IDisruption of the Group Health Insurance in light of the
Affordable Care Act - System Approach
By
Shweta Shefali
B.Tech JMI New Delhi (Electrical Engineering)
Submitted to the Faculty in partial fulfillment of the requirements for the degree of
Master of Science in Engineering and Management
at
Massachusetts Institute of Technology
[May, 2014]
OF TECHNOLOGY
© [2014] [S wit ] AD Rights Reserved.
JUN 2 6 2014
The author hereby grants to MIT permission to reproduce
and to distribute publicly paper and electronic
copies of this thesis document in whole or in part
in any medium now known or hereafter created.
LIBRARIES
Signature redacted
Author:
[SHWETA SHEFALI]
System Design and Management Program
Signature redacted
Certified and Accepted by:
.................................
Patrick Hale
Senior Lecturer, Engineering Systems Division
Director, System Design and Management Program
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Thesis
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2
Disruption of the Group Health Insurance in light of the
Affordable Care Act - System Approach
By
Shweta Shefali
Submitted to the System Design and Management Program on [MONTH, DAY, YEAR] in Partial
fulfillment of the Requirements for the Degree of Master of Science in Engineering and
Management.
Abstract
Our current Healthcare system has multiple problems and it is widely perceived that it is not able
to provide quality affordable healthcare to all Americans; millions of Americans are without Health
Insurance. The Affordable Care Act (ACA) was signed into law to achieve goal of 'quality
affordable care for all American'. The ACA has focus on Individual Health Insurance and the
provision of Health Exchange Marketplaces to find and purchase Health Insurance.
Disruptive Innovation is a phenomenon in which a new entrant company disrupts the existing
established company. As ACA and Health Exchanges have provided level playing field for all
companies - new entrants and established - will this lead to disruption of Healthcare?
Disruptive Innovations is analyzed from System Approach point of view. Disruption is not limited
to two companies; Disruptor System disrupts the existing system including incumbent company.
Disruption will be spearheaded by new entrant Disruptor Company and disruption will take place
at system level.
The existing Healthcare System and Possible Disruptor Systems are defined and investigated.
Relative advantage and disadvantages to these two systems with regard to ACA regulations are
analyzed. Elements of the healthcare disruptor system are analyzed and information present in
the public domain about Health Exchange enrolment after the end of first enrollment seasons is
studied to find out who could be possible disruptor and whether disruptor system formation has
started.
Thesis Supervisor: Patrick Hale
Title: Director, System Design and Management Program
Senior Lecturer, Engineering Systems Division
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Acknowledgments
It was a privilege to work on this thesis for the past three semesters. It enriched my understanding
of the healthcare industry tremendously. While pursuing my graduate studies at MIT, I realized
the importance of being able to visualize a task or situation at the macro level. For example,
viewing a three dimensional pictorial representation always provides greater results as compared
to two dimensional objects, as you are able to see it from different angles. Similarly, being able to
view the healthcare system from different perspectives by the systems thinking developed at
SDM, provided me greater clarity and enabled me to take a sure-footed holistic approach in my
analysis. The systems learnings in the SDM program with its unique analytical pedagogy
approach with lots of knowledge, discussions and analysis helped me to take an in depth
structured approach to the thesis.
I am thankful to all my batch mates, staff and professors at MIT for making the journey at SDM
so enriching and giving me an opportunity to explore and strengthen my knowledge and
capabilities.
The resources and guest lectures offered by the 15.767 course on Healthcare Delivery in the U.S:
Market & System Challenges with industry leaders and pioneers such as Richard Baum helped
me tremendously in analyzing such a complex industry with different perspectives. The wonderful
lectures and discussions of Dr Vivek Farias were enriching and stimulating.
I want to thank my thesis advisor; Pat hale for being an incredible mentor and it was a pleasure
to work with him. I enjoyed and enriched my knowledge deeply with our wonderful conversations
and discussions on the healthcare system. I appreciate his patience, excellent guidance and
providing me with a stress free nurturing atmosphere.
I express my heartfelt gratitude to my husband Himanshu for his tremendous support,
understanding and being my rock at all times, while single handedly managing his demanding job
and being a wonderful dad to our little son Suraj. I would have never been able to complete my
thesis without his support and blessings of my loving family, who have done numerous sacrifices
for me.
Last but not the least I want to thank almighty for leading me to such an opportunity in life, which
helped me grow tremendously professionally and personally and blessing me with strength and
perseverance to deliver under pressure meeting several deadlines simultaneously.
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Table of Contents
Chapter 1: Introduction.......................................................................................................11
Chapter 2: Current Health Insurance................................................................................
13
2.1.
Elem ents of Health Insurance ............................................................................
13
2.2.
Functions of Healthcare ....................................................................................
14
2.3.
Types of publicly financed insurance ................................................................
15
2.4.
Types of private financed insurance...................................................................
16
2.5.
Types of health insurance plans..........................................................................
16
2.6.
Conclusion ............................................................................................................
18
Chapter 3: System s Thinking ...........................................................................................
19
3.1.
Elem ents of System ...........................................................................................
20
3.2.
System Boundary .............................................................................................
20
3.3.
Relationship between Entities ...........................................................................
21
3.4.
Health Insurance - As a System .......................................................................
21
3.5.
Conclusion ............................................................................................................
24
Chapter 4: Affordable Care Act ........................................................................................
25
4.1.
The Affordable Care Act, Section by Section .....................................................
26
4.2.
O bjectives of ACA .............................................................................................
29
4.3.
Conclusion ............................................................................................................
32
Chapter 5: Affordable Care Act - System Perspective ...................................................
33
5.1.
ACA System s Perspective ................................................................................
5.2.
ACA objectives and their effect on Healthcare System Elements....................... 34
5.3.
Conclusion............................................................................................................
Chapter 6: Disruptive Innovation - System Perspective .................................................
33
36
37
6.1.
Disruptive innovation.........................................................................................
37
6.2.
Disruption - System Approach..........................................................................
37
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MIT SDM Thesis
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6.3.
Disruption in Healthcare.....................................................................................
40
6.4.
Conclusion ............................................................................................................
42
Chapter 7: (Ecosystem ) Factors leading to Disruption....................................................
43
7.1.
Health Insurance - A Big Gap............................................................................
43
7.2.
ACA - The new Beginning ................................................................................
45
7.3.
The Penalty...........................................................................................................
46
7.4.
Health Exchange M arketplace .........................................................................
47
7.5.
G roup Health Insurance - Health Insurance of Today.......................................
47
7.6.
Individual Health Insurance under ACA - Health Insurance of the Future .........
50
7.7.
O ld W orld Vs New W orld ..................................................................................
55
7.8.
Dilem m a of Incum bents ....................................................................................
55
7.9.
Advantage to New Entrants ..............................................................................
58
7.10. Conclusion ............................................................................................................
58
Chapter 8: Health Exchange - Sustainability ...................................................................
59
8.1.
Insurance M arketplace.......................................................................................
59
8.2.
Sustainability of Health Exchange (HE).............................................................
60
8.3.
How the M odel W orks.......................................................................................
65
8.4.
Sim ulated Cases................................................................................................
66
8.5.
Conclusion ............................................................................................................
71
Chapter 9 Disruption of Health Insurance........................................................................
73
9.1.
Disruption - Disruptor System Elem ents.............................................................
73
9.2.
Disputed System Issues - Opportunities for Disruptor System .........................
80
9.3.
Conclusion ............................................................................................................
85
Chapter 10: W ho Could be Possible Disruptor .................................................................
10.1.
Desired Q ualities needed in New Disruptor Com pany.......................................
10.2. Possible Suitors .................................................................................................
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87
89
8
1 0 .3 . Co n c lu s io n ............................................................................................................
92
Chapter 11: Early Trends ..................................................................................................
93
11.1. Provider - CVS Minute Clinic and W algreen Health Clinic ................................
93
11.2. Health Exchange Marketplace ............................................................................
95
11.3. Federal Health Exchange Data (March, 2014 Release)....................................
97
11.4. Existing com panies........................................................................................
109
11.5. Independent New Entity by Existing Insurance Provider .....................................
109
11.6. CO-OP Com panies .............................................................................................
111
11.7. Other Com panies on Exchange ..........................................................................
115
11.8. Disruptor System ................................................................................................
115
1 1 .9 . C o n c lu s io n ..........................................................................................................
1 16
Chapter 12: Challenges for Disruptor ................................................................................
117
12.1. Challenge for Disruptor System ..........................................................................
117
12.2. Challenge for Disruptor System Elements...........................................................
117
12 .3 . C o n c lu s io n .........................................................................................................
120
Chapter 13: Conclusion.....................................................................................................
121
A p p e n d ix ...........................................................................................................................
1 23
1.
Maxim us Cost Breakdown of MNSure.................................................................
123
2.
Heath Exchange Sustainability Vensim Model ....................................................
126
R e fe re n c e s .......................................................................................................................
127
T a b le o f F ig u re s ................................................................................................................
12 8
T a b le o f T a b le s ............. ...................................................................................................
129
Table of Abbreviation ........................................................................................................
130
In d e x .................................................................................................................................
131
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Chapter 1: Introduction
People use health care services for many reasons: to cure illnesses and health conditions, to mend breaks
and tears, to prevent or delay future health care problems, to reduce pain and increase quality of life, and
sometimes merely to obtain information about their health status and prognosis. America has witnessed
incredible change in healthcare services delivery in recent past and tremendous progress has been made
in the ways healthcare services are provided and delivered.
When we speak about healthcare we include providers, insurance companies, health insurance, and
everyone else related with healthcare - and this makes healthcare into a complex healthcare system. We
will analyze healthcare in America from a systems perspective as healthcare system.
With the recent changes and technological advancements, healthcare services have undergone an
increase in cost and complexity. At the same time, the role of employer sponsored insurance and
insurance companies have taken individuals and the families out of control of their healthcare. The
Affordable Care Act was passed by the congress and signed into the law by president of United States on
March 23, 2010 to put individuals, families, and small business owners back in control of their health care
and provide affordable-high quality healthcare to all Americans.
The Affordable Care Act (ACA) aims to provide affordable and high quality health care to all Americans.
The ACA's health insurance marketplaces are intended to promote price competition in the individual and
small group markets through greater transparency. They will help consumers by presenting all alternatives
under a single window, comparing all plans in terms of cost and value, and helping them to make an
educated decision.
Will this open a window for disruption of Healthcare in America? Or, in other words, will a new healthcare
system will evolve to provide affordable, effective, and quality healthcare to replace the present
healthcare system?
We will try to find out answers to these questions in coming chapters. However, before we jump to these
questions, we will level set our understanding about present day healthcare, healthcare system, ACA, ACA
in system perspective, and Health Exchanges.
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Chapter 1: Introduction
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Notes:
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Chapter 2: Current Health Insurance
The health insurance is a complex system if systems with multiple stakeholders such as hospitals, clinics,
patient homes, doctors (Primary care physicians and specialized doctors), and insurers; and these
stakeholders interact in a nonlinear fashion. The healthcare is dynamic, exhibits emergence, and is
governed by simple rules.
The main functions of healthcare system include financing, insurance, delivery of services, and payments.
These functions are performed by the elements such as payer, provider, beneficiary etc. Interaction takes
place among these elements while they perform the functions enumerated and information, money, and
services flow from one element to others.
Let us analyze the elements of health insurance.
2.1. Elements of Health Insurance
Following are the element of Health Insurance.
Insurance Coverage
Health insurance provides coverage for medicine, visits to the doctor or emergency room, Hospital
stays and other medical expenses. The employee pays a pre-decided monthly premium to the
Insurer. The various health insurance plans differ in what they cover, deductible, and/or co-payment,
of coverage, and the options for treatment available to the policyholder. The insurance company also
functions as a claim processor and manages the funds to pay the providers.
Provider
Health care provider or simply Provider is a person or healthcare facility licensed, certified or
otherwise authorized or permitted by the law of the state to administer health care or dispense
medication in the ordinary course of business or practice of a profession. In general terminology,
provider includes the physician, specialist, hospital, nurse etc. who provide healthcare to
beneficiaries.
Payer
In simplest words, in the healthcare industry, the payer is an insurance company authorized to provide
health insurance in the state. The payer is also responsible for handling claims for healthcare services,
collecting premiums from clients, and paying claims to healthcare providers. Sometimes words Insurer
or Insurance Company and Payer are used interchangeably and denote the same entity - the payer.
In the subsequent chapters, the term Insurer or Insurance Company is used to denote the payer.
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Chapter 2: Current Health Insurance
Health Insurance Plan or 'Product'
Healthcare Plan is the product of Insurance Company that offers in the market. Health care plans are
programs to which people pay premiums to protect against high health care expenses in the future.
There are multiple types of health care plans, though a person will be limited by which plan their
employer or the government offers.
Employer
Employer is a person or entity that hires individuals - a person, business, or organization that hires
and pays one or more workers - and in healthcare context, an employer is a person or business that
pays for an employer sponsored group healthcare plan. The employer enters into a contract with the
Payer (Health insurance Company) and is responsible to pay the premiums.
Beneficiary
The Beneficiary is an individual who is benefited by the health insurance contract by receiving care
and medical services / products. For group insurance, the beneficiary is either an employee or his /
her family members. Though the beneficiary is not a party who signs the contract in group insurance,
he needs to enroll in the plan in order to receive benefits.
Regulator
The Regulator is a regulatory authority - body of statutory law and administrative regulations - that
governs and regulates the healthcare and health insurance industry and those who are engaged in
business of healthcare and health insurance.
2.2. Functions of Healthcare
All these elements provide following functions of healthcare.
Financing
Health care expenditures can be very expensive with all the required tests, doctor appointments and
hospital stays. Financing is necessary to pay for these health care services. Financing is provided
primarily through insurance and generally the health insurance is employer-based, where the
employers buy health insurance for their employees from an insurance company. Dependents of
employee are also often covered under this insurance.
Payments
Providers are reimbursed by the insurer for the services delivered. Each service provided has a predetermined reimbursement for the service provided.
Insurance
Insurance is a way of protecting against financial risk. One pays small, fixed amounts in order to
protect oneself from having to pay a much larger amount in the event of an economic loss. An
Shweta Shefali
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Chapter 2: Current Health Insurance
individual who is protected against the risk, is called the insured and the organization that assumes
the risk is called the insurer. Health insurance pays specific benefits if an insured person becomes ill
or is injured. A health insurance policy is a contract between an insurance company and individual.
Delivery of Services
Services are delivered to the beneficiary by healthcare provider. These services are in form medical
services and medical care.
There are two types of insurance coverage in the market - Public Financed Insurance and Private Financed
Insurance. Public Financed Insurance is the insurance that is funded by government using taxpayers'
money. There are strict eligibility criteria to qualify for this type of insurance. Privately Funded Insurance
is available to all who can afford it.
2.3. Types of publicly financed insurance
The government has played a key role in expanding healthcare services to those who otherwise would
not be able to afford it. Public financing supports categorical programs, each designed to benefit a certain
category of people e.g. Medicare and Medicaid.
Medicare
The Medicare program finances medical care for people 65 years or older, disabled individuals who
are entitled to social security benefits, and people who are in end stage disease. The federal
government is a payer and purchaser of healthcare benefits and various standards have been
established for the participation for Medicare providers, federally qualified HMOs, and health plans
for federal employees. The healthcare benefits are provided directly or through grants and are
administered within the Department of Health and Human Services (HHS) by the Centers for Medicare
and Medicaid Services (CMS).
Medicaid
It is a joint federal and state program providing hospital and medical expense to low-income
population and certain aged and disabled individuals. The program is jointly financed by the federal
and state governments. The federal government provides matching funds to the state. The Federal
Matching Assistance percentage (FMAP) is between 50-83% per law. In order to deliver care to eligible
recipients Medicaid contract with health plans, prepaid health plans, and primary care case managers.
SCHIP (State's Children Health Insurance Program)
SCHIP provides health assistance to uninsured, low-income household children. The program was
designed to cover uninsured children in families with incomes that are modest but too high to qualify
for Medicaid.
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Chapter 2: Current Health Insurance
2.4. Types of private financed insurance
Private financed insurance is financed by insurance company. Insurance company signs a non-equal value
contract with premium payer to pay for beneficiary's healthcare cost. Types of private financed insurance
are as below.
Group Insurance
Group insurance is the most prevalent health insurance. It is generally obtained through the
employer, unions or through a professional organization. In a group, the risk is shared within a large
pool of people. In most cases the group itself, rather than the individual members of the group must
meet underwriting requirements. The underwriters determine whether a group of people can be
expected to have a predictable loss rate.
The contract is signed between the premium payer and the insurance company. Premium payer is
generally the employer and the beneficiaries are employee and their dependents.
Individual Insurance
Most professionals like the family farmer, self-employed, retirees etc., who could not obtain coverage
through the employer sponsored group insurance get coverage through the individual insurance. The
premiums are higher, as there is no large group to share the risk. The insurer may require an individual
seeking coverage to provide proof of insurability, which consists of the applicant's current health
records and the health and illness history and any activities (e.g. smoking) that affect the applicant's
health.
2.5. Types of health insurance plans
There are various types of health insurance plans available in the market. Most common types of health
insurance plans are as below.
Indemnity
In Indemnity or fee for service plan, a fixed cash amount is paid to the beneficiary per procedure or
service. The beneficiary is examined by the provider chosen by him/her and he/she is responsible to
pay the provider. As the more times an insured visits the provider, the more money the provider
makes, the systemic error can be an unfortunate scenario where the provider is rewarded for an
beneficiary's excessive utilization of medical services.
Managed Care Plans
Managed care plans generally provide comprehensive health services to the members, and offer
financial incentives for patients to use the providers who belong to the plan. MCO's provide a range
of services including preventive care and primary care services.
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Chapter 2: Current Health Insurance
Various types of managed care plans
There are many types of managed care plans in the market. Following are the most popular managed
care plans.
The HMO Plan or the Health Maintenance Organization
The HMO is a healthcare entity that assumes the financial risk of healthcare as well as co-ordinates
the delivery of the healthcare, providing comprehensive medical services to the enrolled
members in return for a fixed monthly premium. There are federal as well as state laws to regulate
the HMO's. To function, the HMO's need to obtain a license as well as they must get a license in
the states in which they have been incorporated and must comply with statuary requirements for
the state in which they conduct business.
The HMO delivers care to members by entering into contracts with providers to form a network.
This network may contain participating physicians, hospitals and other medical ancillary service
providers, delivering care in exchange for a pre-determined compensation. The monthly
compensation paid to an HMO generally covers most healthcare services that members might
need; no matter how often the members use the medical services. HMO's offer individual as well
as group insurance plans, obtained through the employer. HMO members include employees,
their dependents, and individuals. HMOs require plan members to choose a primary care
physician (PCP).
The PPO Plan or the Preferred Provider Organization
PPO's combine the advantages of both indemnity and HMO health insurance plans. This model
came about, as a need to expand outside the HMO provider network and provide flexibility to the
consumer. There is a financial incentive for members who opt for PPO in the form of lower
copayments/coinsurance and maximum limits on an in network out of pocket expense. Insurance
companies own more than half of the PPO plans in the United States.
In the PPO model, the providers contract with the insurance company to accept pre-decided
reduced fee for their services and agree not to bill the patients for the differences between the
normal and the reduced fee. The PPO provides medical services at a lower cost than the traditional
health insurance plans. As the doctors are paid for each patient visit, there may be a tendency of
unnecessary doctor / patient encounters. There is no need of a PCP physician in the pan and the
members can see in network as well as out of network doctors.
The POS Plan or the Point of Service Plan
The Point of Service (POS) Plan delivers healthcare services using the both HMO network and the
Indemnity plan, where individuals can utilize services outside the HMO network. When the
members need medical care, they choose at the point of service, if they want to go to the provider
within the plan or seek medical care outside the network.
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Chapter 2: Current Health Insurance
The Exclusive Provider Organization
The EPO plan is a hybrid of the POS plan. It is a more restrictive type of preferred provider
organization plan in which employees must choose the provider from a specified network of
providers and hospitals. No coverage is provided for care received out of network. The objective
of this plan was greater flexibility at a lower price by combining various plans.
2.6. Conclusion
Health Insurance in America is very complex, and serves a vast variety of customers. All this makes Health
Insurance difficult to manage and regulate.
At the same time, health insurance cannot work in a silo; it interacts with other entities to form a system
to deliver healthcare to millions of Americans.
In the next chapter, we will investigate more about healthcare system and will define healthcare system
with its elements and their form and function.
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Chapter 3: Systems Thinking
Systems thinking recognizes when some entities are working as a system - individual entities are
integrated together and working coherently to achieve goals or to produce desired output. A system can
receive input from environment and can send outputs to environment. Entities of system must be related
either directly or indirectly and a system has well defined system boundary.
As per Prof. Crawley (Prof. Crawley, 2013) definition of system 'is
"A system is a set of elements or entities, and their relationships, whose functionality is greater
than the sum of the individual entities."
If we holistically see a system then it is more than its parts. It's similar to the figure below - individual
parts of the figure do not make an inverted white triangle; however, when we see this figure as one
system, we do see the white triangle - the sum of the parts, put together in a systematic way, is more
than the individual parts.
Figure I - GestaltPsychology Triangle2
1 Prof. Edward Crawley, Systems Thinking, 2013
2 Gestalt Psychology is an early school of psychology
"The whole is more than the sum of its parts":
Reference - Introduction to Psychology by Morgan and King 2000: Chapter: The Science of Psychology
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Chapter 3: System Thinking
In system thinking, we do not merely look at the individual elements but also about their relationship and
interactions. Once a system is formed, an event in one element of the system will influence the event in
another element of the system and similarly the output from system is not compounded from simple
outputs of elements of the system, rather, it consists of organizations and patterns of outputs from
individual elements. This organization and pattern of output makes them more meaningful than just the
sum of individual elements' output.
3.1. Elements of System
Systems can be divided into entities or elements and each entity has form andfunction3. These entities
constitute the system and can be treated as a smaller system in themselves. All entities must be related
to each other in some ways and should interact either directly or indirectly.
~iLIII 1~
/
IF~~
K
I
\
/
qpr
II
/
L
qp'---- ~
/
Figure 2: System Breakup - Its entities, andform andfunctionof entities
3.2. System Boundary
The system boundary defines the scope of the system - which entities, forms, and functions are part of
the system. Everything else is considered outside the system and we can collectively refer to it as
environment. A system may interact one or many other systems outside boundaries.
To study a system, system boundaries should be well defined, as system boundaries define the scope of
the system and study. A system will have inputs and outputs; and all elements of system interact with the
input and each other, either directly or indirectly.
3 Prof.
Edward Crawley, System Thinking, 2013
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Chapter 3: System Thinking
Form
Form is what system or its entity is. This exists physically such as provider and Employer. Form is the
agent which does the work or on which the work is done.
Function
Function is what system or its entities do. These may not exist physically; in health insurance, the
provider - the form - (does) assumes the risk of health expense for beneficiary and pays for it.
Therefore, thefunction of provider is to assume the risk of health expense for beneficiary and pay for
it whenever it occurs. Similarly, function of employer is to buy group health policy for employees and
pay its premium.
3.3. Relationship between Entities
Within a system, entities are related to each other - either directly or indirectly - and interact with each
other - either directly or indirectly. If any entity is not related to any other entity then it may not be the
part of the system. These relationships explain the organization of the system and help us in
understanding how they process the input and produce output.
