment models, and enable the transition of managing risk. View their presentation above. A summary of their analysis follows:

The ACA created significant economic pressure for both health plans and providers alike. The payer market continues to consolidate with approximately two thirds of the market now served by 10 plans. Debt is cheap and well-positioned health plans are evaluating the landscape for consolidation opportunities. Beyond M&A, health plans are arranging strategic partnerships to achieve the benefits of consolidation and greater economies of scale.

As health plans seek to improve their administrative cost position, some regional payers are partnering to gain greater efficiency, stopping short of M&A. Examples include Highmark lending its core processing and back office functions to Independence Blue Cross, and Blue Cross and Blue Shield of North Carolina and Blue Cross and Blue Shield of Kansas City jointly creating a company for back office work. Providers also continue to consolidate, despite more attention from the Federal Trade Commission.

Is like-like consolidation a good thing? Is it sufficient to create real value? We make the case that this approach is too cautious over the long term to get healthcare out of the “no profit zone.” Like-like may make sense in a world that is standing still but not in one where radical shifts are at play, from the rise in consumerism to population health and value-based payments. The shift to value-based care and population health will require fundamental change in healthcare business models, moving toward specialized population ecosystems, an expanded care model lens, a bridge to wellness and consumer engagement, and a new health services marketplace.

In a more consumer-driven marketplace, convenience will move a lot of the market. – Oliver Wyman’s Todd Van Tol

By 2018 projections indicate 34% of all MCO revenues will flow through value-based mechanisms, and Medicare Advantage (MA) may shift even faster. The U.S. Department of Health and Human Services(HHS) has set a goal of tying 85% of all traditional Medicare payments to quality or value by 2016, and 90% by 2018. If HHS succeeds in pushing this amount of volume into value-based payments, then providers will have no choice but to evolve, and we will see more momentum.

What can health plans do to make sure they are in the right spot in the value chain? Providers and provider-integrated players, with their depth in the clinical realm, show impressive population health and quality results: Iora Health achieved a 12% reduction in total healthcare costs applying population health management, while 12 out of 13 5-STAR MA contracts are payer-provider integrated in 2015. We are seeing a multitude of consolidation strategies in the market, ranging from horizontal, like-like integration to bolder, strategic vertical plays:

There are a number of exciting examples of innovation surfacing through vertical alliances and integration. Payers and providers are finding new models for partnership:

  • Innovation Health is an example of Aetna’s strategy to partner with health systems and provide enablement solutions to support transformation. Innovation Health is a partnership between Aetna Accountable Care Solutions and Inova. The partnership has developed commercial and MA, HMO, and PPO products in Northern Virginia, as well as self-insured group products. The successful first year of the partnership achieved growth of 140,000 members.
  • Anthem Blue Cross and seven Southern California health systems have partnered to createVivity, a regional integrated health system with HMO product. The Vivity partnership is a joint venture between Anthem and seven health systems that use a capitation model. All partners pool premiums and share financial risk/gain equally. Providers are held to quality of care and efficiency targets. Vivity aims to reduce costs through improved data sharing and care management.
  • Tandigm Health is a new venture focused on empowering and incenting primary care physicians (PCPs) to improve quality and reduce unnecessary utilization. Tandigm launched in April 2014 as a joint venture between Independence Blue Cross and DaVita Healthcare Partners to address record high utilization in the Philadelphia market. The model is PCP-centric – Tandigm sees PCPs as a customer, prioritizing collaborative design and service, and assuming all risk for membership served.

As healthcare organizations grapple with whether to get bigger to gain scale or go deeper with vertical integrations, there are three major business model archetypes for payers to consider:

Ultimately, the keys to success in considering vertical integration strategies include:

  • Don’t fear vertical integration. All M&A is changing – 60-70% of deals overestimate synergies.
  • “Smart” test and learn. A systematic approach to testing “small bets” versus “spaghetti against the wall.”
  • People and culture matter. Know who you are about to marry, don’t try to change them.
  • Align, align, align. Set out clear objectives that are purpose built. It must be a win-win partnership to work.
  • It’s all about execution. Leadership makes all the difference. Instill a relentless alignment to objectives, ruthless accountability, and continuous adapting.
  • Scale does matter. The winning path is around going deeper and partnering to have if not outright control then some degree of influence on care delivery to offer a better experience and better outcomes.
  • Know what consumers value. In a more consumer-driven marketplace, convenience will move a lot of the market.

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