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Maximize Value April 30, 2020

Payers, Be Bold When Charting Your Financial Future

Cost Transformation Amidst Uncertainty

Partner, Health & Life Sciences, Oliver Wyman
Principal, Health & Life Sciences, Oliver Wyman
Senior Consultant, Oliver Wyman
Key Takeaway
Payers should deliberately withdraw from activities that are undifferentiating. And they should focus on energy investments and assets that develop select capabilities. #OWHealth

Editor’s Note: The following article is part of an ongoing series offering our strategic advice and expertise on what healthcare industry stakeholders should do immediately in response to the rapidly evolving novel coronavirus (COVID-19) pandemic.

The COVID-19 pandemic is a wake-up call for the healthcare industry. There is an opportunity to make the entire system better than before – but only if stakeholders are willing to be bold. Health plans should get in front of the change and chart their courses to future growth. COVID-19 has exposed fractures in the United States’ healthcare system that require re-evaluation. An uncertain future raises two major questions for industry stakeholders: How will you survive unemployment potentially hitting 30 percent nationwide? What will your industry look like in the future?

For businesses in healthcare (particularly health plans), brute-force approaches to cost transformation and business transformation threaten to leave organizations ill-equipped to adapt to rapidly changing industry dynamics.

Cost takeout, in particular, is often associated with small gains and little impact. However, when executed effectively, cost transformation can generate broad-based impact beyond the originator and across the industry. But there is a danger in reacting “day-to-day.” When the economy contracts, prevention-focused companies instinctively jump towards blanket cost reduction solutions. Their main priority is to prevent irreparable business damage. Accordingly, Chief Executive Officers (CEOs) implement enterprise-wide mandates to reduce costs across every line-of-business or functional area. But this brute-force approach to cost-cutting leaves much to be desired for companies – regardless of the industry – seeking to accelerate and thrive in the post-recession environment. Rather, research has shown post-recession winners are companies that master the delicate art of cost-cutting and investing. 

The Solution is Rooted in Deliberative and Well-Executed Cost Transformation

Here are some strategies to maintain control over the direction of your organization, while intelligently and rapidly cutting costs.

Health plans' operating and business models are under tremendous pressure. Leaders are now asking themselves: How do we decrease complexity in the system, remove waste, and become more agile and responsive in the market? As payers restructure operations and refresh their growth strategies amidst the COVID-19 crisis, a robust cost transformation program can provide organizational focus in a time of uncertainty. 

Rethink your cost transformation.

The concept of cost transformation is not revolutionary. But cost transformation programs that are well-executed and effectively maintained are rare. While the underlying concepts of cutting costs and investing in sustainable growth may seem obvious, they are often anything but easy to implement successfully. Without intentional focus and diligent follow-through, efforts to cultivate a sustainable cost management culture will falter.

Oliver Wyman tracked several large-scale transformations across industries to better understand the probability and drivers of success. Only thirty percent of corporations were able to achieve their stated goals, while the remaining seventy percent underperformed (in many cases, significantly). The biggest drivers of success were: program alignment to organizational strategy, strategic clarity of the program intent (such as where and how costs come out), and rigorous execution to ensure costs come out (and stay out).

Additionally, systemic cost transformation can help eliminate 10 to 20 percent of administrative costs, and sometimes even more than this. In the case of one national insurer we worked with that was facing spiraling Selling, General and Administrative (SG&A) expenses, they achieved savings of nearly 20 percent of their current operational costs. This outcome resulted from following specific actions, such as analyzing end-to-end cost drivers in each function across the value chain, figuring out the cheapest processes for each core operation per function and model sustainability based on cost driver, and building an integrated inexpensive platform model to establish a competitive benchmark for industry administrative expenses. 

Define your vision.

Payers should deliberately withdraw from activities that are undifferentiating. And they should focus on energy investments and assets that develop select capabilities.

When defining a “North Star” identity, consider different dimensions like market selection, customer segmentation, value proposition, product offerings, operational processes, provider relationships, and technical capabilities. Few healthcare companies establish a one-dimensional identity, and most payers invest in capabilities across multiple dimensions.

We recommend bringing key stakeholders together to collaboratively participate in activities that are carefully structured to uncover pain points, prioritize differentiating capabilities, and design roadmaps around compelling long-term strategies. Ultimately, carve out a sustainable and profitable long-term market position for your organization. 

According to Oliver Wyman analysis, the top three in ten top performers for cost programs had clearly articulated KPIs (Key Performance Indicators), while bottom performer cost programs did not provide detailed KPIs. Additionally, bottom performer cost programs provided updates every 6 to 12 months from top performers, compared to every 1 to 3 months.

Build towards your vision.

Each organization’s approach will be different, and the options available will vary based on the market and your financial strength. Aggressively optimize your cost structure and ruthlessly minimize spending tied to undifferentiated capabilities to fund investments in those capabilities that truly matter. By aligning your investments and organizational resources to be consistent with your North Star identity, you ensure every choice becomes a strategic decision, rather than just another transaction.

If there ever was a time for payers to double-down on cash optimization, the time is now. From scrutiny will emerge an opportunity and responsibility to reinvent, rebuild, and strengthen the overall healthcare sector.

In an upcoming series on Oliver Wyman Health, we will explore how payers should approach the ongoing novel coronavirus healthcare landscape. Stay tuned on the payer response to COVID-19, where we’ll outline the framework for how health plans can leverage their balance sheets to activate post-COVID-19 strategies and strengthen the healthcare industry at large.

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