3.4. Health Insurance - As a System
Health Insurance works as a system: elements of the health insurance interact with each other to provide
healthcare services to the beneficiary. Well defined relationships exist between the elements of health
insurance. Using system thinking, Health Insurance or Healthcare can be explained as a system Healthcare System.
Let us list entities of this Healthcare System in system perspective.
System boundaries, Entities, and Relationships
A pictorial representation of a Healthcare System can be seen in Figure 3. This figure puts all elements
of the Healthcare System together in form of a system. It also represents relationship between entities
clearly defines system boundaries. In Figure 3
Blue boxes denote the elements of the system
Pointed (single headed and double headed) arrows denote relationships among entities
The outer dotted line marks the system boundary
Light blue boxes denote other systems outside the system boundary interacting with
healthcare system
With System representation, in Healthcare System, as denoted in the figure
Payer, a part of the system, interacts with other parts of system such as Provider, Regulator,
Product, and Technology.
Similarly, other entities in system interact with each other.
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Chapter 3: System Thinking
/
System A, System B, and System C are outside of Healthcare System boundary and interact
with the Healthcare System.
Every entity represented in this system can be represented as a system in itself and can have further
entities.
Other Systems
Interacting with
Healthcare System
I-
System Boundary
I
Entity
Regulator - Provider
Relationship between
Entities
40
I
I
Healthcare System
Figure 3: Healthcare System from System Perspective
Shweta Shefali
MIT SDM Thesis
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Chapter 3: System Thinking
Healthcare System - Form and Function
Let us examine form and function of Healthcare System and its entities. Table 1 represents forms and
functions of the Healthcare System.
Healthcare System
The Healthcare System is Form - a physical entity - in itself and the Function of the Healthcare
System is to supply Healthcare to the beneficiary.
Payer
The Payer physically exists in Form of the Insurance Company and its Function is to collect the
premiums from the policy owner and pay the provider for healthcare services. The Payer is in the
epicenter of the system and it interacts with all other elements of the system directly.
Table 1: HealthcareSystem Form and Function
Provider
Form - Hospitals, clinics, medical practitioners are provider and their function is to provide
Medical Services to the beneficiary.
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Chapter 3: System Thinking
Product
The Product is the insurance policy or the contract with which these entities are elements.
Function of the product is to mitigate the beneficiary's medical expense risk. This risk is assumed
by the payer as negotiated in the product (contract).
Employer
The Employer (Form) buys (Function) a group insurance product or policy for its employees or
beneficiaries and pays (Function) the premiums.
Beneficiary
Form - Employee, dependents of the employee; Function -to receive medical healthcare services.
Beneficiary is the end user of medical product and services.
Technology
When we speak about technology in context of Healthcare System, we talk about two very distinct
domains of technology - Medical Technology and Information Technology - both complementary
to each other in the system. Therefore, Forms of technology are medical technology and
information technology.
Function - Technology provides necessary tools for Healthcare System. Medical Technology is the
backbone of medical services - X-Ray, Cardiogram, CT scan, medicines, surgical instruments etc.
It provides necessary medical information about patient to the medical provider.
Similarly, Information Technology integrates all entities into a system using power of computing.
Regulator
Government organizations and institutes (Form) which supervise (Function) that rules are being
followed and fair practices are used. They also make (Function) new rules and regulation or amend
old ones as necessary.
3.5. Conclusion
We have defined the elements, their form and functions, and boundary of healthcare system. This
healthcare system works to provide healthcare services to America in an organized manner. This
healthcare system does communicate with its environment and other systems, and exchanges
information. This interaction and exchange of information makes it a dynamic and open to change system.
Shweta Shefali
MIT SDM Thesis
24
Chapter 4: Affordable Care Act
On March 23, 2010, President Obama signed the Affordable Care Act. This law puts in place
comprehensive health insurance reform that will roll out over four years and beyond.
ACA aims to reform all functions of Health Care - Coverage, Cost, and Care. ACA reforms are continuous
process that started in 2010 with 'Patient's Bill of Right' and will continue in 2015 as well. The timeline
below gives overview of Health Care Law over time.
The objective of Affordable Care Act (ACA) is to put consumer back in charge of his/her (and of her family)
healthcare. Under the law, a new "Patient's Bill of Rights" gives the American people the stability and
flexibility they need to make informed choices about their health.
2013
Open Enrollment in the
Health Insurance
Marketplace Begins
2014
Insurance Coverage
2013
Increasi ng Access to
begins for Health Insurance
Marketplace Enrollees
2014
Establishing Health Insurance Marketplace
Afford able Care
2012
2011
Linking Paymt ntto
Medicare 50% Discount on Quality Outco mes
Brand-Name drugs
2011
Medicare Key preventive
2010
Coverage Free
Cost Free Preventive Coverage
begins for many Americans
Promoting
Individual Responsibility
2012
Encourage
Integrated
Health Systems
2015
Paying Physician Based on Value
Not Volume
2010
Patient's Bill of Rights
Tod y
v
2011
2012
2010
)I
2013
IF
2014
2015
2015
Figure4: Affordable CareAct on Timeline4
4
Information for this timeline was collected from website
Shweta Shefali
MIT SDM Thesis
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Chapter 4: Affordable Care Act
4.1. The Affordable Care Act, Section by Section
The ACA is divided in 10 Titles as below. sEach Title has multiple section in it. The ACA, as presented in
2010, is a very large document running through 995 pages but these 10 titles give fair understanding about
the act and the objectives it is designed to achieve.
Title 1.Quality, Affordable Health Care for All Americans
This Act puts individuals, families and small business owners in control of their health care. It reduces
premium costs for millions of working families and small businesses by providing hundreds of billions
of dollars in tax relief - the largest middle class tax cut for health care in history. It also reduces what
families will have to pay for health care by capping out of pocket expenses and requiring preventive
care to be fully covered without any out of pocket expense. For Americans with insurance coverage
who like what they have, they can keep it. Nothing in this act or anywhere in the bill forces anyone to
change the insurance they have, period.
Americans without insurance coverage will be able to choose the insurance coverage that works best
for them in a new open, competitive insurance market - the same insurance market that every
member of Congress will be required to use for their insurance. The insurance exchange will pool
buying power and give Americans new affordable choices of private insurance plans that have to
compete for their business based on cost and quality. Small business owners will not only be able to
choose insurance coverage through this exchange, but will receive a new tax credit to help offset the
cost of covering their employees.
It keeps insurance companies honest by setting clear rules that rein in the worst insurance industry
abuses. In addition, it bans insurance companies from denying insurance coverage because of a
person's pre-existing medical conditions while giving consumers new power to appeal insurance
company decisions that deny doctor ordered treatments covered by insurance.
Title II. The Role of Public Programs
The Act extends Medicaid while treating all States equally. It preserves CHIP, the successful children's
insurance plan, and simplifies enrollment for individuals and families.
It enhances community-based care for Americans with disabilities and provides States with
opportunities to expand home care services to people with long-term care needs.
The Act gives flexibility to States to adopt innovative strategies to improve care and the coordination
of services for Medicare and Medicaid beneficiaries. And it saves taxpayer money by reducing
prescription drug costs and payments to subsidize care for uninsured Americans, as more Americans
gain insurance under reform.
http://www.hhs.gov/healthcare/facts/timeline/timeline-text.htm
5 Ten Titles of ACA are present at the location http://www.hhs.aov/healthcare/rights/law/index.html.
Information present in the box is the summary of information present at this source.
Shweta Shefali
MIT SDM Thesis
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Chapter 4: Affordable Care Act
Title Ill. Improving the Quality and Efficiency of Health Care
The Act will protect and preserve Medicare as a commitment to America's seniors. It will save
thousands of dollars in drug costs for Medicare beneficiaries by closing the coverage gap called the
"donut hole." Doctors, nurses, and hospitals will be incentivized to improve care and reduce
unnecessary errors that harm patients. In addition, beneficiaries in rural America will benefit as the
Act enhances access to health care services in underserved areas.
The Act takes important steps to make sure that we can keep the commitment of Medicare for the
next generation of seniors by ending massive overpayments to insurance companies that cost
American taxpayers tens of billions of dollars per year. As the numbers of Americans without
insurance falls, the Act saves taxpayer dollars by keeping people healthier before they join the
program and reducing Medicare's need to pay hospitals to care for the uninsured. And to make sure
that the quality of care for seniors drives all of our decisions, a group of doctors and health care
experts, not Members of Congress, will be tasked with coming up with their best ideas to improve
quality and reduce costs for Medicare beneficiaries.
Title IV. Prevention of Chronic Disease and Improving Public Health
The Act will promote prevention, wellness, and the public health and provides an unprecedented
funding commitment to these areas. It directs the creation of a national prevention and health
promotion strategy that incorporates the most effective and achievable methods to improve the
health status of Americans and reduce the incidence of preventable illness and disability in the United
States.
The Act empowers families by giving them tools to find the best science-based nutrition information,
and it makes prevention and screenings a priority by waiving co-payments for America's seniors on
Medicare.
Title V. Health Care Workforce
The Act funds scholarships and loan repayment programs to increase the number of primary care
physicians, nurses, physician assistants, mental health providers, and dentists in the areas of the
country that need them most. With a comprehensive approach focusing on retention and enhanced
educational opportunities, the Act combats the critical nursing shortage. And through new incentives
and recruitment, the Act increases the supply of public health professionals so that the United States
is prepared for health emergencies.
The Act provides state and local government's flexibility and resources to develop health workforce
recruitment strategies. In addition, it helps to expand critical and timely access to care by funding the
expansion, construction, and operation of community health centers throughout the United States.
Title VI. Transparency and Program Integrity
Shweta Shefali
MIT SDM Thesis
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Chapter 4: Affordable Care Act
The Act helps patients take more control of their health care decisions by providing more information
to help them make decisions that work for them. Moreover, it strengthens the doctor patient
relationship by providing doctors access to innovative medical research to help them and their
patients make the decisions that work best for them.
It brings greater transparency to nursing homes to help families find the right place for their loved
ones and enhances training for nursing home staff so that the quality of care continuously
improves. The Act promotes nursing home safety by encouraging self-corrections of errors, requiring
background checks for employees who provide direct care and by encouraging innovative programs
that prevent and eliminate elder abuse.
Finally, the Act reins in waste, fraud, and abuse by imposing tough new disclosure requirements to
identify high-risk providers who have defrauded the American taxpayer. It gives states new authority
to prevent providers who have been penalized in one state from setting up in another. In addition, it
gives states flexibility to propose and test tort reforms that address several criteria, including reducing
health care errors, enhancing patient safety, encouraging efficient resolution of disputes, and
improving access to liability insurance.
Title VII. Improving Access to Innovative Medical Therapies
The Act promotes innovation and saves consumers money. It extends drug discounts to hospitals and
communities that serve low-income patients. In addition, it creates a pathway for the creation of
generic versions of biological drugs so that doctors and patients have access to effective and lower
cost alternatives.
The Secretary of Health and Human Services has the authority to implement these provisions to help
make medications more affordable.
Title VIll. Community Living Assistance Services and Supports Act (CLASS
Act)
The Act provides Americans with a new option to finance long-term services and care in the event of
a disability.
It is a self-funded and voluntary long-term care insurance choice. Workers will pay in premiums in
order to receive a daily cash benefit if they develop a disability. Need will be based on difficulty in
performing basic activities such as bathing or dressing. The benefit is flexible: it could be used for a
range of community support services, from respite care to home care.
No taxpayer funds will be used to pay benefits under this provision. The program will actually reduce
Medicaid spending, as people are able to continue working and living in their homes and not enter
nursing homes. Safeguards will be put in place to ensure its premiums are enough to cover its costs.
Title IX. Revenue Provisions
Shweta Shefali
MIT SDM Thesis
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Chapter 4: Affordable Care Act
The Act makes health care more affordable for families and small business owners by providing the
largest middle class tax cuts for health care in American history. Tens of millions of families will
benefit from new tax credits, which will help them, reduce their premium costs and purchase
insurance. Families making less than $250,000 will see their taxes cut by hundreds of billions of dollars.
When enacted, health reform is completely paid for and will reduce the deficit by more than one
hundred billion dollars in the next ten years.
Title X. Reauthorization of the Indian Health Care Improvement Act
The Act reauthorizes the Indian Health Care Improvement Act (ICHIA), which provides health
care services to American Indians and Alaskan Natives. It will modernize the Indian health care system
and improve health care for 1.9 million American Indians and Alaska Natives.
4.2. Objectives of ACA
The main focus of ACA is to provide affordable healthcare to all American. Currently a large number of
American do not have health insurance coverage and a good percentage of them are young adult (See
Chapter 7 for more details)
Small Business Tax
Credit
No Denial based on
Pre Existing
Conditions
Protect Against
Healthcare Fraud
Eliminating Annual
Limits
Improving Quality and
SNew Consumer
ConsmerProtection
Ass ista nce
Eliminating Uifetime
Lowering Healthcare
i
Free Preventive Care
Rx Discounts for
Seniors
Limit
\Improving Efficiency
Cost
Bring down
Health Insurance
Marketplace
Extending Coverage
to Young Adufts
Healthcare
Premiums
i
Access to
Rebuilding Primary
Care Workforce
Promoting Individual
Responsibility
reAdess
Linkd ng Payment ar
to
Quality Outcome
Healthcare
i
/
Holding Insurance
Companies Accountable
Overpayment to
Insuran ce
Companies
Strengthening
Medicare
Advanta
Figure 5: Objectives of Affordable Care Act
Shweta Shefali
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MIT
MIT SDM
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29
Chapter 4: Affordable Care Act
ACA aims to remove all hurdles between this uninsured population and the health insurance. There are
series of measures ACA has started to achieve this goal.
Most important ACA objectives are presented in the figure 5 above - they can be divided in four major
sections: Improving Quality and Lowering Healthcare Cost, New Customer Protection, Access to
Healthcare, and Holding Insurance Companies Accountable.
Key features of the ACA 6are given in the table below. This table is compiled from the information present
at the webpage http://www.hhs.gov/healthcare/facts/timeline/timeline-text.html. More details about
these features are present on this webpage.
Table 2: Key Features ofAffordable Care Act
1 Putting Information for Consumers Online
2 Prohibiting Denying Coverage of Children Based on Pre-Existing Conditions
3 Prohibiting Insurance Companies from Rescinding Coverage
2010
2010
2010
4
5
6
7
8
Eliminating Lifetime Limits on Insurance Coverage
Insurance companies will be prohibited from imposing lifetime dollar limits
on essential benefits.
Regulating Annual Limits on Insurance Coverage
Appealing Insurance Company Decisions
Establishing Consumer Assistance Programs in the States
Prohibiting Discrimination Due to Pre-Existing Conditions or Gender
2010
2010
2010
2010
2014
9
10
Eliminating Annual Limits on Insurance Coverage
In 2014, the use of annual dollar limits on essential benefits such as hospital
stays will be bannedfor new plans in the individual market and all group
plans.
Ensuring Coverage for Individuals Participating in Clinical Trials
2014
2014
1
Providing Small Business Health Insurance Tax Credits
Offering Relleffor 4 Million Seniors Who Hit the Medicare Prescription
2 Drug "Donut Hole."
3 Providing Free Preventive Care
4 Preventing Disease and Illness
5 Cracking Down on Health Care Fraud
2010
6
2011
Offering Prescription Drug Discounts
2010
2010
2010
2010
6 This
information is compiled from 'Key Features of the Affordable Care Act By Year'present at
location
http://www.hhs.gov/healthcare/facts/timeline/timeline-text.html.
Shweta Shefali
MIT SIDM Thesis
30
Chapter 4: Affordable Care Act
7
8
9
10
11
12
13
14
15
16
17
18
19
Providing Free Preventive Care for Seniors
Improving Health Care Quality and Efficiency
Improving Care for Seniors After They Leave the Hospital
Introducing New Innovations to Bring Down Costs
Linking Payment to Quality Outcomes
Encouraging Integrated Health Systems
Reducing Paperwork and Administrative Costs
Understanding and Fighting Health Disparities
Improving Preventive Health Coverage
Expanding Authority to Bundle Payments
Making Care More Affordable
Increasing the Small Business Tax Credit
Paying Physicians Based on Value Not Volume
2011
2011
2011
2011
2012
2012
2012
2012
2013
2013
2014
2014
2015
Establishing the Health Insurance Marketplace
The ACA mandates establishment of Health Insurance Marketplace - a
competitive and transparent marketplace - where individuals and small
1 business can buy affrodable health insurance plans.
Providing Access to Insurance for Uninsured Americans with Pre-Existing
2 Conditions
2010
Extending Coverage for Young Adults
Young adults are allowed to stay on their parents' paln until their 26th
birthday.
Expanding Coverage for Early Retirees
Rebuilding the Primary Care Workforce
Holding Insurance Companies Accountable for Unreasonable Rate Hikes
Allowing States to Cover More People on Medicaid
Increasing Payments for Rural Health Care Providers
Strengthening Community Health Centers
Increasing Access to Services at Home and in the Community
Providing New, Voluntary Options for Long term Care Insurance
Increasing Medicaid Payments for Primary Care Doctors
Open Enrollment in the Health Insurance Marketplace Begins
Increasing Access to Medicaid
Promotin Individual Responsiblity
2010
2010
2010
2010
2010
2010
2010
2011
2012
2013
2013
2014
2014
Bringing Down Health Care Premiums
2011
3
4
5
6
7
8
9
10
11
12
13
14
15
1
Addressing Overpayments to Big Insurance Companies and Strengthening
2 Medicare Advantage
2014
2011
Shweta Shefali
MIT SDM Thesis
31
Chapter 4: Affordable Care Act
4.3. Conclusion
Affordable Care Act is an ongoing process- it has changing the face of healthcare in America and its effect
will be more pronounced in the years to come. Most of its regulations are already in force and some other,
such as 'Paying Physicians Based on Value Not Volume' will be implemented in 2015. One of the most
significant regulation of the ACA is to setup of Health Exchange OR Health Insurance Marketplace where
individuals will be able to buy Health Insurance for themselves and their family.
We will analyze the effect of ACA on Healthcare System, and its elements, in the next chapter.
Shweta Shefali
MIT SDM Thesis
32
Chapter 5: Affordable Care Act - System Perspective
5.1.ACA Systems Perspective
We have seen examined elements of healthcare system in Chapter 3 and listed their form and function.
With understanding of System Thinking and knowledge of Healthcare system elements, we can prepare
Healthcare System as shown in the in the Figure 6. In this figure, elements of the system are shown as
subsystems.
Figure6: HealthcareSystem with its elements as subsystem
How will ACA affect the healthcare system? - will it affect the system as a whole touching all (or majority)
of elements OR it will just touch one or two elements.
Shweta Shefali
MIT SDM Thesis
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Chapter 5: Affordable Care Act - System Perspective
If it touches all elements of the system with considerable impact then its effect on system will be far more
pronounced and it will bring some radical changes in the system.
However, if ACA just touches one element (and may be couple of other just marginally) then effects will
be localized to that element itself and ACA will not bring any radical change in the system.
If we study objectives of the ACA and what element of the system that objective would affect, it will give
us an insight into how it is affecting the healthcare system and how much impact it will have.
5.2.ACA objectives and their effect on Healthcare System Elements
As we have seen in Chapter 4, there are 46 major objectives of ACA grouped in four classes, most of the
objectives are already in force, and remaining will be in force soon. Each objective touches and affects
some of the elements of Healthcare System. It is not hard to find what all elements the objective will
affect and all elements the objective affects substantially can be listed.
Following table has list of all objectives taken under ACA and the element of the system they will affect.
'Y' in the box corresponding to System Entity means that this particular ACA Objective will affect the
System Entity. 'Y' is placed only when the interaction is notable and will call for changes in the entity.
Indirect interactions with little or no change are not considered for simplicity.
Table 3: ACA objectives and their effect on HealthcareSystem Elements
NEW CONSUMER PROTECTIONS
Puffing InformTwion for
Consumers Online
Prohibiting Denying
y
y
y
y
y
y
y
y
y
y
y
y
y
Coverage of Children Based on
Pre-Existing Conditions
y
Prohibiting Insurance
Y
Companies from Rescinding
Coverage
Y
Eliminating Lifetime Limits on
Insurance Coverage
Regulating Annual Limits on
Insurance Coverage
Appealing Insurance
Company Decisions
Establishing Consumer
Assistance Programs in the
States
Prohibiting Discrimination
Due to Pre-Existing Conditions or
Gender
Eliminating Annual Limits on
Insurance Coverage
Trials
Shweta Shefali
MIT SDM Thesis
y
Y
y
Y
Y
y
Ensuring Coverage for
Individuals Participating in Clinical
y
y
y
y
y
y
y
y
y
y
y
y
Y
y
IMPROWNG QUALITY AND LOWERING COSTS
y
34
Chapter 5: Affordable Care Act - System Perspective
Providing Small Business
Health Insurance Tax Credits
Offering Relief for 4 Million
Seniors Who Hit the Medicare
Prescription Drug "Donut Hole."
Providing Free Preventive
Care
y
Y
Y
Y
Y
Preventing Disease and
Illness
y
Cracking Down on Health
Care Fraud
Y
Y
Offering Prescription Drug
Discounts
Y
Y
Providing Free Preventive
Care for Seniors
Y
Y
Improving Health Care
Quality and Efficiency
Y
Y
Improving Care for Seniors
After They Leave the Hospital
y
y
y
Introducing New Innovations
to Bring Down Costs
Y
Y
Y
Linking Payment to Quality
Outcomes
Y
Y
Y
Encouraging Integrated
Health Systems
Y
Y
Y
Reducing Paperwork and
Administrative Costs
Y
Y
Y
Y
Understanding and Fighting
Health Disparities
Y
Y
Improving Preventive Health
Coverage
Y
Y
Expanding Authority to
Bundle Payments
Y
Y
Making Care More Affordable y
Establishing the Health
Insurance Marketplace
Y
Y
Increasing the Small
Business Tax Credit
Y
Paying Physicians Based on
Value Not Volume
Y
Y
IY
INCREASING ACCESS TO AFFORDABLE CARE
Providing Access to
Insurance for Uninsured
Americans with Pre-Existing
Conditions
Y
Y
Extending Coverage for
Young Adults
Y
Y
Y
Expanding Coverage for
Early Retirees
Y
Rebuilding the Primary Care
Workforce
Y
Holding Insurance
Companies Accountable for
Unreasonable Rate Hikes
Y
Allowing States to Cover
More People on Medicaid
Y
Increasing Payments for
Rural Health Care Providers
Y
Shweta Shefali
MIT SDM Thesis
Y
y
Y
Y
Y
Y
y
Y
Y
y
Y
Y
Y
Y
y
y
y
y
35
Chapter 5: Affordable Care Act - System Perspective
Strengthening Community
Health Centers
Increasing Access to
Services at Home and in the
Community
Providing New, Voluntary
Options for Long term Care
Y
Y
Insurance
increasing Medicaid
Payments for Primary Care
Doctors
Open Enrollment in the
Health Insurance Marketplace
Y
y
y
Y
Y
Y
y
y
y
Y
Begins
Y
Increasing Access to
Medicaid
Promoting Individual
Responsibility
Y
y
Y
y
y
Y
_
y
y
_y
HOLDING INSURANCE COMPANIES ACCOUNTABLE
Bringing Down Health Care
Premiums
Addressing Overpayments to
Big Insurance Companies and
Strengthening Medicare
Advantage
Score
y
Y
Y
23
Y
y
V
19
y
1
10
29
13
27
The table revels that ACA will affect (is affecting) all-important elements of present Healthcare System.
Highest score of the table is 29 which is for beneficiary (end customer), which means out of 46 objectives
of ACA 29 will affect customer directly and the impact is substantial. This is in line with the intent of ACA;
after all, it is aimed to remove some major pain point of the customer.
Second best (23) is scored by provider - the insurance company - and definitely, insurance company will
need to accommodate major changes to fulfil objectives of ACA.
Lowest score of 10 is scored by employer, which seems logical, as they are not so active participant in
healthcare system.
Other scores range between 10 and 29 means every element of healthcare system will be affected by ACA
substantially.
If all elements of the system are affected substantially, then system itself will not remain immune to the
changes. The system will transform itself, although be it some trial and error, and move into the direction
where ACA objectives are met more effectively.
5.3. Conclusion
All elements of Healthcare System are affected substantially and the healthcare system will see major
changes due to ACA regulations. Will these changes be able to fuel disruption in healthcare system - we
will examine this in coming chapters.
Shweta Shefali
MIT SDM Thesis
36
Chapter 6: Disruptive Innovation - System
Perspective
Disruptive innovation (Christensen, The Innovator's Dilemma, 2000) is a phenomenon in which new
entrant in the market creates a value network (and sometimes new market), and eventually,
systematically disrupts an existing market and value network.
Does disruption happens to the company only and all other entities interacting with it do not get affected
at all? Alternatively, does it affect everything that interacts with the company? In disruptive innovation,
it might appear that one company (entrant) has disrupted the other company (incumbent); however, if
we see it more closely, it is one system disrupting the other system.
Clayton Christianson, in his book Innovator's Prescription (Christensen, Innovator's Prescription, 2009),
has argued about 'Elements of Disruptive Innovation' page xx and he lists -sophisticated technology that
simplifies, Regulations, and standards that facilitate change, Low-cost innovative business model, and
economically coherent value network as elements of disruptive innovation.
If we revisit our Healthcare System (Chapter 5, Figure 6), elements discussed above can be mapped with
the elements of Healthcare System. Therefore, the disruption is not only the disruption of the company
but it is the disruption of the system.
Let us check the fundamental attributes of disruptive innovation and examine what it means from a
systems thinking perspective. In addition, with our Systems Thinking caps on, we can explore how systems
behave under disruption.
6.1.
Disruptive innovation
The disruptor company, with new technology (or new process, business model) cost advantage, targets
customers who do not demand very sophisticated product. Sometimes disruptor companies may target
new customers who never participated in the market due to the high cost of the products (Christensen,
The Innovator's Dilemma, 2000).
As argued in the beginning of the chapter, disruptive innovation is not an isolated phenomenon, it is a
system phenomenon - existing system is disrupted by the disruptive new product.
6.2.
Disruption - System Approach
In disruptive innovation, two systems- the disruptor system and the disrupted system - are at work and
former tries to replace the later.
Shweta Shefali
MIT SDM Thesis
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Chapter 6: Disruptive Innovation - System Perspective
The pictorial representation of disrupted system is in the figure 7. The existing company is in the center
of the system and it interacts with other elements of the systems such as Customer, Product and Services,
Technology, and distributor and supplier.
Figure 7: Existing (Disrupted)System
Note that other elements (apart from company) of the system may interact with each other; those
interactions are not shown in this figure for the sake of simplicity.
Pictorial representation of the disruptor system is shown in Figure 8. The disruptor company is at the
center of the system and is interacting with the other elements. Apart from five elements that were also
there in the disrupted system, there is one extra element in the disruptor system - New Regulation. This
element plays a major role in formation and consolidation of the disruptor system.
As in the disrupted system, in disruptor system also, other elements (apart from company) of the system
may interact with each other; those interactions are not shown in this figure for the sake of simplicity.
Shweta Shefali
MIT SDM Thesis
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Chapter 6: Disruptive Innovation - System Perspective
Figure 8: New DisruptorSystem
Now how do these two systems come together to play game of disruption? In the beginning, the disrupted
system is well established and has the lion's share of the market. This system is in the nucleus of the
industry, providing product to most of the customers and controlling the market. This system is on the
top of the game dealing with the most demanding customers and earning the highest profit margin.
The disruptor system comes into the periphery of this nucleus system and starts as a marginal player
without even attracting or fulfilling the needs of mainstream consumers. The nucleus system does not
notice it or rejects any threat from it until it tries to go up in the value chain and fight for up market share.
The peripheral system pushes inwards, towards the nucleus system, with an aim to replace it and reach
out to higher profit margin customers.
This process is pictorially represented in the figure 9 below. The peripheral system is pushing the nucleus
system inwards to ultimately phase it out and take its place. Think of it as spiral current or water swirl the nucleus system is sinking inwards and the peripheral system is taking its place. In some time, from few
years to few decades historically, the nucleus system of today will disappear or sink and peripheral system
of today will become the nucleus system.
A new wave of disruption will come and there will be a new peripheral system, which will push the nucleus
system towards disappearance ... and so on. The process of disruption will continue from outwards to
inwards.
Shweta Shefali
MIT SDM Thesis
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Chapter 6: Disruptive Innovation - System Perspective
Figure 9: PeripheralDisruptorSystem in action to DisruptNucleus System
In Figure 9, the dark blue inner system is the nucleus system and the light blue outer system is the
peripheral system. So disruptive innovation is not only about the disruption of a company but also about
the disruption of a system of which the company is a part. Let us examine the two systems and the process
further.
6.3.
Disruption in Healthcare
There could remain one doubt about disruption; all the forgoing examples are about other industries and
not about healthcare. In fact, these industries are altogether different from the healthcare industry.
Shweta Shefali
MIT SDM Thesis
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Chapter 6: Disruptive Innovation - System Perspective
Industry technology, customers, products, services, delivery models... all these have almost nothing in
common with healthcare industry.
However, disruption is never about the industry, it is about how we - humans - make decisions. All
successful disruption examples shown above are indicative of a pattern in decision-making and if people
are put in similar circumstances, , they will likely make similar decisions. Fundamental drives of human
nature do not change and we can find more examples of disruptions, not only in business but in history
as well -ancient, medieval, and modern history - is full of disruptions.
Thus now, we are left with a big question, whether the Affordable Care Act objectives will be met by
sustaining innovation within the current nucleus system or a disruption will take place and disruptive
innovation will be better able to take care of society's needs?
Sustaining innovation does not seem a realistic possibility to fulfil ACA objectives (outlined in Chapter 5)
- in the first place, ACA came into picture due to perceived issues and inefficacies in the current healthcare
system. This indicates there are some real issues with existing companies and business models that they
are not able to identify and correct. Incumbents are not the favorites to innovate and fulfill ACA objective
-
affordable quality Healthcare to all Americans - due to following reasons:
Intense Competition among themselves
Current system companies are in tune with competition within the current business models. This
means they are competing intensely with each other, attracting each other's customers, retaining
their customers in active competition. They are not likely ready for the innovation that ACA demands.
In fact, they are so involved in competing with each other that they may not even pay any attention
to disruptor until it is late in the game.
Individual Health Insurance - low profit margin
Individual health insurance is a low profit margin business compared to group health insurance. This
will be one big deterrent for existing insurance companies to step up and innovate to capture new
market.
Reimagining Healthcare
The healthcare system present today is not able to fulfil the requirement of 'quality affordable
healthcare to all Americans'. There is definitely a need to reimagine healthcare to bring all Americans
under a healthcare net. However, there is very little or no incentive to the existing health insurance
companies to do so.
System Overhaul
In the current Healthcare system, there are major inefficiencies in use of Information Technology from
payer side, such as use of Legacy Hardware; at the same time there are major inefficacies in how the
healthcare provider side is delivering healthcare, such as overpriced and unnecessary services. These
inefficiencies are making system ineffective and healthcare costly. It is not possible to fight these
Shweta Shefali
MIT SDM Thesis
41
Chapter 6: Disruptive Innovation - System Perspective
inefficiencies without overhauling the system. It will not be easy to convince all stakeholders to
overhaul a working and profitable system for less lucrative and not yet fully developed market.
Technological Constraints
These companies have investing aggressively in new technology, they are adopting the innovative
technology such as mobile aps, cloud computing etc., but this adoption is far from technological
innovation for them. It is being added on and patch worked on to the existing technology making
technical interface more complex, bureaucratic to change, and costly and difficult to maintain. It will
be much more difficult and costly for them to add new functionalities to cater new market. With low
profit margin, it will take little sense to make big investment in technology infrastructure.
Not listening to non-customers
They are listening to the customers and even fulfilling their more demanding demands. However, they
have not paid any attention to potential market that is not currently their customer. Culturally, they
have never competed against non-usage. This will make them less effective in innovation to fulfil
needs of this market.
6.4.
Conclusion
From system perspective, it is not just the company that goes thru process of disruption, instead, it the
complete system that goes thru disruption. Formation of disruptor system starts much before the
disrupted system is disrupted and the new company becomes the leader of disruption.
We will examining in Chapter 7 what ecosystem factors are leading to disruption.
Shweta Shefali
MIT SDM Thesis
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Chapter 7: (Ecosystem) Factors leading to Disruption
This chapter analyzes the dilemma existing players will have in responding to changing scenario and
demand, and most importantly to the emerging new market. The situation will be favorable to disruption
only if existing players are not able or not willing to offer what the disrupter could. Will they be able to?
What constraints and dilemma they face? Let us examine.
Traditionally the healthcare plans have been group insurance plans, purchased by the employers in bulk
for their employees from the healthcare insurance companies. For example, the employer IBM or
MassMutual buys health insurance coverage for all its employees from health insurance providers like
Aetna, Cigna etc. This has led to a large gap in coverage, population that could not get insurance thru
employer was left out of the healthcare coverage.
7.1. Health Insurance - A Big Gap
Health insurance is traditionally Employer Sponsored Insurance, though a small portion is Individual
Insurance as well. Most of the Americans either have Employer Sponsored Insurance or do not have
Health insurance at all. A relatively very small population has Individual Insurance.
According to the United States Census Bureau, in 2011 there were 48.6 million people in the US (15.7% of
the population) without health insurance. 7 The percentage of the non-elderly population who are
uninsured has been generally increasing since the year 2000.
The number of people who lack insurance at some time during a multi-year period is greater than the
number currently uninsured. A study published by Families USA in 2009 'estimated that approximately
86.7 million people were uninsured at some point during the two-year period 2007-2008. This
represented about 29% of the total US population or about one-in-three under 65 years of age.
According to United States Census Bureau in 2012, young adults, age 19 to 34 years old, had the highest
uninsured rates of any other age group (26.9 percent)9 . As per the graph (Figure 10) below, which uses
data from the 2008 through 2012 American Community Surveys (ACS), 18 million uninsured 19 to 34 year
old in 2012 accounted for 40 percent of the uninsured population under age of 65.
Another trend is recorded by United States Census Bureau in the figure 11. Uninsured rate changed
dramatically for age group 19 to 25 after implementation of policy change in September 2010 that allows
dependents to remain on their parents' health insurance plan until their 26th birthday. However, there
were no significant changes in 26 to 34 year uninsured rate changes.
7 Information
8 Report
taken from report present at httg://www.census.gov/Drod/2012pubs/60-243.pdf.
is available at location htp://familiesusa.org/sites/defaul/files/product documents/hidden-health-
tax.Ddf.
9 hftr://www.census.aov/how/infoaraphics/vouna uninsured.html data is obtained from this webpage.
Shweta Shefali
MIT SDM Thesis
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Chapter 7: (Ecosystem) Factors leading to Disruption
Percent Uninsured by Single Year of Age 0 to 64
35%
30
25
20
15
10
5
0
5
10
15
20
25
30
35
40
45
50
55
60
64
The 18 million uninsured 19- to 34-year-olds in 2012 accounted for
40 percent of the uninsured population under the age of 65.
Figure 10: PercentageUninsured by Single Year cfAge 0 to 6410
In addition, we can observe in Figure 10 above that uninsured rate in 18 years old is significantly less than
the uninsured rate in 19 years old. This indicates following thing -
A significant percentage of population starts loosing access healthcare insurance as
dependent to parents' healthcare when they reach 1 9th birthday.
/
Clearly, at 26, more than 30 percent were not able to get employer-sponsored health
insurance and either could not afford individual healthcare insurance or were not interested
in individual healthcare as suitable healthcare solutions were not available.
35%
30
25
20
15
10
5
0
Change in Uninsured Rates 2008-2012
19 to 25
26
2008
to 34
2009
2010
2011
2012
Since the implementation of the September 23, 2010 policy change that allows
dependents to remain on their parents' health insurance plan until their 26th
birthday, the trend in health care coverage for the 19- to 25-year-old age group
has seen a significant shift, while the trend for 26- to 34-year-olds has remained
relatively stable.
Figure 11: Change in UninsuredRates 2008-2012"
As per US Census Bureau, following are the absolute number of 'Young and Uninsured'.
10 http://www.census.gov/how/infoqraphics/young uninsured.html - taken from this webpage.
11 http://www.census.gov/how/infographics/young uninsured.html - taken from this webpage.
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MIT SDM Thesis
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Chapter 7: (Ecosystem) Factors leading to Disruption
19- to 25-year-olds
uni
4
-u)
8 million
-uoe(
22 million
26- to 34-year-olds
-10
million
-27 million
Figure 12: Uninsured Populationin USA 2012 Data2
All this indicates a very large uninsured gap. Moreover, the good thing is that ACA has a lot of focus to
bring these uninsured under health insurance cover. Obviously, they cannot come under group insurance,
neither does ACA encourage them to do so; they will need to come under individual health insurance. The
ACA thus is not providing additional customers to existing health insurance companies. Rather, it is
creating a new health insurance customers that have a very different needs form current mainstream
customers.
This customer base will go to any company that is able to fulfill their needs and expectations. There are
few major attributes of this customer base V' They need individual health insurance.
v
The majority of them are young adults.
V
They will be very cost conscious.
Participation form this uninsured population will transform individual insurance market from very small
to a very big market. This big individual insurance market will be available to insurers via marketplace.
7.2.ACA - The new Beginning
If we summarize ACA in one sentence it would be - 'Quality Affordable Healthcare for all American'.
Quality Healthcare for all Americans is not possible under the Healthcare system the way it is today. In
today's healthcare system, there is no focus on individual insurance; a substantial percentage of the
population remains outside healthcare coverage.
The Patient Protection and Affordable Care Act (ACA), if enacted as written, could redefine the market for
health insurance with a speed and significance never before witnessed in this industry, and rarely seen in
any other. Power to the People, A Deloitte' s study (Deolitte, 2013) finds that ACA could increase the
market size for individual health insurance by more than five-fold by 2020, raising the number of individual
policy holders to approximately 72 million in 2020.
Much of this increase will likely be net new consumption as uninsured Americans enter the market. The
law will not only encourage individuals to buy health insurance but also punish them if they do not buy
12
http://www.census.-ov/how/infoaraphics/youna uninsured.html - taken from
this webpage.
Shweta Shefali
MIT SDM Thesis
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Chapter 7: (Ecosystem) Factors leading to Disruption
health insurance. ACA does not aim to be a passive onlooker when people are out to buy health insurance.
It will establish Health Exchanges (Insurance Marketplace) to buy and cell health insurance.
7.3. The Penalty
Individual mandate of ACA has made insurance an individual responsibility and if someone does not have
insurance then he/she would be bound to pay the penalty. Penalties will be very small to start with but
will rise steeply in next few years. However, there is a limit; penalty cannot exceed the national average
premium for bronze coverage, which is the cheapest plan available in Market Exchanges. Penalty for 2014
is flat $95 per adult and $47.50 per child up to maximum $285 per family. These penalties will be collected
via tax return.
This penalty will persuade and somewhat force people to buy health insurance instead of paying it as with
penalty they will not get anything in return. It would make better sense to buy health insurance than to
pay penalty. And as Health Exchange Marketplace would be most completive place to shop with penalty
of options and comparison among the plans, people will shop at Marketplace instead of going to the
insurer individually.
2014
2015
$95
per adult
$325
per adult
$695
per adult
or
or
or
2%
2.5%
1%
of family income
2016
offamiy income
Offamiy income
whichever is greater
Figure 13: Health Insurance Penaltyfrom year 2014 to 2016 and beyond
3
The marketplace will be an engine of growth for individual health insurance. This may not make available
the sizable potential market overnight but in couple of years, it will be the biggest place to buy and sell
individual health insurance. A few years will not be a very big time for insurance marketplace, as the open
enrollment will happen annually. Therefore, this wait would mean only couple of buying seasons for
marketplace.
13Taken
from source http://money.cnn.com/2013/08/13/news/economv/obamacare-penalty/.
Shweta Shefali
MIT SDM Thesis
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Chapter 7: (Ecosystem) Factors leading to Disruption
There are more benefits of buying plans at Health Exchange - if qualified (based on income and other
parameter) - insured can get tax benefit or advance tax credit, which will lower premiums. Apart from
this, in terms of coverage, insured can get following advantages
v
-
No plan can turn you away or charge insured more because you have an illness or medical
condition.
Plans must cover treatments for preexisting conditions.
Plans cannot charge women more than men for the same plan.
Many preventive services are covered at no cost.
7.4. Health Exchange Marketplace
One of the provisions of ACA is to setup a Health Exchange Marketplace (simply called Marketplace
sometimes; See Chapter 4). The Health Exchange is a place where people can compare and buy health
insurance.
Healthcare exchange is going to be the biggest change in healthcare industry that is taken place in recent
past. This will change the rules of the game and is beginning of new era in Healthcare.
Individuals desiring non-group insurance or without access to group insurance can participate in the
Health Exchange to buy health insurance for themselves and family. As health insurance will be mandatory
for individuals, more and more people who do not have health insurance will come to Health Exchange to
shop for some sort of Health Insurance Coverage. This will not only increase enrollments in the Health
Exchange but also expand the market for Individual Insurance.
Marketplace is for not only people who do not have access to Health Insurance otherwise but also anyone
who has access to employee-sponsored insurance can also buy insurance from marketplace. However,
such a person may lose certain privileges to reduce cost and the employer may have to pay a fine.
7.5. Group Health Insurance - Health Insurance of Today
Current business model of (Group) Health Insurance is not end consumer centric. Group Health Insurance
is provided by Employer; and employers need different ways to manage the cost. This leads to the
employer centric (friendly) business model that generally subjugates the needs and demands of end
consumers.
The Group Health Insurance provider ignores the identity of the end consumer. They are treated as a
group with no individual characteristics. Clearly, this does not take care of individual's needs very well and
can cause dissatisfaction.
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MIT SDM Thesis
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Chapter 7: (Ecosystem) Factors leading to Disruption
ID XXX
ID YYY
ID ZZZ
ID AAA
ID BBB
Figure 14: Current Group Insurance- Every insuredis an ID
Current group insurance can be characterize as complex, with no personal choices, limited options, no
control, and accords preference to employer need. Multifunctional chart in figure 15 (next page) describes
what happens today.
Shweta Shefali
MIT SDM Thesis
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Chapter 7: (Ecosystem) Factors leading to Disruption
Rules and
regulations
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Chapter 7: (Ecosystem) Factors leading to Disruption
7.6. Individual Health Insurance under ACA - Health Insurance of the Future
Health Insurance of the future
As individual insurance will be in focus, individual needs will be more pronounced than ever. This will
put the end customer at the center of health insurance and make future model more consumer
centric.
New consumer centric view
Claire
Ms brown
Elena
Victor
Steve
Jason
Figure 16: Individual Health Insurance- Individual Identities Recognized andAcknowledged
In contrast with the Employee sponsored Health Insurance, where end consumer does not shop for
the plan, Individual Health Insurance under ACA will give fair choices to consumer to shop for plan in
the marketplace. This will put consumer in the driver's seat of the decision making process.
Shopping Health Insurance at Health Exchange has become reality. There are variety of options multiple level of cost and coverage - available at the health exchange.
Shweta Shefali
MIT SDM Thesis
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Chapter 7: (Ecosystem) Factors leading to Disruption
Figure 17: Health Exchange Marketplace Website Snapshot 4
Four level of plans are available in Health Exchange - Bronze, Silver, Gold, and Platinum - to take care
of needs to every consumer.
About Health Connector Plans
To make finding your plan easier, we grouped plans by key design features.
Bronze
Silver
* Lower monthly
premium
HHigher out-of-pocket
a Monthly premium is
costs when you get
-Moderate out-of-
medical care
SA good choice if you
expect to use a low
amount of health
services during the
plan year,
generally higher
than Bronze
poc ket costs when
you receive medical
care
A good option If you
expect some
services beyond
standard care
" Monthly premium is
generally higher
than Silver
* Lower out-of-pocket
costs when you
receive medical care
" A good option lif want
to balance your
monthly premium
and out-of-pocket
expenses
Platinum
" Highest monthly
premium
" Lowest out-of-pocket
costs when you
receive medical care
SA goodopton if you
expect to use a lot of
health services
during the plan year
Figure 18: Types of Plan availableat Marketplace. Information takenfrom https://www.healthcare.gov.
The Healthcare Marketplace is a consumer friendly place to shop for health insurance. It provides all
necessary information to the buyers. It will also inform the the buyer if he/she is eligible for any state
or federal sponsored aid.
If insurance is purchased from Health Exchange then:
14
Information taken from address https://www.healthcare.gov/.
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MIT SDM Thesis
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Chapter 7: (Ecosystem) Factors leading to Disruption
The buyer may qualify for a premium tax credit. These premium tax credits may be awarded in
advance to be applied to monthly insurance premium to bring monthly premium down.
If person buys 'silver category plan' he may qualify for out of pocket costs saving depending on
family income - known as "cost sharing reductions".
Figure 19 snapshot is from the Marketplace website in which it is telling user how many plans are
available for her in her area. Plans can be sorted and filtered to narrow down the search.
Shop for Plans
Review Plans. Narrow your choices with Plan Filters. You may view plan details by cickIng on the plan name.
Select up to 3 plans to compareShow Plan filters
pI
CoiPlan
Sort Plans By
Showing 60 plans ofBO total, based on your filter settings
$576 $42
Show Bronze Plans
Benefits package
v
8?
Monthly Premium for Bronze Plans
High
Annual Deductible
SILVER 12 PLANS
$591 43 $1 56 8
Show Silver Plans
Moderate
Monthly Premium for Silver Plans
698 83
Show Gold Plans
Annual Deductible
$1 23993
Low
Monthly Premium for Gold Plans
Annual Deductible
Monthly Premium for Platinum Plans
LOW
Annual Deductible
PLAT)NUM 14 PLANS
Show Platinum Plans
Figure 19: Shop for Plans at Marketplace.Information taken from httDs://www.healthcare.gov.
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MIT SDM Thesis
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Chapter 7: (Ecosystem) Factors leading to Disruption
Not only the availability of plans, but the options can be covered side by side - an instrument that will
make Health Exchange better place to shop, as it will promote educated well-informed decisions: see
figure 20 below. Here user has selected two plans to compare them side by side.
This website is lot more convenient than going thru multiple company websites, collecting plan
information, and then comparing them to make a decision.
0
I I
:omnxinity
FCHP Select Care Silver
A
$845.74 / mo
Access Blue Basic
$908.47 I mo
You have selected
2 PLANS
view a detailed plan
comparison.
Figure 20: Compare Marketplace Plans.Information takenfrom https://www.healthcare.gov.
The multifunctional flow chart below projects the picture of future - less complex, more choices for
people, better control.
Shweta Shefali
MIT SDM Thesis
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Chapter 7: (Ecosystem) Factors leading to Disruption
RuLes and
regulations
Plan Re
os itory
L*
Available Plan
Marketplace
in
Revie+
Employer Plans Marketplace Plans
Plan older
Employee/indivi dual
Analyze Multiple Choices
Collect Health
Em/I
Prvd
caxerec
Prepare Claim
Submit Claim
Figure21 Cross-FunctionalChart- Insurance with Health Exchange
Shweta Shefali
MIT SDM Thesis
54
ueCide
la im
Cost and
Claim
Chapter 7: (Ecosystem) Factors leading to Disruption
7.7. Old World Vs New World
From the discussion above, we have seen Individual Health Insurance backed by ACA is much more
flexible, gives enough information to make informed decisions, and empowers people to choose what
they want. The new world will bring following key differentiators in the way healthcare is done and
perceived today.
People with Choices
The people will have choices at hand without any dependence on the employer. This will call for a
new marketing strategy on the part of insurance companies - The face of the consumer will change
from the white collared corporates buying group insurance plans to less sophisticated purchasers of
individual plans based on what they want specifically for themselves and their families.
Power to the People
In an individual insurance market, people will ask for more power - power to choose from, power to
control (change), preference to their needs, and simplicity. Unlike group insurance where 'one size
fits all', individual insurance in the Marketplace will provide customers a customized solution - after
all a healthy person may want a different insurance plan compared to a non-healthy person.
This advantage of the Marketplace over current group insurance will be a factor which will encourage
the disruption of healthcare. People will demand customized, flexible, choice-driven solutions and
that will not be possible though group insurance.
Interest in End Consumer's Health
In the new world, insurance companies will take keen interest in beneficiary's (insured's) health, as
their profit margin (and the cost of the product) will depend on beneficiary's health. The healthier the
beneficiary is the more profitable he or she is for the insurance company. This will generate keen
interest of insurance company in beneficiary's preventive care and primary care.
Better preventive and primary care would mean less healthcare expense down the line. At the same
time, the beneficiaries - end consumers- will feel that insurance company really cares for them. This
will be a remarkable difference in beneficiary's perception about insurance company as today it is
perceived as passive intermediary.
7.8. Dilemma of Incumbents
If the incumbent is successfully able to rise up to the expectations of ACA and end consumers then
disruptive innovation will become only a remote possibility. However, for incumbents it is never
straightforward decision - they always have two options - maintain the status quo or disrupt the existing
setup. Conventional wisdom favors maintaining the status quo as it is tried and tested. Let us examine
what dilemma incumbents may face during next few years while disruption is taking its course.
Shweta Shefali
MIT SDM Thesis
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Chapter 7: (Ecosystem) Factors leading to Disruption
The first Dilemma
There is clearly a huge gap between the individual insurance seeker's aspiration and current group
insurance provider's approach. This leaves a bigger question - will current group insurance
providers be able to bring the cultural shift in their approach to cater to this need? Most
importantly, they will need to do so while the keeping current group insurance focus intact, as
they would not like to lose the more lucrative group insurance market for the less profitable
individual insurance market.
Initiating this new focus and maintaining two foci in one organization might confuse employees,
sales teams, and customers as well. Thefirst Dilemma - whether to shift focus to low profit margin
individual insurance market or maintain focus on high profit margin group insurance?
The second Dilemma
Existing group insurance focused companies will have another Dilemma - whether go back to
drawing board and make new innovative plans truly empowering people OR use existing plans
and market them in the marketplace. As argued earlier in this chapter, the new individual
insurance consumer will be very cost sensitive and a major percentage of them will be young
adults. Anything drawn on the line of existing group insurance plan may not suit them.
Third Dilemma - Cost/Profit Margin Dilemma
There is a huge difference in revenues and profit margins in selling Group Insurance vs. Individual
Insurance. This difference is similar to the difference between selling Mainframe computers vs
personal computers.
Selling group insurance brings big revenue, sometimes millions of dollars, with high to very high
profit margin, whereas selling individual insurance is few hundred dollars and low profit margin
on a per policy basis. Selling one group insurance policy may mean a big business, whereas selling
one individual policy is just peanuts.
As explained in the figure 22, as we move to group insurance number of clients decrease and so
does the management effort, whereas if we move to individual insurance the number of clients
would increase and so does the management effort. Also, profit per client increases as we move
to group insurance and profit per client decreases as we move to individual insurance.
Shweta Shefali
MIT SDM Thesis
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Chapter 7: (Ecosystem) Factors leading to Disruption
Large Number of Clients
at individual Insurance
Low profit per client for
individual Insurance
A
\Ciiert Cient Ciet Client Cdent CientCfert Clent Clent Client
/
OL
0
Low Number of Clients
to Manage
High per client profit for
Group insurance Client
Figure 22: Group Insurance Vs Individual Insurance
The system is in place to sell group insurance and to deal with group clients. This system clearly
cannot take care of individual insurance clients because of two basic reasons - needs are different
for both and concentrations of clients are very different. In individual insurance system would
need to deal with enormous numbers of clients versus some senior professionals of big
organizations.
Protection of the Status Quo - incumbents are more focused on protecting the status quo, committing all
their energy to the current Healthcare System. This will essentially mean that they are missing, neglecting,
and rejecting the innovations in technology and changes in market sensibilities.
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MIT SDM Thesis
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Chapter 7: (Ecosystem) Factors leading to Disruption
7.9. Advantage to New Entrants
The rise of the individual market promises to create a viable foothold for a radically different business
model in health care insurance. If this proves true, commercial insurers will likely face the same
dilemma that has handcuffed every successful incumbent that fell to a Disruptor: The new game
begins long before the old game is over. As long as the group market remains large and profitable which is likely the case for the foreseeable future - it will be almost impossible for incumbent group
carriers to free-up the resources required to develop viable solutions for the individual market, no
matter how profitable or fast-growing it might become.
success in the individual market is based on providing affordable products and services via offering
customers the chance to select the product feature trade-offs that best match their anticipated health
care needs with their pocketbooks. The likeliest path to meet this set of requirements is with process
and product configuration innovations at enrollment, supported by customer management,
informatics, and segmentation that result in new levels of customer intimacy.
All of these innovations are likely to be built on new information technology platforms. This means
that successful individual carriers are likely to have a business model with a rapidly improving enabling
technology. Over time, as this new model matures and becomes more sophisticated, it may give the
individual carriers the ability to compete effectively for the group market with higher levels of
customization, yet lower costs, than today's dominant group carriers.
Change in Consumer Behavior - Movement of market is taking shape. Individual consumer will be
willing to take control of his/her healthcare need. Imagine, if these 16 million age 26 to 35 people get
insurance as individual subscribers deciding what is best form them and choosing what they want.
This will bring a change in behavior of these consumers when they are employed and participate in
group insurance from employer. They will miss the kind of control they had on their healthcare policy
decisions and will opt to do so if they had chance and viable alternative. Health Exchange will make
this possible for them. Consumer behavior shift will take place, not so because behavior of consumer
will change but because consumers with changed behavior will enter the market.
7.10. Conclusion
Under ACA and current ecosystem factors, the U.S. Healthcare System is clearly ready for disruption.
Health Exchanges will lead the market to the path of disruption and success of ACA will depend on the
success of Health Exchanges. In next chapter we will examine sustainability of Health Exchange to find out
how stable and permanent they will be.
An additional dependency is how much 'young adult - 19 to 34 year old' segment will engage in the ACA.
We will check this in chapter 11 - Early Trends.
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MIT SDM Thesis
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Chapter 8: Health Exchange - Sustainability
8.1. Insurance Marketplace
The Health Insurance Marketplace is designed to make buying health coverage easier and more
affordable. Starting in 2014, the Marketplace will allow individuals and small businesses to compare
health plans, get answers to questions, find out if they are eligible for tax credits for private insurance or
health programs like the Children's Health Insurance Program (CHIP), and enroll in a health plan that
meets their needs.
The Marketplace Can Help Customer:
Look for and compare private health plans.
Get answers to questions about health coverage options.
Get a break on costs.
Enroll in a health plan that meets customer's needs.
Health Insurance and Marketplaces
Starting 2014, consumers, and small businesses have access to new health insurance marketplaces
(or Exchanges). Consumers in every state are be able to buy insurance from qualified health plans
available through a marketplace and about 18 million Americans are eligible for tax credits to help
pay for their health insurance.
There are two types of Exchanges (Marketplaces) proposed in ACA. The first, called the State based
Marketplace where each state creates its own marketplace - e.g. California, Connecticut, and
Massachusetts. Second, called State Partnership Marketplace is a hybrid marketplace in which the
state runs certain functions - e.g. Delaware, Illinois, and Iowa. A Partnership Marketplace allows state
to make key decisions and tailor the marketplace according to local needs and market conditions. The
federal government will establish and operate a marketplace in those states that do not establish their
own.
All marketplaces have launched open enrollment in October 2013.
Any individual, who does not have insurance coverage from his/her employer can buy health
insurance in the exchange operating in his/her area. All Health Exchanges have established their easily
navigable website to search, compare, and enroll into the health plan as per customer need. Enrolling
into a Healthcare Plan using HE online website is four step simple process -
Create an account
Shweta Shefali
MIT SDM Thesis
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Apply
-)
Pick a Plan
-+
Enroll
59
Chapter 8: Health Exchange - Sustainability
How the Marketplace works
Create an account
Apply
Pick a plan
First provide some basic
information. Then choose a user
name, password, and security
questions for added protection.
Next youl enter information about
you and your family, including your
income, household size, other
coverage you're eligible for, and
more.
Next you'll see all the plans and
programs you're eligible for and
compare them side-by-side.
You'll also find out if you can get
lower costs on monthly premiums
Enroll
Choose a plan that meets your
needs and enroll
Find out when coverage can 130#
and learn how to complete your
enrollment.
Figure23: How marketplace works"
Apart from online, one can buy Health Exchange Marketplace plans
By phone
Within person assistance (Navigators, Application Assistors, Certified Application Councilors,
and Government Agencies such as State Medicaid and Children's Health Insurance Program
Offices.
With a Paper Application
8.2. Sustainability of Health Exchange (HE)
To make a lasting impact and become a viable business option, a Health Exchange must be selfsustainable. In the vensim model below we will examine whether Health Exchange can be sustainable and
how much time they will take to become sustairnable. This provide data to study, Minnesota exchange
MNSure and information present in public domain about MNSure was examined. This study takes
exchange setup and maintenance cost from MNSure sources.
Following Vension diagram study examines the sustainability of health exchange.
Overview of Model
This model simulates the Health Exchange System Cost-Revenue dynamics. The objective of this
model is to predict when a Health Exchange (HE) will be sustainable. HE will attain sustainability in
year i when cumulative Operating Revenue (OR) of HE is greater than cumulative Operating Cost (OC)
of HE for that year. Sustainability is measured as cumulative Operating Revenue minus cumulative
This figure is captured from http://marketplace.cms.aov/GetOfficialResources/Logo-andinfoqraphics/how-marketplace-works-4-steps.pdf.
15
Shweta Shefali
MIT SIDM Thesis
60
6
Chapter 8: Health Exchange - Sustainability
Operating Cost. This model has capability to predict when a Health Exchange will be sustainable and
how various factors affect its sustainability.
For any particular year, i sustainability will be calculated as below. Where i E I (integer)
10
10
Si = >ORi - >LOCi
i=0
i=O
If Si is greater than zero for any year i (and subsequent years) then the Health Exchange has become
sustainable that year.
Operating Cost (OC) Calculation
OC is calculated as sum of operating expenses and the installment of initial investment that is to be
recovered. Operating expenses of HE will be incurred in salaries and Health Exchange (IT setup)
maintenance. One example of the calculation is as below.
The initial Investment in setting up the exchange = $ 43 Million (first year extra cost $1.44 million
is included in initial investment assuming it is due at the start of the term) 6
Government may fund this setup expenditure totally or partially (Government Contribution in
initial Cost). Let us assume government contribution is zero then Assuming this initial investment is to be recovered in next 5 years in equal yearly installment and
4% interest.
Yearly recovery installment per year = 9.66 million
Yearly Maintenance cost of the Exchange = $ 2.33 million' 7
Assuming 100 employees are needed to run the exchange and average cost per employee is $
80,000 per year (including salary and benefits).
Employee Cost per Year = 8,000,000 = $ 8 million
Yearly Operating Cost = Yearly Recovery Installment + Yearly Maintenance Cost of Exchange +
Yearly Salary Cost to run exchange
This cost is taken from 'Maximus Cost Breakdown of MNSure'. This is present on MNSure website
location https://www.mnsure.orq/about-us/rfp-contractlindex.isp (see under 'maximus, inc' link '1C.
MAXIMUS, Inc. Exhibit C'. PDF is copied and pasted in Appendix point 1.
17Taken as average maintenance cost form 'Maximus Cost Breakdown of MNSure'
16
Shweta Shefali
MIT SDM Thesis
61
Chapter 8: Health Exchange - Sustainability
Operating Revenue (OR) calculation
People enrolled in exchange will pay monthly premium. Accounting annually, these premiums are
converted into yearly premium $. Assume 3% of premium $ will be charged as operating revenue of
the exchange.
Yearly Operating Revenue = Yearly Premium $ * (0.03)
= (Average number of people enrolled)*(Average Yearly Premium $) * (0.02)
Sustainability of the exchange will be achieved once cumulative operating cost = cumulative
operating revenue
10
10
Si= >ORi - >LOCi
i=O
i=O
If sustainability Si < 0 for some year i then the model was not sustainable for that year.
Difference (deficit) will be carried over to the next year.
If sustainability Si > 0 for some year i than exchange became sustainable that year. Which
means its revenue for that year was not only greater than the operating cost that year but also
the surplus has cleared all deficits accumulated in past years.
The Model
Sustainability calculation is done in the model as explained above. To calculate OR and OC, model uses
following formulae.
[ftI"'-
e
L"". M~0Qd.
500-
~ rQ
5
Vd
~
A.W
s
......
Figure24: Vensim model showing Sustainabilitycalculationpart
Shweta Shefali
MIT SDM Thesis
62
Chapter 8: Health Exchange - Sustainability
Operating Revenue (OR) Calculation
OR = Average Premium per person *Number of full Premiums*% of premium towards operating
revenue"/100
Operating Revenue will come as a percentage ofpremium $ collected. We can very this percentage
to check sustainability at various level.
Average Premium per person = $2988 per year
To calculate average premium per person, average ofpremium per month of all marketplace Silver
plan for adult individual age 21 is multiplied with 12. Raw data is present in Marketplace Excel
sheet released in March 2014 (Individual Marketplace Data & https://data.healthcare.gov/, 2014)
Fraction paying full premium = 0.95
Assuming total premium collected corresponds to the full year premium paid by 95% of people
enrolled. This will happen as people will enter and drop any time in year.
Number of full Premiums = Fraction paying full premium *Number of People Enrolled in Exchange
This is how number offull premiums is calculated.
%of premium towards operating revenue
Only a percentage of premium $ collected will go towards HE operation and maintenance. This
percentage may vary from year to year. A model could be front loaded (greater percentage goes
in initial years) to get sustainability early OR to top competition it could charge less percentage in
initial years. In this model, a lookup graph table is used to control this percentage variable.
xrbalsi
XI10o-a
.. j
a
ax..w igsi
e
p731
u.41s
p7.41
w
J
i.mjl.-O eJ.
_c
Figure25: Percentage ofpremium towards operatingrevenue - Vensim model variable
Number of People Enrolled in Exchange
This variable is driving the revenue of the exchange and itself depends on various other variables
and rates.
Number of People enrolled in exchange
Shweta Shefali
MIT SDM Thesis
63
Chapter 8: Health Exchange - Sustainability
This number will be affected by initial enrollment, yearly enrollment, and yearly drop.
Number
peop
(Ok~~~~~~t
n-xr
td
f'-1
VnA
Y.
P
-o
p
1_WA
ado-MA-U
~~
~W. -----------
3~~~
C.:.
77
Fiue2:Nme*fpol
noldi
exchae
-Vensi
caclto
hif
adC
en rol
Enrollment~FW
=
F4.
e Onli
Appkiatn
modew
hiW. b~
mentC*P)
'
PaprApiain+
hn
plcton+I
esnHl
Figure 26: Number ofpeople enrolled in exchange - Vensim calculationmodel
Number of people enrolled in exchange
=
enrollment
-
drop
Enrollment = Online Application + Paper Application + Phone Application
Application + Effective Initial Enrollment
Paper Application
enrollment* Time)
=
+
In Person Help
Insurance Eligibility*6000 *(1 Percentage Decrease per year in new
Not all applicants will be eligible for insurance thru health exchange. Insurance eligibility is afactor
to account for that. For study, we have taken this factor to be 0.9 (or 90%). We have also assumed
that we will get 6000 paper applications in the first year. There will be decrease in new applications
in subsequent years due to market saturation or other factors. Variable Percentage Decrease per
year in new enrollment is used to account for this decrease.
Similar formulae are used for 'Online applications', 'phone applications', and 'in person help
applications'
Effective Initial Enrollment = Initial Contributor Constant*lnitial Enrollment
Initial enrollment will take place at the time of launch only (year = 0). To take this into account,
'Initial Contributor Constant'factor is used. Value of this factor is 1 for year = 0 and value is O for
all other years. Number of initial enrollments is assumed 5000.
Drop = Coverage not needed + Dissatisfaction + Ineligibility
Shweta Shefali
MIT SDM Thesis
64
Chapter 8: Health Exchange - Sustainability
Coverage not needed = 0.03*Number of People Enrolled in Exchange
Assuming that 3% people enrolled in the exchange will drop due to 'coverage not needed' reason.
Ineligibility = 0.02 *Number of People Enrolled in Exchange
Assuming that 2% people will drop, as they will become ineligible for coverage thru exchange.
Dissatisfaction = 0.01 *Number of People Enrolled in Exchange
Assuming that 1% people will drop due to dissatisfaction (and move to other providers).
Now, let us see the calculation of Operating Cost
Operating Cost (OC) Calculation
OC will be incurred in salary to employees to run the exchange, yearly maintenance of the exchange
and the yearly initial cost recovery installment.
Operating Cost = Yearly Initial Cost Recovery Installment + Yearly Maintenance cost of Exchange +
Yearly Salary Cost
Yearly Initial Cost Recovery Installment = ((Rate of Interest/100)*lnitial Investment to be
Recovered)/(1-(1/(1+Rate of Interest/100)ANumber of Years to Recover Initial Investments))
This is yearly installment calculation assuming recovery period = 5 years and rate of interest 4 %.
Initial Investment to be Recovered = Initial Investment in Setting up Exchange-Government
Contribution in initial cost
Assuming government is also contributing on non-recovery basis. Any residual amount will be
recovered.
Yearly Salary Cost = Average Salary of Employee *Number of Employees
Yearly Maintenance cost of Exchange is taken from MNSure (explained under heading 'Operating
Cost (OC) Calculation' above) source and it is 2.33 million $.
Model
Hea
Ehange
Model V .mdl
Heah Ezhange
Model V 8.2mdl
8.3. How the Model Works
Time step is 1 year and model is simulated for 5 years. Setup all variables and simulate the model. Model
will first calculate 'Number of people Enrolled in Exchange' based on 'Enrollment' and 'Drop' rates.
Shweta Shefali
MIT SDM Thesis
65
Chapter 8: Health Exchange - Sustainability
This data will be fed into the 'Sustainability' calculation. Sustainability will be calculated using Operating
Revenue and Operating cost.
Various levels of parameters can be selected and 'Sustainability' can be plotted on time scale. Model will
predict when Health exchange will be sustainable on given parameters.
8.4. Simulated Cases
Three cases are simulated - Case A, Case B, and Case C. in these three cases, all other values are same
except for number of enrollments. Sustainability graphs are plotted for these three cases.
Case A - has considered value of enrollment numbers from various sources. Case B has considered 25%
percent less enrollment than Case A from all these sources. Case C further decreases the enrollment
number and has just only 50% of Case A. In these simulated cases, graph is plotted between Sustainability
and Number of Enrollment. All other factors remain same in these three simulated cases. Note - In these
cases data is selected such a way that no return on initial expense is required (cost to setup exchange =
contribution from government to setup exchange).
Values of factors in these three cases are as in the table below. All other variables are calculated in this
vensim model. Row values highlighted in green are same for these three cases. Case B - Red - enrollment
values are 25% less than Case A (Yellow) values. Case C - Blue - enrollment values are 50% less than Case
A (Yellow) values.
Table 4: Three simulated caseparameters
Shweta Shefali
MIT SDM Thesis
66
Chapter 8: Health Exchange - Sustainability
Hrst year new application trom this
source.
Government agencies, such as
State Medicaid and Children's
Health
Insurance
Program
(CHIP) Offices"
Shweta Shefali
MIT SDM Thesis
67
Chapter 8: Health Exchange - Sustainability
Sustainability Comparison of Case A, Case B, and Case C
As we see in the sustainability graph below, as number of enrollment decreases, the time to attain
Sustainability increases. It also shows that sustainability is very sensitive to number of enrollments as
is reached very late once number of enrollment are less.
Sustainability
50
35.5
21
6.5
-8
0
1
2
3
4
5
6
Thme (Year)
7
8
9
10
Sustainability : Case C
Sustainability : Case B
Sustainability: Case A - 3 Year
Figure27: SustainabilityGraph by Vensim Model
Relative numbers for each case are in the table below
Shweta Shefali
MIT SDM Thesis
68
Chapter 8: Health Exchange - Sustainability
3
I
C.C
4 ,
4V
.413
419
-7'W13
4.04~3
4
4144
4
44
9F
go;~W
Of'.
i
18
9
F.i
/CM
2- O'h bwi
91/mes"
LSP"K
meedd
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I..H..
Figure28: SustainabilityValues from Vensim Model
We can summarize these results in table below.
Table 5: SustainabilitySummaryfrom Vensim model
20000
15000
1uuuu
25500
19125
12750
Between 4 and 5
years
Not even in 10
years
Just after
(much
year)
3rd year
before
4th
In Case C, we are not reaching sustainability in even
10 th
year. Therefore, enrollment numbers are
very crucial for sustainability of HE.
Let us look at the number of people enrolled in exchange in all three cases. The graph below shows
that number of people enrolled in exchange increases in the beginning and becomes almost flat
towards the end of 1 th year. This would be due to saturation in market. The Case A number remains
higher than the other two case's number.
Shweta Shefali
MIT SDM Thesis
69
Chapter 8: Health Exchange - Sustainability
Number of People Enrolled in Exchange
200,000
150,000
100,000
50,000
0
0
1
2
3
4
5
6
Time (Year)
7
8
9
10
Number of People Enrolled in Exchange: Case C Number of People Enrolled in Exchange: Case B Number ofPeople Enrolled in Exchange: Case A - 3 Year
Figure 29: Number ofpeople enrolled in Exchange - Vensim Model
Table values of number of people enrolled for all three cases are as below.
VV-1H""M E.O-V. M.,W V &,,01 V-IA
r
&"W
CC
7
a
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1 43413
of P-,m
E-+W"
. 64W
im
4.35
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256.
Wa
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f
"
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dooks N
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Figure 30: Number ofpeople enrolled in Exchange - Vensim Model
Shweta Shefali
MIT SDM Thesis
70
Chapter 8: Health Exchange - Sustainability
It is clear from this table that Case C only reaches to 63k number of people enrolled in HE (at 1 0 th year)
and that is not sufficient to make it sustainable even in 10 years. Case B attains Sustainability in fair
amount of time and Case A attains Sustainability just after 3 rd year.
8.5. Conclusion
The number of people enrolled in Case C is (almost) half of Case A at the end of each year. Case A attains
sustainability in 3 years, which seems to indicate that Case C will attain Sustainability in 6 years. However,
this is not the case. Accumulated losses year after year are affecting Case C very severely and it is not able
to attain sustainability even after 10 years. Case A will remain Sustainable even if it just maintains the
numbers enrolled at the end of 3 years (78K). So large enrollment in first 3 years of the commission of the
exchange is the key to sustainability. Exchange will be Sustainable (and will survive) even if it loses some
steam after 3 years of large enrollments.
With the enrollment data available until end of January 2014, enrollments are taking place in far larger
numbers. This means there is no threat on the sustainability of the Health Exchange. From chapter 9, we
can see the targeted audience is much larger than what exchange demands for sustainability. At the same
time in chapter 11, we will see the actual enrollments will far exceed these numbers.
In addition, as the major enrollment is expected from relatively young population, internet and HE website
will play a major role. A walkthrough on couple of HE websites (Massachusetts, California, and New York)
gives an impression of easily navigable, information rich, and user-friendly websites. However, there were
some glitches initially, but the gaps were plugged in quickly. These websites will certainly prove critical
success factor for Health Exchanges.
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MIT SDM Thesis
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Chapter 8: Health Exchange - Sustainability
(Page intentionally left blank for notes)
Notes:
Shweta Shefali
MIT SDM Thesis
72
Chapter 9 Disruption of Health Insurance
In chapter 7, we have examined what factors, external to the system, may lead to disruption of healthcare
industry. In this chapter, we will be revisiting some of those factors from peripheral or disruptor system
perspective.
While analyzing these elements from the disruptor system perspective, we will try to find out answers to
questions - what the disrupter will be able to do that the incumbent may not be able to do? How disrupter
system may form and emerge as possible leading player in nascent market? What conditions are favoring
the disrupter and what advantage it has on incumbent?
In addition, we will analyze elements of peripheral system as well to find out how they will shape up with
new ACA initiatives and what a disruptor can do with these elements to bring them in line with ACA
objectives.
9.1.
Disruption - Disruptor System Elements
In the figure 31 below, elements of disruptor system are listed and we will visit them one by one.
Payer - New Disriuptor Cornpany
N wSple
New Dist uptor Techniology
itiu
New Low Cost Pr oduct Ser vices
New RegLation) - ACA
Non Participantt POtenltial CustornerS
Figure31: DisruptorSystem Elements
Non Participant Potential Customers
In chapter 7, we have seen that there is a potential individual customer market, which is still untapped.
The biggest chunk of this market is of 19 to 36 years old. At this age, individuals start losing insurance
provided by parent's employer due to various reasons such as parents come out of workforce and do
not have access to employer-sponsored insurance or individuals become ineligible to get insurance
through parent's employer on
2 6 th
birthday.
At the same time, this is the age when individuals come out of school and universities and enter in job
market. They might not be able to get employer sponsored insurance and could not be able to very
Shweta Shefali
MIT SDM Thesis
73
Chapter 9: Disruption of Health Insurance
high rate individual insurance in the market. However, Marketplace will be able to engage them and
provide other alternative.
Table 6: Enrollment in Health Insurance Exchange'8
Table 3.
Enrollment in, and Budgetary Effects of, Health Insurance Exchanges
Individually Purchased Coverage
Subsidized
Unsubsidizedb
Total
Employment-Based Coverage
Purchased Through Exchanges"
Total,
20152014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2024
Exchange Enrollment
(Millions of nonelderly people, by calendar year)*
5
1
6
11
2
13
19
4
22
20
4
24
20
5
25
20
5
25
20
5
24
20
5
25
19
5
24
19
5
24
19
5
24
n.a.
n.a.
n.a.
2
2
3
4
4
4
4
4
4
4
4
n.a.
Table 6 lists the numbers of enrollments (in millions) predicted by Congressional Budget Office (CBO)
each year in Health Insurance Exchanges. It says 6 million enrollment in year 2014. As of today, March
28, 2014, Health Insurance Exchanges have enrolled 6 million with three days still to go 19(enrollment
will end on March 31, 2014). The size of this market is predicted to be 25 million by 2018 and this will
be an exponential growth - 0 to 25 million in just 4 years.
The disruptor company would need to get creative in providing affordable solutions to these
consumers. One thing will work in favor of Disruptor Company is that the needs of these new
consumers would be very basic. In addition to that, the low profit margin of individual insurance will
make it less attractive for existing players.
This consumer base is likely to be a low demanding consumer. As a great portion is expected to be
young adult, a majority of them will not need high skill/high cost care and services. At the same time,
the population that currently has no insurance and looking for a low cost product will not be a
demanding customer base.
Disruptive new Technology
It is not clear at this point what new technology disrupter could bring into the new system to
challenge. However, one thing is clear that whatever it may be it should make healthcare more
affordable and reachable. Technology may not be a new out of the box procedure to cure most
complex medical condition. It could simply be a creative customization of existing technology and
processes to serve the target segment better, more effectively, and at substantially lower cost.
Present at http://www.cbo.qov/sites/default/files/cbofiles/attachments/43900-2014-02-ACAtables.pdf
"Insurance Coverage Provisions of the Affordable Care Act-CBO's February 2014 Baseline"
19 From Healthcare.gov blog https://www.healthcare.-ov/bloq/6-million-and-counting/
18
Shweta Shefali
MIT SDM Thesis
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Chapter 9: Disruption of Health Insurance
Technology is used everywhere, in most diversified forms, in this healthcare system. It is the blood
that is running in the system to run the system. There are numerous opportunities to creatively
integrate technology with processes to cut down the cost.
As described in chapter 3, in healthcare system, technology can be classified in two different heads Medical Technology and Information Technology. Let us check what role technology can play in in
disruption of healthcare system.
Information Technology
Information technology advances will accelerate disruption; companies can leverage the advent of
social media to reach out to this social media savvy segment of prospective customers. The use of
'social media' reinforced by clear pricing edge will move the customer base at very minimal
advertisement expense.
Company can make intelligent process and layout changes at providers' end to provide maximum
services in minimum visits or movement of customer. Modern technology of movable gadgets and
cloud base computing can really help to achieve this goal. In addition, these technologies can cut down
on traditional ID costs as applications will be more modular and payment will be as per usage instead
of a fixed cost. Software as service will cut down cost at provider end and will be based on volume
instead of just a fixed cost.
Current Insurance companies have their own IT hardware and have developed software in house.
They are maintaining and enhancing this software using vendors and their own IT staff. This strategy
is very inefficient in many ways
-
-
Best management of technology can be done by a technology company. Incumbents are not
technology companies and hence they are not able to take full advantage of modern technical
advancement. Technological enhancements they are going thru are not originating from their
R&D on new technology, instead they are derived by benchmarking - someone else has done
this and seems beneficial to them, so we ought to do this.
Management and enhancement of IT applications is very costly. However, they have
outsourced support functions to cut down the cost but they are still overspending due to use
of outdated technology.
Big technical savings may come when insurance provider companies will not use Legacy Mainframe
based systems to handle backend batch and online processing. For existing companies, these legacy
based systems are necessary evil - they cannot think beyond these systems as data hosted on them
is huge and converting it to new technological modern modular system will take years of pain and
bundles of money with no seamless transition or even success guarantee.
Legacy systems force companies to 'duct tape integrate' new technologies with the old and the
resultant system becomes more complex and costly to maintain. For example, CICS has become
backbone of online screens for years but customer wants to access data on PC so .Net or Java front
Shweta Shefali
MIT SDM Thesis
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Chapter 9: Disruption of Health Insurance
ends are developed that internally call CICS screens or functions and display returned value. Or worse,
sometimes the book of records remains on mainframe and another parallel database is maintained
on SQL database that is updated every night from mainframe data. The SQL database feeds PC based
applications and mainframe CICS based applications. Every night these two synchronize up then
process and updates are made at both places.
These unnecessarily complex uses of technology force companies to maintain many technologies that
they actually do not need and many experts to operate and maintain these unnecessary technologies.
It is difficult and expensive to make two or more different technologies work in synergy. They are not
meant to work together - different origin, different companies and software written for different
purposes.
Additionally, bureaucracy developed around legacy process makes it even more expensive and very
less flexible and responsive. Companies face stiff resistance from internal (employees) and external
(auditors) people if they try to make changes to this bureaucratic system. Legacy system also restricts
the company to make full use of available technology, as new technology does not integrate well or
easily with existing legacy system.
Best strategy for Disruptor Company would be to outsource the IT Software on its own IT hardware.
This will give stability and agility to its IT infrastructure that is needed for a modern company. There
are various options available in the market and it can select best-suited solution depending on desired
functionality and number of customers it expects to serve.
-
A technology company will manage software at its end and provide latest and greatest to the
application. This will promote efficient use of technology.
Maintenance and enhancement of software applications would be less complex and more
cost effective.
Use of technology will prompt to take interest in customer's health instead of just being a passive
onlooker. GPS data, Reminders, Automated calls from annual physical for customer from insurance
company - all these and many more technology enabled can be used to make services more effective
and efficient. For example, compilation of list of customers who has not gone thru physical after being
due and sending this list to provider to follow up. These preventive measures will improve overall
health, reduce risk, and in turn reduce medical expense.
Medical Technology
Medical technology too is fast changing and new, more sophisticated technology is constantly making
its presence felt in healthcare. However, disruptor system does not need to offer the latest and
greatest in the medical technology. The need is to use the technology 'out of the box' to make
healthcare more effective, convenient, and affordable. Technological innovation is not just about the
technology, it is about how it improves healthcare experience of customer.
Not so long ago, houses were only equipped with a thermometer, and, with a bit of luck, a set of scales.
Now it is not unusual for people to have portable equipment for measuring blood pressure or devices
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MIT SDM Thesis
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Chapter 9: Disruption of Health Insurance
for testing blood sugar levels at home. A disruptor can aim at growing the range of health equipment's
for individuals. This will enable patient to use them at home and make educated decision whether they
want to consult a doctor.
For example, disruptor may encourage patient to adopt a specially designed medical equipment to
monitor patient's vital signs in domestic environment. This might eliminate multiple visits to the
hospital and lab, and would be very cost effective for patient.
Regulation
Affordable Care Act is the new regulation that is acting as catalyst for disruption in healthcare industry.
We have already discussed objectives of ACA in detail in chapter 5. With these objectives and
initiatives to achieve these objectives, a new era has started in the healthcare industry. Before ACA,
there was no industry focus on individual insurance but ACA has brought this focus. This will be a
remarkable change as till today all decisions about healthcare were made by parties other than whose
health is to be cared for. The beneficiary was never a focal point due to various constraints and
interests of other stakeholders. ACA has not only made individual a focal point for health insurers but
also made individual responsible for getting the health insurance.
We have discussed the ACA and how it is shaping disruption in Healthcare in previous chapters and
we will keep referencing this in coming chapters as well.
New Supplier - Distributer
In the new Healthcare System, the Health Exchange will become the new distribution or marketing
channel. This marketing channel is equally accessible to all including disruptors and incumbents.
However, this is advantage to the disruptor as it could participate on equal terms even though it is
new in market. Products of Disruptor Company will be displayed side by side with the products of
products of incumbent companies. Incumbents, even they possess greater wealth, market presence,
and brand name, will not have any advantage in this market channel, which, in its own way, is a
disadvantage to the incumbent.
In Health Care System context, from health insurance company perspective, suppliers are the
providers of the health care services. Definitely, there is a big room for improvements there. New
suppliers will also emerge with well thought strategy to best fit in and mobilize the peripheral system
to disrupt nucleus system. Some existing providers may tweak their processes and operational
infrastructure to synergize it with emerging peripheral system so that this system may offer low cost
and effective services to customers. For peripheral system, for all practical purposes, these existing
suppliers will be considered as new suppliers.
New suppliers will be very crucial for the peripheral system; they will act like blood pumping system
of body and will bring peripheral system to life. The more strength added to supplier entity of the
system, the more effective and delivering the system would be. Supplier system will have direct
responsibility to provide effective care, cut down on over service, and cut down on administrative
overheads,
Shweta Shefali
MIT SDM Thesis
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Chapter 9: Disruption of Health Insurance
Low Cost New Product and Service
Insurance companies offer Plans to customers in Marketplace; these plans are the products of the
insurance company. One attribute of the disruptor is that it brings a new more cost effective product,
which sometime may be lower quality (or not that sophisticated), to the low demanding consumers.
A lower cost insurance plan for the target consumers will be perfect for the peripheral system.
Marketplace will be a very cost sensitive marketing channel as consumer will be able to see pricing of
similar products from all companies at a single window. There are very limited possibilities of
gimmicks by companies as the product line at marketplace will be predefined - just four type of
products - bronze, silver, gold, and platinum. Also, the minimum coverage by the plan is already set
by regulation. Therefore, consumer will really be comparing apples with apples and be able to judge
easily which plan is the cheapest for his needs.
Cost and money considerations are little complex in the HealthCare systems as the path that money
takes is different from the path that services take. Beneficiary is not necessarily paying the provider.
In addition, there is also a flow of internal services, which may not affect the end consumer directly
but surely, they affect the quality of deliverables and cost at which they are delivered.
Shweta Shefali
MIT SDM Thesis
78
Chapter 9: Disruption of Health Insurance
Internal Services
Negotiate Fee /Sala
S
Drug Prescription
'I
7*
Negotiated Fee
Negotiated Cost
*
Co Pay / Premmiiun-
-
Prescription Drugs
I
Premium
Pre
mum Pye
Co Pay-
rLegends:
L - --
Flow of Mone
y
-
Flow of se rvice to
Extemal Customer
Two way flow of Service to
Internal Customer
Figure 32: Flows in Healthcaresystem
Due to the different routes of flow of money and flow to customer service, customer is
not in the
bargain position to get better services at lower cost. This has brought a kind of inefficiency
in the
current nucleus system. In current system, insurance company, which is in the
epicenter of the
system, is indifferent to the cost and to a great extant the quality of services. Cost and quality
do not
affect its profitability directly and it can conveniently transfer any cost increase to Employer
/
premium payer to safeguard its margin.
In the peripheral system, as Health Insurance Company will be in the center of this system,
it can
implement checks and balances to contain cost of the services. This will bring cost of its products
down in Health Exchange. In addition, if it can deliver better quality services at lower cost then it
will
be a huge advantage for insurance company in particular and Peripheral System in general as the
target customer base is expected to be cost sensitive.
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Chapter 9: Disruption of Health Insurance
New Disruptor Company
The new disruptor company will be in the epicenter of the peripheral system. As we see in the costservices diagram (figure 32), the insurance company is the hub that regulates the system and control
of the money flow. It is the entity that goes in contract (non-equal value contract) with beneficiary,
lists its products in Health Exchanges, sells, and collects premiums, pays to providers for services, and
it ultimately becomes responsible for the services provided to the customers.
For peripheral system, the expected entity to lead the disruption is the Insurance Company as it is the
entity that is in money in and money out and controls the flow of money. It will have the power and
resources to drive the business logic around the peripheral system.
In the chapter 7, we have argued that existing insurance companies cannot disrupt the existing
nucleus system. A new company is needed which can disrupt the existing nucleus system - this may
be a brand new company or may be an independent company formed for this purpose by an existing
company.
9.2.
Disputed System Issues - Opportunities for Disruptor System
So far, we have checked whether all elements needed to make disruptor system are present. In addition,
we found that these elements are either present or taking shape. Next, we can examine the problems
with the current system that the disruptor system can target to eliminate to be more efficient, reliable,
and cost effective.
Cost of Overservice
One of the main reason of high healthcare cost is cost of over service, which comes from unnecessary
care given to the patient. Experts believe the health care system is full of unnecessary care and
troubling variations in care.
Healthcare Cost is one of the main consideration of ACA and it will be one to the main consideration
of the new customers as well. Disruptor will need to bring the cost of healthcare substantially down
in order to successfully disrupt the system.
Providers can also utilize for medical practitioner nurses for level 1 services, which are regular and
preventive in nature and do not need expertize. Level 2 services can be provided by medical
practitioners doctors once referred by nurse practitioner and level 3 by specialists once referred to
them by doctors. Obviously, nurses cost less than doctors do and doctors cost less than specialist do.
The idea is not to cut the quality of the service to cut cost but to eliminate over service and bring
efficiency in system, and still provide the care that customer needs and deserves.
Cost of Quality Healthcare
Cost and quality are two most important points of the healthcare. General perception is - higher cost
would mean higher quality service. However, this is not necessarily true. Quality does not depend only
on cost; there are other parameters that effect quality. In other words, reduction in healthcare cost
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Chapter 9: Disruption of Health Insurance
is very much possible without the deterioration in quality of healthcare; even reduction in healthcare
cost is possible with improvement of healthcare quality.
Figure 33 below represents Relationship between 1-year survival rates and total inpatient costs for
Medicare beneficiaries with three common conditions.
76
4
7.
2500'6
'00400
1-Yew TO
Costs. Fltered and R-AdAtued
Figure33: Relationshipbetween ]-year survival rate and total inpatient cost.20
In the graph above, a line is drawn at 70 percent rate of survival and if we see the cost axis - horizontal
axis - we do not see any relationship between the cost and survival rate. If we consider below 70
percent as low quality and above 70 percent as high quality AND left side of 30000 cost as low cost
and right side of 30000 as high cost then
Number of low survival case in low cost (low cost low quality quadrant) are almost equal to the
number of low survival cases in the high cost (high cost low quality quadrant)
Number of high survival cases in low cost (low cost high quality quadrant) are almost equal to
the number of high survival cases in high cost (high cost high quality quadrant)
The Healthcare Imperative: Lowering Costs and Improving Outcomes: Workshop Series
Summary.
Institute of Medicine (US) Roundtable on Evidence-Based Medicine; Yong PL, Saunders RS, Olsen LA,
editors. Washington (DC): National Academies Press (US); 2010; Webpage
http://www.ncbi.nlm.nih.gov/books/NBK53937/figure/ch2.f1/?report=objectonly
20
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Chapter 9: Disruption of Health Insurance
If there were any relation between high cost and high quality then we would expect more points in
high survival high cost quadrant then low cost high survival cases.
This establishes that the quality of service is not driven by cost of the service instead, it is driven by
other factors such as process, skill etc. of the provider.
With this learning, we can draw cost and quality matrix as sown in figure 34.
Most Preferred
-77
Hw t
1ilt
H ghQua IityV a t
Lowest Cwst
II
etOLllt
it I
HR hQ aly
otilgh
Low Quality
Low Cost
Lowest Qua lity
Lnvt
at Lowest Cost
AI
Highest Quality
iiat Highest Cost
w Cot
High Quality at
Ho Cost
a
( ti'd
H
t
t
atLwQaiya
HghCs
t
,t
a
i
e s
rfre
11
Figure 34: Cost and Quality Matrix
The left top quadrant is the best performing quadrant - it has provided the best service at the lowest
cost. Moreover, the right bottom quadrant is the worst performing - it has provided inferior service
at higher cost. If we can align technology, process, and skill of the worst performing quadrant with
the best performing quadrant then significant quality improvement and cost saving will be achieved.
Aligning each quadrants' process, skill, and technology to the best performing quadrant should be the
goal.
If disruptor chooses network providers intelligently from best performing quadrant, instead of just
being a passive onlooker, it will be able to provide better quality services at lower rates to its
customers.
Integrated Vs Modular Structure
One of the most fundamental difference between new company and the existing company will be the
way it organizes itself. Existing companies are organized in an integrated way; however, to reap all
the benefits of fast changing HealthCare industry under ACA, new company will organize itself in a
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Chapter 9: Disruption of Health Insurance
modular way. Similarly, it will build the peripheral structure modularly so that it may respond quickly
and have less bureaucratic framework. Integrated structure has served well the nucleus system to
optimize the system with performance and reliability but at the cost of responsiveness and flexibility.
For peripheral system, as a new market is emerging and new regulations are settling down, Modular
architecture will win with responsiveness, speed, flexibility, and convenience.
win with performance
and reliability
win with responsiveness,
speed. and convenience
difference in capabilityof an optimized intagrated
armhitecture vs. a modular architecture
Time
Figure35: Shift from integratedto modulararchitecture2 '
System Fragmentation
System fragmentation is one of the hidden problem Healthcare system is facing today. 22 There is
fragmentation in every entity of the system - provider, payer, regulators - and this fragmentation has
become a fundamental problem for effective and efficient medical services. Fragmented
communication between providers and duplicative testing and absence of vital information is
affecting the result and the cost both. Insurance Company is the central hub of this HealthCare system
and if it tries hard to remove fragmentation then it will not only be able to reduce the cost of the
service but also the quality of the service.
As we have seen in the figure 32, the information flows from one entity to other - we can call it as
data hop. It is responsibility of both parties - sender and receiver - to complete 'information
transaction' effectively without any loss. Presented picture is just a high level and there are many
'data hops' involved in one full service. Unfortunately, information is lost between these 'data hops'
more than often and sometimes meaning of the information is altered. This pushes for multiple
21 Shift from integrated to modular architecture: Christensen
and Raynor. Graph taken from source
http://rainwillow.com/2012/04/integrated-versus-modular-architectures/
22 Page 36 of "The Healthcare Imperative: Lowering Costs
and Improving Outcomes: Workshop Series
Summary" report is present at location http://www.ncbi.nlm.nih.gov/books/NBK53920/pdf/TOC.pdf
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Chapter 9: Disruption of Health Insurance
iterations of 'information transactions' which causes confusion and delay shooting cost and creating
pain for end consumer.
One example of this inefficient and ineffective 'information transaction' is billing. Billions of dollars
are lost in rework on billing 'data hop' every year due to inefficient billing and collection, and belling
errors. Manual billing process at any side - sender or receiver - bears high probability of errors and
inefficiency. This was identified as a major healthcare waste in 'The Healthcare Imperative: Lowering
Costs and Improving Outcomes: Workshop Series Summary' report. Table from this report is below
(page 150 in report).
Table 7: Examples of Healthcare Waste23
TABLE 3-8 Examples of Healthcare Waste
Clinical
Administrative
Intraorganizational
Interorganizational
0 Unnecessary procedures
9 Excessive testing
* Inefficient care delivery
processes
* Medical errors
*
e Inefficient billing and collections
* Redundant provider credentialing
* Avoidable
* Manual vs. automated processes
Manual vs. automated processes
/ Patient identification
/ Eligibility/coverage verification
/ Pharmacy interactions
* Claims payment processes
Duplicative testing
e Lost information
* Fumbled hand-offs
* Nonstandardized disease
management, formularies, etc.
*
Inefficient Primary and Preventive Care
"Only six to eight percent of health care spending goes to primary care - less than the
percentage that goes to private insurance overhead." - Health Care Delivery System Reform
24
(A Report from Senator Sheldon Whitehouse for the U.S. Senate Committee on Health,
Education, Labor & Pensions)
Primary and preventive care is facing multiple challenge - shortage of primary care providers (due to
disadvantage in earning), low focus of insurance provider towards primary and preventive care (they
simply do not care), ignorance, and inadequate knowledge about primary and preventive care in end
consumers.
This table is taken from report 'The Healthcare Imperative: Lowering Costs and
Improving Outcomes: Workshop Series Summary' page 150. PDF copy is present at location
http://www.ncbi.nlm.nih.gov/books/NBK53920/pdf/TOC.pdf
24From Report 'Health Care Delivery System Reform and The Patient Protection & Affordable Care Act'.
Report is available at location
http://www.whitehouse.senate.gov/imo/media/doc/Health%20Care%20Delivery%20System%20Reform%
20and%2OThe%20Affordable%2Care%2Act%20FINAL2.pdf.
23
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Chapter 9: Disruption of Health Insurance
With Individual health insurance in focus, the focus will be back on the individual insured and primary
care and things will change for good. This will be an opportunity for disruptor to disrupt the
conventional strategy of low focus on preventive care by putting great emphasis on preventive and
primary care. In addition, strengthen the disruptor system network of primary care and preventive
care. This will give a long-term cost advantage as well.
Passive Middleman Vs Active Contributor
Another thrust for ACA is to make insurance company an active contributor in people's health and
wellness instead of merely behave as passive onlooker. Existing companies do not take direct interest
in beneficiaries' health, as their payment is not directly dependent on the beneficiary. Disrupter
Company will aim to change the behavior of beneficiary to bring cost of its products down. This will
give a winning edge to disruptor and will help system to be a more consumer friendly delivery system.
Change behavior 4 Improve Health
+ Reduce HealthCare
costs
"Unfortunately less than one percent of health care spending in the United States goes to
clinically-based, effective prevention strategies." - Health Care Delivery System Reform 25 (A
Report from Senator Sheldon Whitehouse for the U.S. Senate Committee on Health,
Education, Labor & Pensions)
Health insurance companies are acting as passive intermediaries with no real interest in the health
and fitness of the insured. They do not care if the insured's have completed their preventive
screenings and annual health checkups. There is no active reminder system and no persuasion of the
case in most of the companies. They probably do not maintain this database and analyze whether the
population has gone thru these preventive cares.
Instead of spearheading the healthy culture, insurers are just acting as intermediary. They classify
insured's into certain risk categories, collect premium dollars, and pay to providers. A comprehensive
network that will reinvent itself as a comprehensive health deliverer will reduce insurance cost
substantially. Insurance provider can better control this instead of care provider. As this will demand
in high technical expertise, large setup, and huge data.
9.3.
Conclusion
Disruptor system can offer a lot more than the healthcare system today, which will result in improved
efficiency, improved effectiveness, and lower cost of healthcare in disruptor system. There is very big
potential market, which is aggressively aimed at, by ACA, to be brought under health insurance net. All
other elements needed for disruptor system formation are either available or coming up. We will check,
in coming chapters, who could possibly fill in to provide these elements to system.
25
Same as 28
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Notes:
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Chapter 10: Who Could be Possible Disruptor
This is the most intriguing question on Healthcare disruption study. There are two parameters that make
it most difficult to identify whether disruption has begun - one, the stage for disruption is set by ACA,
which in itself is a very recent phenomenon: moreover, as open enrollment happens only annually, the
movement and shifts will only be visible annually - second; a peripheral disrupter system has to emerge
to take a clear edge over disrupted system, the formation of coherent, synergized, and spontaneous
system can take around four to five years.
Though entities must have started taking form with open enrollment, it may take time for the system to
form. As the main building block of disrupter system would be the new insurance companies and it will
build the system around itself, we may focus on what are the desired attributes of this new company, who
could be a best fit and what early trends are.
10.1.
Desired Qualities needed in New Disruptor Company
Let us check the desired qualities needed in the possible disruptor company.
Information Technology
The new company should have great understanding of Information Technology such as how to
manage technology, what could be a strategic (long term) technology investment and what could be
a tactical (short term) technological investment, when and what to outsource and what to build in
house.
Information Technology is backbone of any insurance company, and a wise investment in and
management of IT is needed. Not only management but also innovative integration of technology is
needed to leverage its full potential and make system more user friendly and cost effective. In current
system, existing technology companies are 1) not able to leverage full potential of modern technology
2) they are not able to use technology efficiently.
Strong Financial Understanding
Insurance company will be deeply involved in the cost monitoring and control of healthcare delivery.
Excellent financial understanding is needed to make the system work at the same time financial
management should be lean enough to do away with overheads and not to keep capital locked
unnecessarily.
People's Trust
If the new company is supported by a group (of people or institutes) or by an existing company then
the group or existing company should have excellent confidence of people. If the new company is a
startup by not so known group or people then it needs to build trust in the market quickly. Ethical
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Chapter 10: Who Could be Possible Disruptor
behavior is necessary in market, nothing short will work, and any fumble will erode even the biggest
gains company might have.
Financial Sponsorship
Establishing a new company will take a good amount of money. To name the few and cardinal
activities, the company would need to establish operations, get regulatory and statutory approvals
and licenses by fulfilling predefined requirements, attract talent from market to get functional in IT
infrastructure and Healthcare underwriting, build IT infrastructure with strategic long term vision, and
get the products listed in Health Exchange. Every activity will cost money and call for capital
investment.
Most of the fixed cost spending will occur even before first customer can be enrolled. Which means
strong financial backing and easy access of capital is essential to establish operations.
Variable cost per customer will not be as high as the fixed cost, and this could be managed out of
premiums paid by customers. Once steady cash flow is maintained, managing variable cost will have
a different challenge - to optimize variable costs to serve customer efficiently at low cost.
Talent Attracter
Every company needs talented resources to succeed but for new startup, it becomes tricky to attract
talent as fear of stability is associated with the company. However, a careful study of talent market to
formulate suitable strategy to attract talent for different functions - Information Technology, Medical
Underwriting, Legal Experts etc. - can establish it as a talent attracter. Unless company becomes
talent attracter - which means steady supply of talented people - and gets talented people onboard,
it will not be able to succeed in achieving its functional and in turn its financial goals.
The new entrant could be a talent attractor already but if it is not then it needs to establish it as one
fairly quickly.
Some Knowledge of Insurance Business is preferred
Knowledge of Health Insurance (or even Insurance) is preferred to give the company an understanding
of what they intend to do. However, this is not must - After all Tesla manufactured and electric car
successfully without any previous knowledge of car business or even cars. If the team is passionate
and has right mix of people, it will be able to acquire knowledge quickly and build on it.
Think beyond Existing System
The key is to think beyond the existing system. Think beyond how healthcare is being done and
managed today, what products are being offered in market today, and how services are being
delivered to customers. The entrant needs to think beyond HMO, PPO, and other similar options as
well.
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Do not get trapped in the existing system - if entrant is trapped in existing system then most likely it
will be trapped with the existing system's limitations as well - and form a new system to do what have
not been done till today.
The existing system is very well integrated system that makes it optimized and bureaucratic system.
Whereas to extract maximum mileage from the changing market dynamics and regulations,
modularity of the new system is more than desired.
10.2.
Possible Suitors
As argued earlier, there are still no signs of disruptive system formation. However, in the light of the
analysis we have done so far, we can speculate who could the suitors for the role of new companies.
Independent Entity formed by existing Insurance Player
Independent companies formed by the any existing insurance company to take care of emerging
Individual Insurance market qualifies to be the best suitor to be a disrupter company provided they
consciously tackle the retroactive interference2 6 . A very conscious effort will be needed by this new
company to disrupt the current company and system. The biggest asset - the experience in health
insurance business - will pose the biggest challenge as well - what to learn from parent and what not
to learn from parent company.
Altogether, chances would be very good for such new company if they know what they are doing and
do so with commitment.
Financial Institutions such as Banks
Other big suitors are financial institutes such as bank. They have market presence, albeit in a different
genre, which gives them two advantages - a reputation between the market and access to the market
through its pan American network. In spite of being new, they are household names and are trusted
in their ability to do financial business and deliver results. Banks, by the very functioning of it, are
comfortable with technology and have good understanding of financial market.
Pharmacies - CVS Minute Clinic
Pharmacy is one of the providers of healthcare system; they provide customers products such as
medicine and medical supplies and explain about medicine to them. If any pharmacy wants to take
lead, its knowledge of medicine, ability to do routine medical test, presence among customer, readily
available office space closest to customer, availability of human resources, and comfort with
technology can come as very big advantage. Additionally, it would know how to cut down on medicine
cost and medical supplies cost - this will provide them an edge in terms of controlling cost.
Retroactive interference - past learning interfering in learning new thing. (From Introduction to
Psychology by Morgan, Knight, and King - Retroactive Interference).
26
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Chapter 10: Who Could be Possible Disruptor
To their disadvantage -they may not want to upset their partners from existing system by competing
with them. Prescription drugs are a big part of sales that a pharmacy makes and if any big existing
insurance company takes it off network drug provider list then they will lose existing business in bulk.
Large organization, such as Caremark (parent CVS) has influence, though keeping existing partners
happy and entering into new model to compete with them will be a challenge.
Additionally, almost all pharmacies cell tobacco product in their premises, which may not go well with
the customers. Pharmacy may need to stop selling tobacco products under its roof it wants to enter
in healthcare service market. CVS pharmacy has already announced that it will take all products off
the shelf by October 2014. 27
Message from Larry Merlo
President and CEO
CVS/pharmacy will stop selling cigarettes and
all tobacco products at its more than 7,600 stores
nationwide by October 1, 2014.
Figure 36: No tobacco messagefrom CVS website
Technology Company - Amazon
Technology companies such as Amazon, Oracle, and eBay are other big suitors for this job. To their
advantage, they are household names and trusted, they have successfully established business
models in past, and they have or can access sufficient financial backing. They are very comfortable
with IT technology and technology in general, and they will be attract partners to form a disruptive
system.
Their major disadvantage is their lack knowledge about Health Insurance, Medical services, and
medical underwriting, however, this is not something that is impossible to fix. A determined,
structured, and well-planned approach can attract talent to fill knowledge gaps in these areas.
Until this time, there is no such information in public domain that indicates that technology firms are
taking interest in healthcare industry.
27This
message is present on their website www.cvs.com as of 3/9/2014.
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Chapter 10: Who Could be Possible Disruptor
A Medical Group - Hospital Group
It is not a requirement for a disruptor to be present nationwide and launch services in all Health
Exchanges; a beginning can be regional and services can be launched in the area of presence only such
Health Exchange of one state. Hospital group, which has good presence in the area or the state can
from a firm to offer health insurance in that area. This small beginning will give them chance to focus
on customers and better handle iterative learning process, as stakes will be much lower.
Hospital groups, to their advantage, will have knowledge of medical services and internal cost
structures, existing patrons who can be potential customers, and people's trust as medical service
provider. As a disadvantage, they need to get knowledge and acquire talent in field of IT and Medical
underwriting. Also, they would need to get more creative to bring down the cost of medical care,
which will not be a very easy thing to do - as a Medical service provider they receive servicing cost
from insurance company, the more they serve the more revenue (and profit) they will generate. If
they are the insurance company as well, they would want to cut down the medical service charges by
cutting down the over service and by other measures. Whereas if for a patient, they are not the
insurance provider, then they would like to provide the normal level of services to maximize revenue
and profit. This will be very contradictory for the staff and organization as a whole. If they provide the
lean service to other insurance company patient, they will not only leak revenue but also giving away
the competitive edge that they might have due to reduced cost.
As a healthcare services provider, to come out of this dilemma and contradiction, they would need to
pursue their values instead of pursuing profit. The key to be a successful disrupter would lie in making
a disruptive system that will offer more than what its components can offer individually.
A Combination of Above - New Investment Vehicle
If there is a start from any combination of firms above, it will indicate that a system formation is taking
place. Any such firm that is promoted by a combination of firms above will have advantages more
than they individually can offer - an attribute of the system. Obviously, any combination will form
based on strengths of the partners and ability to fill each other's weakness. This may have some
perceived problems - such as different partners may have different financial and strategic goals and
may push its personal agenda within the new firm. This may cause failure due to implosion.
From Scratch - a new company
An entirely new company without any experience in IT, Healthcare related technology, financial
services, and pharmacy. In principle, this entry may seem illogical or impractical but TESLA, without
any experience in car making and marketing or even any related field, has built cars successfully,
marketed then and has become a hot stock in share market and has proved that it can be done.
Field for disruption is open to all yet and any such firm will not have any huge disadvantage, however
it would need to find partners quickly and bridge knowledge gaps swiftly and effectively. New firm
would need to offer insurance products and collaborate with other firms to form healthcare system
to provide end-to-end services to its customers.
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Chapter 10: Who Could be Possible Disruptor
10.3.
Conclusion
Emergence of disruptor new company is very first crucial step for formation of disruptor system and
disruption itself. There are many possible suitors with their own advantages and disadvantages. The best
suitor is an independent entity formed by existing insurance company. In the next chapter, we will analyze
the early trends and find out who it could be. There could be more than one most suitable, and we could
have missed some suitable in our analysis - early trends will provide us some concrete information.
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Chapter 11: Early Trends
This is the first enrollment season for Health Exchanges and ACA plans. This is the very beginning of the
new era in individual health insurance. In this chapter, we will look for and analyze early trends that are
visible in the market today. In doing so, we will keep our system approach on check for trends for each
element of disruptor system.
Let us start from provider side. We have already checked few facts about CVS Minute Clinic (and similar
clinics) in chapter 10; we will check what trends suggests and if it can make an impact as provider.
11.1.
Provider- CVS Minute Clinic and Walgreen Health Clinic
One more interesting service CVS has in its service mix is Minute Clinic (started in 2000)- the medical clinic
in CVS/Pharmacy - which treats minor illness such as allergy, ear infection, cough, common flu, bug bite
etc. and provide some basic lab tests. The services these minute clinics provide and their cost is well
advertised on its website. They are open off office hours including weekends no appointments are
necessary.
Minute Clinics provide healthcare services by engaging medical nurse practitioners (instead of doctors)
which has twin advantage of lower cost and greater availability. As they treat very basic medical conditions
and treat minor conditions, nurse medical practitioner are best suitable for the job - this is addressing
one big problem of current healthcare - over service - and result is reduction in cost. CVS has demarked
space for minute clinic in every CVS location; however, minute clinics are functional at very few locations
only currently.
Minute clinics are engaging people on social media such as youtube.com as well. They have small, basic,
but very informative talk shows on most common health problems such as cold, allergy, ear infection etc.
This may not be very best use of social media for preventive healthcare (one-way communication only)
but it is a very good step in right direction.
Similarly, Walgreens Pharmacy - healthcare clinic, target pharmacy - clinic, rite aid pharmacy - NowClinic
also have clinics in their premises. Services and offerings are very similar to the minute clinic.
With clinics and medicine available in house, pharmacy companies become great suitor to be a disruptor.
However, with the information available in public domain, there is no sign of a system formation (or its
planning) by any pharmacy.
Walmart have slightly different idea of clinics at its store, clinics are independently owned and operated
at Walmart. Services and offerings are quite similar to the CVS minute clinic. As per their website, none of
Walmart locations in Massachusetts has clinics2". Walmart approach does not appear to be medical
This information is present at this location htt://i.walmart.com/i/if/hmD/fusion/Clinic Locations.odf
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Chapter 11: Early Trends
services centric; it appears more like extension of 'everything under one roof'. However, this does not
take Walmart out of consideration.
In this - http://money.cnn.com/2013/08/13/news/economylobamacare-penalty/ - August 13, 2013
article of CNNMONEY (money.cnn.com), Geoff Colvin, CEO of Walgreens, indicates that he is taking
primary care business very seriously by utilizing his healthcare clinic. He also sees larger role for
pharmacists in healthcare well beyond pharmacy and into the space of primary care and preventive care.
Similarly, CVS is also planning to offer primary care at its minute clinic29; these clinics are already offering
preventive care. In this newsletter, president of MinuteClinic -- Andrew Sussman - declares
"The innovations we are employing at MinuteClinic to deliver easily accessible, low cost, evidence-based
care are applicable to health systems outside the United States,"
Table 8 below lists all services advertised on its website. Clearly, it covers most common health issues of
day-to-day life and preventive screening lab tests as well. The advertise cost is very reasonable too.
)TaP (diphtheria, tetanus, pertussis) $99.99
:lu - Seasonal (preservative-free available) $31.99
:lu - High Dose (ages 65+) $49.99
:lu - Intradermal (90% smaller needle) $36.99
As per the press release CVS Caremark site webpage - http://info.cvscaremark.com/newsroom/Dressreleases/cvs-caremark-minuteclinic-president-discusses-rimay-care-innovation-london.
29
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Chapter 11: Early Trends
Impetigo
Hepatitis A (child) $112.99
Lice
Hepatitis
Minor skin infections and rashes
Hepatitis B (child) $112.99
Oral / mouth sores
Poison ivy / oak (ages 3+)
HPV (human papillomavirus) - Gardasil* $234.99
Ringworm
Meningitis $144.99
Scabies
MMR (measles, mumps, rubella) $129.99
B (adult) $139.99
IPV (polio) $109.99
Shingles
PPSV (pneumonia) $84.99
Styes
Td (tetanus, diphtheria) $89.99
Sunburn
Tdap (tetanus, diphtheria, pertussis) $64.99
-Swimmer's itch
Adeno $21
Wart evaluation (ages 5+)
Blood sugar test $21
Alc check $59
Flu test influenza A & B $33 each
Diabetes monitoring $79
High cholesterol monitoring $79
Aic $32
Mononucleosis (mono) test $22
Cholesterol screen (Lipid panel) $37
Hpalth rnnditinn
Negative quick strep $33
High blood pressure evaluation $79
Pregnancy test $22
Table 8: Services Offered in CVS Minute Clinic
L
Quick strep $30
Urine dip stick $28
This new development is not exactly brining a new disruptor insurance company but is extremely
significant for the disruptor system. As this would be a big leap from the provider side and it will give
options to Disruptor Company to tie with these new low cost players to provide services.
If Primary and Preventive care thru these clinics takes shape then it will be a major disruptive step at
provider side. The new Disruptor Company will be able to utilize these clinics to provide primary and
preventive care to customers at lower cost. This will also take disruptor company's dependency on existing
providers, which will remove a major roadblock as existing providers may not be willing to modify their
processes suiting new disruptor company as they already have tactical understanding with existing
insurance companies and may not want to jeopardize this understating or relationship.
11.2.
Health Exchange Marketplace
Let us check what the early trends at health insurance marketplace are and how did our health exchanges
have done. Health Exchange Marketplace started open enrollment form October 1, 2013 and as it is the
first year of enrollment, open enrollment will remain open until March 31, 2014. From next enrollment
season onwards, open enrollment will end on December 31.
Shweta Shefali
MIT SDM Thesis
95
Chapter 11: Early Trends
As per HHS.gov newsletterO
*
More than 4.2 million (4,242,300) people selected Marketplace plans from Oct. 1, 2013, through
Mar. 1, 2014
This includes 1.6 million in the State Based Marketplaces (SBM) and 2.6 million in the FederallyFacilitated Marketplace (FFM).
About 943,000 people enrolled in the Health Insurance Marketplace plans in the February
reporting period, which concluded March 1, 2014.
*
*
As per Department of Health & Human Services - USA report (USA, March 1, 2014, p. 5), Marketplace
enrollment has crossed 4.2 million mark (it crossed 6 million on
statistics presented in this report.
27 th
March 2014). These are some vital
Marketplace Eligibility Determinations and Plan Selection
V Number of Eligible Persons who have Selected a Plan through the SBMs and FFM: 4.2 million
Number of Persons who have had a Medicaid/CHIP Determination or Assessment through the
Marketplaces: 4.4 million (does not include individuals applying through State Medicaid/CHIP
agencies.)
Marketplace Plan Selection by Gender
45 percent of the persons who have selected a Marketplace plan are male
55 percent of the persons who have selected a Marketplace plan are female
Marketplace Plan Selection by Age
V 25 percent of the persons who have selected a Marketplace plan are between the ages of 18 and
34
o The percent of young adults who selected a Marketplace plan was 3 percentage points
higher in January and February than it was from October through December (27 percent
versus 24 percent). This trend is expected to continue.
V 31 percent of the persons who have selected a Marketplace plan are between the ages of 0 and
34.
Marketplace Plan Selection by Metal Level
18 percent of the persons who have selected a Marketplace plan have selected a Bronze plan
63 percent of the persons who have selected a Marketplace plan have selected a Silver plan
11 percent of the persons who have selected a Marketplace plan have selected a Gold plan
V 6 percent of the persons who have selected a Marketplace plan have selected a Platinum plan
V 1 percent of the persons who have selected a Marketplace plan have selected a Catastrophic plan
Looking at this above statistics, we may conclude that
30 This
newsletter dated March 11, 2014 can be seen at location
http://www.hhs.gov/news/press/2014pres/03/20140311 a.html
Shweta Shefali
MIT SDM Thesis
96
Chapter 11: Early Trends
/
Marketplace is getting good response from individual consumers and enrollments are in line (even
exceeding) the estimates.
v
One forth enrollees are young adult and young adult enrollment is on the rise. This means the
healthy population of young adult is shopping at marketplace. This is a very good indicator for
insurance companies especially for Disruptor Company.
Approximately One-third enrollees are in 0 to 34 age group, which is again a low risk population.
Preventive and primary care will be the main focus of this group.
Silver plans are the more preferred plans in the marketplace (close to 2 third plans were silver).
Catastrophic plan enrollment is just 1 percent.
Note: As per Department of Health and Human Services report, page 1 (Department of Health and Human
Services, 2014), the final percentage of enrollment of young adult is 28. Which is slightly up from 25
percentage as reported in March 11 report. Also, total enrollment stands more than 8 million.
Apart from this information which sheds light on the size of the market and how the market is shaping up,
there is much more information available that is very vital to analyze about overall ACA initiatives. These
early trends give all indication that healthcare is ready for disruption and making progress towards it. Let
us examine other facts.
11.3.
Federal Health Exchange Data (March, 2014 Release)
Federal government has published Individual Market Medical data (Individual Marketplace Data &
https://data.healthcare.gov/, 2014) on its website in spreadsheet format listing all plans offered in all
exchanges in United States (name of the file - IndividualMarketMedical_vllc.xlsx). This has plan
information of federally participated marketplace and State Partnership Marketplace. This includes dental
plans as well. This spreadsheet contains all the data - state, county, insurer name, plan name, metal
level, plan type, insurer phone and website, and a lot of other information - spanning across 111
columns and 78,393 rows.
Various filters can be used to extract meaningful reports from this data. Following data analysis reports
are generated based on data from this spreadsheet.
Health Exchange: State and Company
Health Exchanges are offering products and services in 34 states in United States. As shown in Table
9, there are total 141 companies offering health insurances in these health exchanges. There are only
7 states where more than 10 companies are offering plans and in 21 states there are less than 5
companies offering plans.
Shweta Shefali
MIT SDM Thesis
97
Chapter 11: Early Trends
Health Exchange : State & Company
STATES WITH LESS THAN 5 COMPANIES
21
STATES WITH 10 AND MORE COMPANIES
STATES WITH 5 AND MORE COMPANIES
13
TOTAL NUMBER OF COMPANIES
141
UNIQUE STATE - COMPANY COMBINATION
171
UNIQUE COMPANIES OPERATING IN ALL STATES
141
STATES OFFERING HEALTH EXCHANGE PLANS
34
0
States
offering
Health
Exchange
____
mber
I
Plans
--
34
20
40
60
80
100
120
140
160
180
Unique
Unique State
Total
States with 5 States with States with
Companies
- Company
Number of
and more 10 and more less than 5
Operating in
Combination Companies companies companies
companies
all States
I
141
171
141
13
7
L
U Total Number
Table 9: Companies Operatingin Heath Exchange and State of Operation DataKey Points
Table 10 presents number of companies operating in each state. State of Wisconsin WI has the most
13 companies operating whereas state of North Hampshire has only one company operating.
This is to be noted that if a company is operating in one state then it does not mean that company is
providing services in all counties of the state. It is very much possible that there is no company
operating in one (or more) counties of the state even though couple of companies are operating in
the state.
Shweta Shefali
MIT SDM Thesis
98
Chapter 11: Early Trends
Table 10: Number of companies operating in State Exchanges
,0
W1
VA
UT
TX
TN
SD
SC
PA
OK
OH
NJ
NH
NE
ND
NC
*wMT
MT
MS
MO
MI
ME
LA
KS
IN
IL
---
I-
IA
GA
FL
DE
AZ
AR
Shweta Shefali
MIT SDM Thesis
NII
" I
1
-I
27
99
Chapter 11: Early Trends
Table 11: Number of states covered by some companies
No of States by Company
MOLINA HEALTHCARE
KAISER FAMILY FOUNDATION
COVENTRY HEALTH CARE (ACQUIRED BY ATENA IN
2013)
W
AMBETTER - CENTENE CORPORATION
E
0
z
HUMANA GROUP
CIGNA
BLUE CROSS AND BLUE SHIELD ASSOCIATION
COMPANIES
I
AETNA
Number of States
Table 11 report shows the number of states in which some big companies are operating. None of the
big companies is operating in all states. Best presence is shown by Blue Cross and Blue Shield
Association Companies; rest other companies are not even offering plans in half of 34 states. This
indicates that these companies are not very keen on Individual Health Insurance business.
Following table 12 report is generated by the date provided in this spreadsheet. This table has two
views - 1) lists companies operating in the states and 2) states in which a particular company is
operating. Name of the company is very important as it will provide vital information about the
company (internet, website) such as the type of the company, parent company, or group name etc.
Table 12: Company Name and State ofOperation: two views: State View - Pivot on State: Company View - Pivot on
Company
1) State View - Companies operating in State
AK
Moda Health
Premera Blue Cross Blue Shield of Alaska
AL
Blue Cross and Blue Shield of Alabama
Humana Insurance Company
AR
Ambetter of Arkansas
Arkansas Blue Cross Blue Shield
Shweta Shefali
MIT SDM Thesis
2) Company View - Company operating in
states
AAA Vantage Health Plan
LA
Aetna
AZ
FL
IL
OK
PA
TX
100
Chapter 11: Early Trends
QualChoice Health Insurance
AZ
Aetna
Blue Cross Blue Shield of Arizona, Inc.
Cigna Health and Life Insurance Company
Health Choice Insurance Co
U
Aetna Life Insurance Company
VA
Health Net Life Insurance Company
Health Net of Arizona
Humana Health Plan, Inc.
Meritus Health Partners
Alliant Health Plans
GA
Altius Health Plans
UT
Ambetter from Buckeye Community Health
Plan
OH
Ambetter from Magnolia Health Plan
MS
MERITUS MUTUAL HEALTH PARTNERS
Ambetter from MHS
University of Arizona Health Plans University Healthcare Marketplace
DE
CoventryOne
Highmark Blue Cross Blue Shield Delaware
FL
Aetna
Ambetter from Sunshine Health
Cigna Health and Life Insurance Company
CoventryOne
Florida Blue (BlueCross BlueShield FL)
Florida Blue HMO (a BlueCross BlueShield
FL company)
Florida Health Care Plans
Health First Insurance, Inc.
Humana Medical Plan, Inc.
Molina Marketplace
Preferred Medical Plan
GA
Alliant Health Plans
Ambetter from Peach State Health Plan
Anthem Blue Cross and Blue Shield
Humana Employers Health Plan of Georgia,
Inc.
Kaiser Foundation Health Plan of Georgia
IA
IN
Ambetter from Peach State Health Plan
GA
Ambetter from Sunshine Health
FL
Ambetter from Superior Health Plan
TX
Ambetter of Arkansas
AR
AmeriHealth New Jersey
NJ
Anthem Blue Cross and Blue Shield
GA
IN
ME
MO
NH
OH
WI
Arches Health Plan
UT
Arise Health Plan
WI
Avera Health Plans
CoOportunity Health
Coventry Health Care of Iowa Inc.
Gundersen Health Plan, Inc.
Shweta Shefali
MIT SDM Thesis
Arkansas Blue Cross Blue Shield
AR
AultCare
OH
101
Chapter 11: Early Trends
IL
Aetna
Blue Cross Blue Shield of Illinois
Coventry Health Care
Health Alliance Medical Plans
Humana Health Plan, Inc.
Humana Insurance Company
Land of Lincoln Mutual Health Insurance Co.
IN
Ambetter from MHS
Anthem Blue Cross and Blue Shield
MDwise Marketplace
PHP
KS
Blue Cross and Blue Shield of Kansas City
Blue Cross and Blue Shield of Kansas, Inc
Coventry Health and Life
Coventry Health Care Of Kansas Inc
LA
AAA Vantage Health Plan
Blue Cross Blue Shield Louisiana
HMO Louisiana, Inc
Humana Health Benefit Plan of Louisiana,
Inc.
Louisiana Health Cooperative
ME
Anthem Blue Cross and Blue Shield
Maine Community Health Options
MI
Blue Care Network of Michigan
Blue Cross Blue Shield of Michigan
Consumers Mutual Insurance of Michigan
HAP
Humana Medical Plan of Michigan Inc.
McLaren Health Plan, Inc.
Meridian Choice: Your Connection to
Bronson Healthcare
Molina Marketplace
Priority Health
Total Health Care USA, Inc.
MO
Anthem Blue Cross and Blue Shield
Shweta Shefali
MIT SDM Thesis
Avera Health Plans
IA
SD
Blue Care Network of Michigan
MI
Blue Cross and Blue Shield of Alabama
AL
Blue Cross and Blue Shield of Kansas City
KS
MO
Blue Cross and Blue Shield of Kansas, Inc
KS
Blue Cross and Blue Shield of Nebraska
NE
Blue Cross and Blue Shield of North Carolina
NC
Blue Cross Blue Shield Louisiana
LA
Blue Cross Blue Shield of Arizona, Inc.
AZ
Blue Cross Blue Shield of Illinois
IL
Blue Cross Blue Shield of Michigan
MI
Blue Cross Blue Shield of North Dakota
ND
Blue Cross Blue Shield of Oklahoma
OK
Blue Cross Blue Shield of Texas
TX
Blue Cross Blue Shield of Wyoming
WY
Blue Cross of Northeastern Pennsylvania
PA
BlueChoice HealthPlan
SC
BlueCross and BlueShield of Montana
MT
BlueCross BlueShield of South Carolina
SC
102
Chapter 11: Early Trends
Blue Cross and Blue Shield of Kansas City
Coventry Health and Life
Coventry Health Care
MS
Ambetter from Magnolia Health Plan
Humana Insurance Company
MT
BlueCross and BlueShield of Montana
Montana Health CO-OP
PacificSource Health Plans
NC
Blue Cross and Blue Shield of North Carolina
CoventryOne
ND
Blue Cross Blue Shield of North Dakota
Medica
Sanford Health Plan
NE
Blue Cross and Blue Shield of Nebraska
CoOportunity Health
Coventry Health Care of Nebraska Inc.
Health Alliance-Alegent Creighton Health
Partner
NH
Anthem Blue Cross and Blue Shield
NJ
AmeriHealth New Jersey
Health Republic Insurance of New Jersey
Horizon Blue Cross Blue Shield of New
Jersey
OH
Ambetter from Buckeye Community Health
Plan
Anthem Blue Cross-and Blue Shield
B BlueCross BlueShield of Tennessee
TN
BridgeSpan Health Company
UT
Capital BlueCross
PA
CareFirst BlueChoice, Inc.
VA
CareFirst BlueCross BlueShield
VA
CareSource
OH
Cigna Health and Life Insurance Company
AZ
FL
TN
TX
Common Ground Healthcare Cooperative
WI
Community Health Alliance
TN
Community Health Choice
TX
CommunityCare HMO
OK
CommunityFirst
TX
Consumers' Choice Health Plan
SC
Consumers Mutual Insurance of Michigan
MI
AultCare
CoOportunity Health
CareSource
HealthAmericaOne
HealthSpan
IA
NE
Coventry Health and Life
Humana Health Plan of Ohio, Inc.
KS
Kaiser Foundation Health Plan of Ohio
MedMutual
MO
OK
Shweta Shefali
MIT SDM Thesis
103
Chapter 11: Early Trends
Molina Marketplace
Paramount Insurance Company
SummaCare
OK
Aetna
Blue Cross Blue Shield of Oklahoma
CommunityCare HMO
Coventry Health and Life
Coventry Health Care of Kansas, Inc.
GlobalHealth
PA
Aetna
Blue Cross of Northeastern Pennsylvania
Capital BlueCross
Geisinger Health Plans
HealthAmericaOne
Highmark Health Insurance Company
Highmark Health Services
Independence Blue Cross
Keystone Health Plan Central, A Capital
BlueCross Company
UPMC Health Plan
SC
BlueChoice HealthPlan
BlueCross BlueShield of South Carolina
Consumers' Choice Health Plan
CoventryOne
SD
Avera Health Plans
DAKOTACARE
Sanford Health Plan
TN
BlueCross BlueShield of Tennessee
Cigna Health and Life Insurance Company
Community Health Alliance
Humana Insurance Company
TX
Aetna
Ambetter from Superior Health Plan
Blue Cross Blue Shield of Texas
Shweta Shefali
MIT SDM Thesis
U
Coventry Health Care
IL
MO
Coventry Health Care of Iowa Inc.
IA
Coventry Health Care Of Kansas Inc
KS
Coventry Health Care of Kansas, Inc.
OK
Coventry Health Care of Nebraska Inc.
NE
Coventry Health Care of Virginia, Inc.
VA
CoventryOne
DE
FL
NC
SC
DAKOTACARE
SD
Dean Health Plan
WI
Firstcare Health Plans
TX
Florida Blue (BlueCross BlueShield FL)
FL
Florida Blue HMO (a BlueCross BlueShield
FL company)
FL
Florida Health Care Plans
FL
Geisinger Health Plans
PA
Globallealth
OK
Group Health Cooperative- SCW
WI
Gundersen Health Plan, Inc.
IA
WI
104
Chapter 11: Early Trends
Cigna Health and Life Insurance Company
Community Health Choice
CommunityFirst
Firstcare Health Plans
Humana Health Plan of Texas, Inc.
Humana Insurance Company
Molina Healthcare of Texas
Scott & White Health Plan
Sendero Health Plans
UT
Altius Health Plans
Arches Health Plan
BridgeSpan Health Company
Humana Medical Plan of Utah, Inc.
Molina Healthcare of Utah Marketplace
SelectHealth
VA
Aetna Life Insurance Company
CareFirst BlueChoice, Inc.
CareFirst BlueCross BlueShield
Coventry Health Care of Virginia, Inc.
HealthKeepers, Inc.
Innovation Health Insurance Company
Kaiser Permanente
Optima Health
WI
Anthem Blue Cross and Blue Shield
Arise Health Plan
Common Ground Healthcare Cooperative
Dean Health Plan
Group Health Cooperative- SCW
Gundersen Health Plan, Inc.
Health Tradition Health Plan
Medica
MercyCare Health Plans
Molina Healthcare of Wisconsin
Physicians Plus Insurance Corporation
Security Health Plan of Wisconsin, Inc.
Unity Health Insurance
Shweta Shefali
MIT SDM Thesis
U
HAP
Ml
Health Alliance Medical Plans
IL
Health Alliance-Alegent Creighton Health
Partner
NE
Health Choice Insurance Co
AZ
Health First Insurance, Inc.
FL
Health Net Life Insurance Company
AZ
Health Net of Arizona
AZ
Health Republic Insurance of New Jersey
NJ
Health Tradition Health Plan
WI
HealthAmericaOne
OH
PA
HealthKeepers, Inc.
VA
HealthSpan
OH
Highmark Blue Cross Blue Shield
WV
Highmark Blue Cross Blue Shield Delaware
DE
Highmark Blue Cross Blue Shield West
Virginia
WV
Highmark Health Insurance Company
PA
Highmark Health Services
PA
HMO Louisiana, Inc
LA
Horizon Blue Cross Blue Shield of New
Jersey
NJ
105
Chapter 11: Early Trends
WV
Highmark Blue Cross Blue Shield
Highmark Blue Cross Blue Shield West
Humana Employers Health Plan of Georgia,
Inc.
GA
Humana Health Benefit Plan of Louisiana,
Virginia
WY
Inc.
LA
Blue Cross Blue Shield of Wyoming
WlNhealth Partners
Grand Total
Humana Health Plan of Ohio, Inc.
OH
Humana Health Plan of Texas, Inc.
TX
Humana Health Plan, Inc.
AZ
IL
Humana Insurance Company
AL
IL
MS
TN
TX
Humana Medical Plan of Michigan Inc.
Ml
Humana Medical Plan of Utah, Inc.
UT
Humana Medical Plan, Inc.
FL
Independence Blue Cross
PA
Innovation Health Insurance Company
VA
Kaiser Foundation Health Plan of Georgia
GA
Kaiser Foundation Health Plan of Ohio
OH
Kaiser Permanente
VA
Keystone Health Plan Central, A Capital
BlueCross Company
PA
Land of Lincoln Mutual Health Insurance Co.
IL
Louisiana Health Cooperative
LA
Shweta Shefali
MIT SDM Thesis
106
Chapter 11: Early Trends
Maine Community Health Options
ME
McLaren Health Plan, Inc.
MI
MIDwlse Marketplace
IN
Medica
ND
WI
MedMutual
OH
MercyCare Health Plans
WI
Meridian Choice: Your Connection to
Bronson Healthcare
MI
Meritus Health Partners
AZ
MERITUS MUTUAL HEALTH PARTNERS
AZ
Moda Health
AK
Molina Healthcare of Texas
TX
Molina Healthcare of Utah Marketplace
UT
Moina Healthcare of Wisconsin
WI
Molina Marketplace
FL
MI
OH
Montana Health CO-OP
MT
Optima Health
VA
PacificSource Health Plans
MT
Paramount Insurance Company
OH
PHP
Shweta Shefali
MIT SDM Thesis
107
Chapter 11: Early Trends
IN
Physicians Plus Insurance Corporation
WI
Preferred Medical Plan
FL
Premera Blue Cross Blue Shield of Alaska
AK
Priority Health
Ml
QualCholce Health Insurance
AR
Sanford Health Plan
ND
SD
Scott & White Health Plan
TX
Security Health Plan of Wisconsin,, Inc.
WI
SelectHealth
UT
Sendero Health Plans
TX
SummaCare
OH
Total Health Care USA, Inc.
Ml
Unity Health Insurance
W
University of Arizona Health Plans University Healthcare Marketplace
AZ
UPMVC Health Plan
PA
WlNhealth Partners
WY
Websites of all these companies were visited to find out if the company is subsidiary of an existing
company or is a CO-OP company. Following key points come to the light if we see the company table
above more closely (Also see table 11).
Shweta Shefali
MIT SDM Thesis
108
Chapter 11: Early Trends
Only 23 out of 37 Blue Cross and Blue Shield Association companies are participating covering
23 states.
Aetna is operating in 7 states and its subsidiaries are operating in 10 states (total 17).
Cigna is operating in 4 states only.
Humana Group is operating in 12 states.
V
Newcomer Ambetter (promoted by Centene Corporation) is operating in 7 states.
v
13 CO-OP companies are offering plans in 14 states.
Going thru all these 141 companies we find out following categories of companies are operating.
11.4.
Existing companies
There are existing companies already offering employer sponsored group insurance plan in the market.
Still, any of these companies is not operating in all 34 states. Blue Cross and Blue Shield Association
companies are participating in the most - 23 out of 34 - states. Second most, Humana group is operating
in 12 only whereas Aetna is operating in 7 states and Cigna only in 4 states. Coventry Healthcare (which
was acquired by Aetna in May 2013) is offering plans in 10 states.
With respect to the market prediction, this participation is very low. What could be the possible reasons?
1. Are these companies are not keen on Health Insurance Marketplace? May be its not that
profitable business after all.
2. They were not able to put their act together to offer plans in all states.
3. They wanted to see if Healthcare Marketplace is going to survive the test and good number of
people enroll. If it looks big, market after first year may be they will participate in more states.
As these are big and resourceful companies, 2 above does not seem to be possibility. All these companies
have dealt with regulatory, compliance changes for years, and offering plans in market place was no big
deal for them.
For point 3, if they hesitated because of the uncertainty around the marketplace, probably uncertainty
will not turn into certainty completely in coming open enrollment. Increased competition and doubt about
significant increase in enrollment number will be a detractor. Sudden jump in participation may not come
in coming year.
Point 1 appears to be the most probable reason and if it is so, this is clear indication that Healthcare is
moving towards disruption.
11.5.
Independent New Entity by Existing Insurance Provider
Shweta Shefali
MIT SDM Thesis
109
Chapter 11: Early Trends
Couple of existing insurance companies have formed new entities solely to offer insurance plans in Health
Exchange Marketplace. The frontrunners are Centene Corporation and Cambia Health Solutions
Company. Both parent companies offer health insurance and both child companies will offer plans in
Health Exchange Marketplace only.
Ambetter
Centene Corporation is offering Ambetter Health Plans (Ambetter, 2014) in 7 states. Ambetter plan
coverage has started from January 1, 2014 in all 7 states. Company website sports following message.
"Ambetter is our suite of health insurance product offerings for the Health Insurance Marketplace...
...Established to deliver quality health insurance through local, regional and community-based
resources, our Ambetter products are offered by Centene Corporation - a Fortune 500 company...
...deliver high quality, locally-based healthcare services to its members, with our providers benefiting
from enhanced collaboration and strategic care coordination programs. "
This message indicates that Ambetter is striving to offer something that existing companies do not
and its stress on local resources indicates Ambetter's willingness to work with other entities to
evolve a new system to provide healthcare.
Centene's keenness to make a new company to offer plans in Health Exchange Marketplace indicates
that Centene is conscious about difference between Employee sponsored group insurance and
marketplace sold individual insurance and is convinced that it is not best suited to participate in
Individual Health Insurance market under Health Exchange.
If the company itself identifies that an employee sponsored group insurance company is not suitable
for marketplace sold individual insurance then it would be first to identify other components of the
system, which does not suit the new, company so much. The new company will try to find out other
entities outside the present system to evolve a new system best for individual health insurance.
This makes Ambetter the best suitor to be a disruptor, however, how quickly and effectively it will be
able to do so will depend upon its ability to form disruptor system.
BridgeSpan Health Company
Similar to Ambetter, BridgeSpan Health Company is a Cambia Health Solutions Company (a nonprofit
company) and offers HealthCare Plans through health insurance exchange marketplaces in Idaho,
Oregon, Utah, and Washington. The website of the company (BridgeSpan, 2014) states that
"Are you looking for health insurance? Tour our website and learn what BridgeSpan Health has to
offer. We have plans for every budget and optional programs to help you improve your health."
As the company website suggests, the target market for the company is individual health insurance
with an aim to provide new kind of individual health insurance experience. BridgeSpan Health
Company was formed by the parent company to offer individual healthcare solutions through Health
Exchange in Oregon, Washington, Idaho, and Utah beginning Jan. 1, 2014.
Shweta Shefali
MIT SDM Thesis
110
Chapter 11: Early Trends
There is not much information present about the mission and vision of the company, however, it the
information present gives an impression that cost is not a major factor company is focusing on, instead
it is focusing on quality and attempting to use the brand name established by parent company. Though
website claims that company is offering plans through Insurance Exchange in four states, however,
Marketplace Plan spreadsheet (Individual Marketplace Data & https://data.healthcare.gov/, 2014)
shows plans for state of Utah only.
It does not seem BridgeSpan reached in the marketplace where they wanted to be. How serious and
committed they are to the marketplace will be clear in the next enrollment season hopefully.
11.6.
CO-OP Companies
ACA has created a new type of private nonprofit health insurer - Consumer Operated and Oriented Plan
CO-OP - with aim to make individual and small business healthcare more affordable, consumer friendly
and high quality. These CO-OP companies will offer health plans through Health Insurance Exchange as
well as outside Health Insurance Exchange.
As per National Business Coalition on Health website (National Business Coalition on Health & , 2014)
"...the Affordable Care Act (ACA) calls for the establishment of the Consumer Operated and Oriented
Plan (CO-OP) Program. The CO-OP Program will foster the creation of at least one, qualified nonprofit
health insurance issuer in each of the 50 states and the District of Columbia, to offer competitive health
plans in the individual and small group markets..."
ACA has appropriated $3.8 billion in start-up and solvency loans to fund CO-OP development 1 . These
loans are available to private, nonprofit companies with high financial viability; rate of interest on loan is
much lower from open market.
As per Kaiser Family Foundation website (Kaisar Family Foundation, 2014), as of first quarter of 2014,
following is the table of loans awarded
31
United States
$2,088,892,884
NA
Alabama
NA
NA
Alaska
NA
NA
Arizona
$93,313,233
Arkansas
NA
NA
California
NA
NA
Colorado
$72,335,129
Connecticut
$79,553,768
HealthyCT
Delaware
NA
NA
Compass Cooperative Health
Network
Colorado Health Insurance
Cooperative, Inc.
National Business Coalition on Health webpage - http://www.nbch.org/CO-OPs.
Shweta Shefali
MIT SDM Thesis
111
Chapter 11: Early Trends
District of
Columbia
NA
NA
Florida
NA
NA
Georgia
NA
NA
Hawaii
NA
NA
Idaho
NA
NA
Illinois
$160,154,812
Land of Lincoln Health
Indiana
NA
NA
Iowa
$1,126,121,001
CoOpertunity Health
Kansas
NA
NA
Kentucky
$81,494,772
Kentucky Health Care
Cooperative
Louisiana
$65,790,660
Louisiana Health Cooperative,
Inc.
Maine
$64,686,124
Maine Community Health
Options (MCHO)
Maryland
$65,450,900
Evergreen Health Cooperative,
Inc.
Massachusetts
$156,442,995
Michigan
$71,534,300
Minnesota
NA
NA
Mississippi
NA
NA
Missouri
NA
NA
Montana
$85,019,688
Montana Health Cooperative
Nebraska
NAl
NA
$65,925,396
Nevada Health Cooperative
NA
NA
$109,074,550
Freelancers CO-OP of New Jersey
New Mexico
$77,371,782
New Mexico Health Connections
New York
$174,445,000
North Carolina
NA
North Dakota
NA
NA
Ohio
$129,225,604
Coordinated Health Mutual
Oklahoma
NA
NA
Oregon2
$117,305,405
Pennsylvania
NA
NA
Rhode Island
NA
NA
Nevada
New
Hampshire
New Jersey
Shweta Shefali
MIT SDM Thesis
Minuteman Health, Inc.
Michigan Consumer's Healthcare
CO-OP
Freelancers Health Service
Corporation
NA
Oregon's Health CO-OP;
Freelancers CO-OP of Oregon
112
Chapter 11: Early Trends
Consumers' Choice Health
Insurance Company (CCHIC)
South Carolina
$87,578,208
South Dakota
NA
Tennessee
$73,306,700
Texas
NA
Uta h
$89,650,303
Vermont
NA
NA
Virginia
NA
NA
Washington
NA
NA
West Virginia
NA
NA
Wisconsin
$56,621,455
Wyoming
NA
NA
Community Health Alliance
Mutual Insurance Company
NA
Arches Mutual Insurance
Company
Common Ground Healthcare
Cooperative
NA
Table 13: State wise table ofACA loan to establish CO-OP Company
Only 22 (out of 51 states) have used this fund until March 2014.
Total loan awarded to these state is $2,088,892,884.
Only one state - Oregon - has two awardees.
All other states have only one awardee.
One awardee - CoOpertunity Health - serves in both Iowa and Nebraska.
All other awardees serve one state only.
$ 2.08 billion has already been utilize until January 1st, 2014.
$ 1.8 billion is still available for qualified loans.
Going through website of all 141 companies, which are offering products through Health Exchange, one
by one and finding out how many of these CO-OP companies have offered coverage from 1St January 2014
has revealed that only 13 companies have offered plans in 14 states.
This means out of 22 states and 22 companies, only 13 companies are offering plans in 14 states. Rest
companies could not offer coverage beginning January 1 1t, 2014. In all possibility, these companies will be
able to offer products in open enrollment season in 2014. Therefore, 2014 open enrollment season will
see more than 22 CO-OP companies offering products in 22 states.
Let us check the information present about some of these companies on their websites and find out the
areas they are focusing on.
Shweta Shefali
MIT SDM Thesis
113
Chapter 11: Early Trends
Arches Health Plan
Arches Health Plan came into existence in 2013 and is offering healthcare plans in Utah. Arches aims
to be the first consumer driven, CO-OP, Non Profit health Insurance Company in Utah and the theme
of the company is to provide lower rate with a promise of better care. It has started offering plans
effective October 1 st, 2013 and coverage has started from January 1 s, 2014.
Website of Arches Health Plan promises to deliver lower health plan cost with approach that website
calls 'Medical Home' approach. Following content is from their website (Arches Health Plan, 2014)
'Medical Home
The medical home is best described as a model or philosophy of primary care that is patient-centered,
comprehensive, team-based, coordinated, accessible, and focused on quality and safety. It is a place
where patients are treated with respect, dignity, and compassion, and enable strong and trusting
relationships with providers and staff Above all, the medical home is not a final destination instead, it is
a model for achieving primary care excellence so that care is received in the right place, at the right time,
and in the manner that best suits a patient's needs."
Though the website does not offer how 'Medical Home' approach will bring the cost down, however,
the CO-OP and nonprofit nature with focus on cost reduction may be able to deliver the results sooner
than later. Success registered by this company will prompt other states to promote companies on the
similar lines and replicate the success.
Common Ground Healthcare Cooperative - CGHC
CGHC is very similar to the 'Arches Health Plan' above - a nonprofit, CO-OP company - and is
operating in Eastern Wisconsin area. CGHC is a creation of ACA, as its website states (Common Ground
Healthcare Cooperative, 2014)
"In February 2012, Common Ground Healthcare Cooperative (CGHC) was awarded a loan from the
U.S. Department of Health and Human Services to launch the new nonprofit health insurance
cooperative and bring affordable health insurance to the region beginning January 1, 2014."
This is one of those positive effects of ACA that will drive the industry towards disruption. As in case
of 'Arches Health Plan', CGHC has also started enrollment from 1s October, 2013 and coverage has
started from 1st January, 2014.
Apart from these two companies on the similar model with ACA or State funding origin are
Table 14: CO-OP companies offering healthcare effective from January1, 2014.
No
COO
1
2
3
4
Nam
Arches Health Plan
Common Ground Healthcare Cooperative
Community Health Alliance
Community Health Choice
Shweta Shefali
MIT SDM Thesis
Stt
UT
WI
TN
TX
0omn
Eastern Wisconsin
Southern Texas
114
Chapter 11: Early Trends
5
6
Consumers' Choice Health Plan
Consumers Mutual Insurance of Michigan
7,8 CoOportunity Health
9
10
11
12
13
14
CA
MI
Operates in Southern California.
IA,
Operates in two states - IA and
NE
NE
Health Republic Insurance of New Jersey
NJ
Louisiana Health Cooperative
Maine Community Health Options
Meritus Health Partners
Montana Health CO-OP
Sendero Health Plans
LA
ME
AZ
MO
TX
There is an interesting observation for 'Consumers' Choice Health Plan - CA' and 'Community Health
Alliance - TN': content, look and feel, and even the logo on the websites of these two companies are
same (just company name is different). This could be a sheer coincidence instead of strategy.
However, this indicates towards a very effective measure to control the cost. If the development of IT
resources is shared by two or more CO-OP companies, it will bring down the IT cost substantially.
Community CO-OP companies can do this the best as their marketing is based on Health Exchange
and word of mouth instead of ostentatious websites, offices, and costly advertisement campaigns.
These CO-OP companies can disrupt existing Healthcare System, these companies are nonprofit, and
consumer operated so they will be able to make decisions that are best suited for customers.
There is no expectation of a good return on investment, which could make these companies more
competitive in the market. In addition, as provide a level playing field, these companies need not
worry about costly advertisement campaign and other commercial gimmicks. Being locally operated
will give them further opportunity to reduce cost by streamlining its operations.
11.7.
Other Companies on Exchange
There are other companies operating in the exchange, however, most of them are operating in one or
two states only. These are mostly existing insurance companies that are also offering insurance at
exchanges. At this point, there are no radical, path breaking innovation expected from these companies
and any effects from these companies will be local only.
11.8.
Disruptor System
Elements of the disruptor system are taking shape; however, there is no evidence of disruptor system
itself taking shape. Moreover, it is early to get that as coverage has just started from January 1, 2014 and
open enrollment is still going on.
Disruptor System Element
Shweta Shefali
MIT SDM Thesis
Early Trend
115
Chapter 11: Early Trends
Payer - New Disruptor Company
Ambetter and CO-OP companies
New Disrupter Technology
New innovative processes to use existing technologies better
to reduce cost
New Regulation
ACA
Non Participant Potential Consumer
6 million have opted for Healthcare thru Health Exchange
Provider
MinuteClinic CVS and Walgreen Clinic
New Low Cost Product
Plans offered in Health Exchange
New Supplier-Distributer
Health Exchange
11.9.
Conclusion
Early trends unambiguously indicate towards disruptor system formation. They also indicate that Health
Exchanges are a hit and there is no threat to their sustainability. Health Exchanges have added more than
8 million Americans under health insurance. Of this 8 million, an impressive 28 percent is young adult age 19 to 34.
As expected, an independent entity formed by existing insurance company is frontrunner to be new
disruptor company. However, CO-OP companies formed under ACA are not far behind. If they put their
act together, and with all ACA support to them, they could very well be the disruptor new company. In
this vast market, there is space for more than one company to be a disruptor, and Ambetter and CO-OP
companies both can survive and flourish at the same time.
Shweta Shefali
MIT SDM Thesis
116
Chapter 12: Challenges for Disruptor
In this chapter, we will analyze what challenges disruptor system will face or is facing. And what challenges
elements of this system are facing individually.
12.1. Challenge for Disruptor System
In chapter 11 we have seen that elements of the disruptor system has taken shape however it is still too
early to witness any system formation, so the first challenge is to form the system. Thought the disruptor
system has not formed yet; let us see what challenges this system will have once it is formed.
Forming a disruptor system
A clear formation of disruptor system will be the first challenge for the elements of the system.
Remember, the system offers more than sum of its parts offer so unless the system is formed, these
elements will not be able to reap all benefits of working together.
Moving up the value chain
Once the system is formed, next challenge would be to go up in the value chain. This might not be a
quick and easy thing and it may take few years before Disruptor Company may start looking upwards.
Maintain quality and innovation
Healthcare services are very quality sensitive; these services cannot be tested in advance and
produced at the time of consumption only, which makes maintaining quality of services tricky. For
example, delivering primary care to customer-this service is being produced by primary care provider
and is consumed by the customer at the same time. Well-defined processes and procedures, and
strong adherence to them by the staff are key to quality service. However, this is easier said than
done.
Similarly, innovation should be an ongoing phenomenon. System needs to constantly innovate to
make healthcare more reliable, accessible, and cost effective.
12.2. Challenge for Disruptor System Elements
There are major challenges for the elements of the disruptor system even before the system can form.
These challenges are for their very own success and survival. Their success lies in bringing efficiency, cost
effectiveness, and accessibility to the reliable health care series. If the elements of the disruptor system
live up to the expectation and meet these challenges then they will make disruption successful.
Shweta Shefali
MIT SDM Thesis
117
Chapter 12: Challenges for Disruptor
CO-OP Companies
The idea of CO-OP companies is based on nonprofit, which means no pursuit of profit. This will hinder
its desire to disrupt the existing setup to some extent.
The main reason CO-OP companies are promoted by administration is to contain the profit that
private companies are making and bring down the cost by doing so. However, as the profit is not a
goal, whether these companies are as willing to make processes and services more efficient to bring
the cost down will remain a question. The real benefits and objectives of ACA will remain unfulfilled
unless efficiency comes into the processes and services in healthcare industry and moves the cost
down.
Another factor that will not work so much in favor of these companies is economy of scale. As these
companies are regional - sometimes not serving a complete state even - with no intention of
becoming pan American company, if we see a big picture it is obvious that multiple independent
companies will be operating in country to provide services in one state and United States.
Some of functions of all these companies will be duplicate and be an unnecessary cost to consumers.
For example - IT infrastructure - one portal for each company, one IT system for each company
costing support, maintenance, and enhancement. In contrast, one company-operating pan America
will centralize many of its functions and infrastructure and will get benefit of economy of scale.
Overhead or support function cost per service will be higher for these companies than a big national
player.
As they will be regional nonprofit players, the incentives will be very minimal to innovate in long run.
Same is true for administrative quality - as of today - almost all CO-OP companies offering coverage
effective January 1st, 2014 do not have a customer login capability. This capability is very important
and is a quality measure especially for young adult population.
Though, it is understandable that these are early days and new CO-OP companies may have teething
trouble, however, it will be interesting to see how effectively and efficiently these troubles are
handled.
New Company from Existing Company
We have seen in chapter 11 that Ambetter is a new company formed by and existing health insurance
company with the sole purpose of offering insurance plans in Health Exchange Marketplace.
Challenges are plenty for any such companies as well.
The first challenge is to live with the contradiction - parent company is based on employer sponsored
insurance provider company whereas the child company is an individual insurance provider company.
These are two very diverse stream of health insurance. The child company needs to scale these
contradictions even being dependent on parent company in many ways.
Another challenge for any such company to think beyond the existing system. Child Company with its
parent in the existing system will not work well to serve the kind of market it is striving to serve. It
would need to find new partners and spearhead the evolution of new system to be successful.
Shweta Shefali
MIT SDM Thesis
118
Chapter 12: Challenges for Disruptor
Retroactive interference in learning - past learning interfering with new learning - will be another
challenge for this company. Parent company has had certain ways of doing things to cater to its market
and the child company will learn to perform same function in a new way to be more effective in its
market; here retroactive interference will pose a challenge for Child Company.
Provider - Minute Clinic
CVS MinuteClinic and Walgreens Healthcare Clinic have capacity to innovate from provider side and
offer primary and preventive care at low cost. Biggest challenge for them would be to become the
part of the system as a reliable healthcare provider partner. Once they are the part of the system,
they will be able to get customers in bulk and provide agreed upon reduced pricing to the 'in system'
customers. This will not only be beneficial to them but also to the system as well.
Other challenge for them would be to bring the cost of the medicine and medical supplies down.
Shifting focus to generic medicine for 'in system' customers would be one way, however, they would
need to do so with minimum damage to their pharmacy profit margin. Some goes for medical supplies
as well.
Regulator
Main challenge for regulator is to get ACA implemented in its true spirit. Open enrollment that started
on October 1, 2013 had a very bumpy ride initially - the website breakdown, confusion, and delay in
fixes - that send jittery signals to administration and common people. Though it was not the direct
fault of regulators, nonetheless, it was their responsibility to make it success. After this initial hiccup,
things went pretty smoothly and more than 6 million individuals have opted for coverage using health
exchange marketplace.
There are certain pieces, which still need to be resolved, such as - how IRS will collect the ACA penalty
if someone does not have insurance? And legal and technical questions surrounding IRA collecting
this penalty.
Another challenge for regulators is the participation of young people. This participation is close to one
third, but not in the numbers, experts had expected. Attracting young adults is an important factor in
ACA's success. Young adults are generally healthier and less expensive, thus they can offset the
healthcare cost on older Americans. Most importantly, today's young population is tomorrow's old
population, if they come in healthcare today and get preventing and primary screening, tomorrow's
old population will be a lot more healthier. One main objective of ACA - changing behavior of
Americans for better health - will not be fulfilled unless all young adults come into healthcare net.
The challenges for regulators are not only legal, compliance, and enforcement but they are political
too. Keeping everyone happy and get buy in from everyone is a tough challenging job.
Lastly, they need to learn quickly and improve the law to make it more pragmatic and effective. They
should keep their focus on "Quality affordable Healthcare for all Americans".
Shweta Shefali
MIT SDM Thesis
119
Chapter 12: Challenges for Disruptor
Health Exchange
Finally, we come to health exchange - health exchange is the engine, which is powering the disruption
in Healthcare as it is providing a level playing field to all companies and is transparent to consumer.
Setting up health exchange is done by states and federal government. As setting up exchange is one
time cost so, state and federal government can take it up (though many states have refused to bear
the cost). However, Sustainability of Health Exchange will be major challenge for them.
Primarily, Governments may not be willing to pump taxpayer dollars in Health Exchanges endlessly.
Secondly, if Health Exchanges are not sustainable, some government can pull the plug in future as it
is essentially taxpayer's money that is going into it.
With our study in chapter 8 and the number of enrollment available, it appears that all exchanges will
be sustainable fairly quickly. However, it will remain a challenge for them to become self-sustainable.
The push to sign people up for Health Insurance at Marketplace will not end on March 31. It will begin
all over again on November 15 when open enrollment starts for 2015. In addition, the bar will be
much higher in coming years. Keeping the bumpy start this year in mind, Health Exchanges needs to
do a better job in the coming open enrollment season.
12.3. Conclusion
The biggest challenge for a disruptor company is to form a disruptor system. Disruptor System formation
will be the biggest step towards the successful disruption of Group Health Insurance based Healthcare
System today.
Individual elements of the system have and will have challenges of their own. Elements of Disruptor
System will have to use their strength and innovate, wherever required, to meet these challenges.
Formation of disruptor system will also help them in meeting these challenges.
Shweta Shefali
MIT SDM Thesis
120
Chapter 13: Conclusion
This is the first enrollment season of open enrollment season and it is just the start of a start. As of today,
March 30, 2014, health insurance coverage has already started for more than 2 million, and, health
insurance coverage will start for more than 4 million people coming April 1, 2014. Thus, more than 6
million people will have health insurance coverage purchased thru Health Exchanges.
Therefore, it is just the start of a start.
With the analysis here, we can see Individual elements of disruption are making presence felt. More
entities will join these elements of the system in coming time. This clearly shows that
V
Healthcare industry is ready for disruption
V
Initial signs for start of disruption are visible
However,
V There is no clarity whether disruptive system formation has started, probably it is too early to look
for these signs
There is no sign that conscious efforts are underway to disrupt Healthcare System
System formation will start as coverage has started from January 1, 2014. System formation will take some
time and it would be a bit trial and error process as well. It may take 3 to 4 open enrollment season to see
credible disruptor system formation.
Currently entrants are entering the individual market sensing business opportunity. There is no indication
that entrants are entering market sensing disruption opportunity and there is no conscious disruption
effort visible.
Shweta Shefali
MIT SDM Thesis
121
Chapter 13: Conclusion
(Page intentionally left blank for notes)
Notes:
Shweta Shefali
MIT SDM Thesis
122
Appendix
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Shweta Shefali
MIT SIDM Thesis
123
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MIT SDM Thesis
HOelt EangS
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126
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Shweta Shefali
MIT SDM Thesis
127
Table of Figures
Figure 1 - G estalt Psychology Triangle......................................................................................
19
Figure 2: System Breakup - Its entities, and form and function of entities............................... 20
Figure 3: Healthcare System from System Perspective ............................................................
22
Figure 4: Affordable Care Act on Timeline...............................................................................
25
Figure 5: Objectives of Affordable Care Act............................................................................
29
Figure 6: Healthcare System with its elements as subsystem...................................................
33
Figure 7: Existing (Disrupted) System .....................................................................................
38
Figure 8: N ew D isruptor System ..............................................................................................
39
Figure 9: Peripheral Disruptor System in action to Disrupt Nucleus System...........................
40
Figure 10: Percentage Uninsured by Single Year of Age 0 to 64.............................................
44
Figure 11: Change in Uninsured Rates 2008-2012...................................................................
44
Figure 12: Uninsured Population in USA 2012 Data ..............................................................
45
Figure 13: Health Insurance Penalty from year 2014 to 2016 and beyond ..............................
46
Figure 14: Current Group Insurance - Every insured is an ID .................................................
48
Figure 15: Group Insurance Multi Chart ...................................................................................
49
Figure 16: Individual Health Insurance - Individual Identities Recognized and Acknowledged 50
Figure 17: Health Exchange Marketplace Website Snapshot....................................................
51
Figure 18: Types of Plan available at Marketplace. Information taken from
https://w w w .healthcare.gov. .........................................................................................................
51
Figure 19: Shop for Plans at Marketplace. Information taken from https://www.healthcare.gov.52
Figure 20: Compare Marketplace Plans. Information taken from https://www.healthcare.gov... 53
Figure 21 Cross-Functional Chart - Insurance with Health Exchange......................................
54
Figure 22: Group Insurance Vs Individual Insurance...............................................................
57
Figure 23: How marketplace works..........................................................................................
60
Figure 24: Vensim model showing Sustainability calculation part ..........................................
62
Figure 25: Percentage of premium towards operating revenue - Vensim model variable .....
63
Figure 26: Number of people enrolled in exchange - Vensim calculation model.................... 64
Figure 27: Sustainability Graph by Vensim Model ...................................................................
68
Figure 28: Sustainability Values from Vensim Model ..............................................................
69
Figure 29: Number of people enrolled in Exchange - Vensim Model......................................
70
Figure 30: Number of people enrolled in Exchange - Vensim Model......................................
70
Figure 31: Disruptor System Elements .....................................................................................
73
Figure 32: Flows in Healthcare system.....................................................................................
79
Figure 33: Relationship between 1-year survival rate and total inpatient cost. .........................
81
Figure 34: Cost and Quality M atrix..........................................................................................
82
Figure 35: Shift from integrated to modular architecture ..........................................................
83
Figure 36: No tobacco message from CVS website ................................................................
90
Shweta Shefali
MIT SDM Thesis
128
Table of Tables
Table 1: Healthcare System Form and Function........................................................................
23
Table 2: Key Features of Affordable Care Act ..........................................................................
30
Table 3: ACA objectives and their effect on Healthcare System Elements ..............................
34
Table 4: Three simulated case param eters ................................................................................
66
Table 5: Sustainability Summary from Vensim model.............................................................
69
Table 6: Enrollment in Health Insurance Exchange ................................................................
74
Table 7: Exam ples of Healthcare W aste ...................................................................................
84
Table 8: Services Offered in CVS Minute Clinic .....................................................................
95
Table 9: Companies Operating in Heath Exchange and State of Operation Data Key Points...... 98
Table 10: Number of companies operating in State Exchanges ..............................................
99
Table 11: Number of states covered by some companies...........................................................
100
Table 12: Company Name and State of Operation: two views: State View - Pivot on State:
Company V iew - Pivot on Com pany .........................................................................................
100
Table 13: State wise table of ACA loan to establish CO-OP Company..................................... 113
Table 14: CO-OP companies offering healthcare effective from January 1, 2014..................... 114
Shweta Shefali
MIT SDM Thesis
129
Table of Abbreviation
ACA - Affordable Care Act
CBO - Congressional Budget Office
HE - Health Exchange
ACS - American Community Survey
OC - Operating Cost
OR - Operating Revenue
CO-OP - Consumer Operated and Oriented Plan
USPS State Abbreviation - US State Table
AK
AL
AR
AS
AZ
CA
Alaska
Alabama
Arkansas
American Samoa
Arizona
California
KY
LA
MA
ME
MD
MI
Kentucky
Louisiana
Massachusetts
Maine
Maryland
Michigan
OH
OK
OR
PA
PR
RI
Ohio
Oklahoma
Oregon
Pennsylvania
Puerto Rico
Rhode Island
CO
Colorado
MN
Minnesota
SC
South
Connecticut
MO
Missouri
SD
South
DC
District of
Columbia
MS
Mississippi
TN
Tennessee
DE
FL
Delaware
Florida
MT
NC
Montana
North Carolina
TX
UT
Texas
Utah
GA
Georgia
ND
North Dakota
VI
Virgin
_______Carolina
CT
I___
_______
GU
Guam
NE
HI
Hawaii
NH
IA
ID
IL
IN
KS
Iowa
Idaho
Illinois
Indiana
Kansas
NJ
NM
NV
NY
Shweta Shefali
MIT
MIT SDM
SDM Thesis
Thesis
Nebraska
Dakota
Islands
VT
Vermont
mpshire
VA
Virginia
New Jersey
New Mexico
Nevada
New York
WA
WI
WV
WY
Washington
Wisconsin
West Virginia
Wyoming
130
130
Index
Affordable Care Act. 1, 3, 11, 25, 26, 29, 30,
32, 33, 45, 74, 77, 84, 111, 130
Objectives of ACA ............................
29
Beneficiary ............................. 14, 24, 34, 78
CO-OP Companies ........................ 111, 118
Cost of Overservice .............................
80
Cost of Quality Healthcare ................... 80
Dilemma of Incumbents ....................... 55
Disruption in Healthcare....................40
Disruptive innovation .......................
37
Disruptive Innovation............. See Disruptive
Innovation - System Perspective
6.3. Disruption - System Approach ...... 37
Disruptive Innovation - System Perspective
...........
................ See System
Disruptor System Elements..................73
Early Trends ........................................
93
Factors leading to Disruption................43
Group Insurance .............. 16, 48, 49, 56, 57
Health Exchange
Health Exchange - Sustainability ......... 59
Health Exchange Marketplace .......... 95
How Model Works............................65
Operating Cost .................................
61
Operating Revenue...........................62
Overview of Model............................60
Simulated Cases .............................
66
Health Exchange Marketplace..............47
Individual Insurance ... 16, 43, 47, 56, 57, 89
Provider13, 17, 18, 21, 23, 34, 93, 109, 116,
119
Regulator ....................... 14, 21, 24, 34, 119
S ystem .................................................
19
ACA Systems Perspective ................ 33
Disruptive Innovation - System
Perspective ..................................
37
Elements of System..........................20
Form ...............................................
. . 21
Function........................................... 21
Health Insurance -As a System.....21
System Boundary .............................
20
Who Could be Possible Disruptor.........87
Shweta Shefali
MIT SDM Thesis
131