By Gordon G. Andrew, senior vice president, Connextions Inc.
On Aug. 20, a press release issued by Virginiabased Hamilton Insurance Agency announced its selection as one of Revolution Health´s first "charter brokers." According to the release, which attracted very little media attention, Hamilton will "market and distribute innovative health and wellness programs to employers for the benefit of their employees."
The significance of this partnership between Revolution Health—a self-described "consumer engagement company"—and the ninth-largest insurance broker in the mid-Atlantic region did not go unnoticed, however, by many of the nation´s best known health insurance plans. This obscure news was, in fact, another good reason for those plans to push down even harder on their consumer-direct gas pedal. What exactly is going on here?
Thanks to a perfect storm consisting of employers off-loading work force health care costs, Internet-based transparency and access, and cultural change generated by baby boomers who demand choice and value, the established health insurance supply chain is ready to implode. Many of the big health plans see a new competitive landscape emerging, understand what´s at stake and are skating hard to get ahead of the puck.
Although certainly not a tipping point, the Revolution/Hamilton Insurance alliance is further evidence supporting what many health care C-suite managers envision as a plausible and threatening view of a near-future marketplace architecture in which plans are marginalized by a new type of intermediary—whether it be Google, WebMD, Revolution Health, American Express, ADP, Bank of America or some yet unknown company.
The Health Insurance Industry´s Worst Nightmare
The future that health plans fear most involves new intermediaries that possess a strong retail consumer franchise. Initially, these outsiders build health-related relationships with a significant number of individual consumers by providing helpful information, socialization platforms and tools. Eventually, they apply this same formula on a bundled, "mass customized" basis to employers, many of whom are eager to relinquish their thankless health care-related responsibilities.
This large-scale aggregation of individual members—eerily similar to Steve Case´s successful AOL business model—is expected to gradually shift the entire health care administration burden from employer to intermediary. In this scenario, the health care intermediary (perhaps Hamilton Insurance or Revolution´s own licensed insurance agency, RHG Insurance Services LLC), controls the selection and number of health plans that are offered to employees of companies who are members of the intermediary´s family. If this occurs, health insurers will be severely limited in their ability to independently grow individual plan membership under their own brands and, lacking brand differentiation in the eyes of consumers, they eventually will be relegated to a commodity status. From an economic standpoint, this new generation of health care intermediaries threatens to emasculate the nation´s health insurers by squeezing plan "supplier" margins in a Wal-Mart-like, pay-to-play fashion. In a retail world, it´s all about shelf space.
Health Plans Respond to the New CDHC World
There is nothing sinister or un-American about this fast-approaching market transition. Revolution Health´s playbook is brilliant. In fact, the supply chain disruption that Revolution and other new intermediaries are fueling likely will be the catalyst for significant innovations in control, choice and information that consumer-direct advocate Harvard Business School professor Regina Herzlinger claims are missing from the health insurance industry´s current offerings. "Unrelated to this tsunami of bad press from academia and Hollywood, it appears as though capitalism—with help from the technology geeks—ultimately will be responsible for reconfiguring the health insurance industry."
Not surprisingly, the industry´s established players are not accepting this new world order as envisioned by Steve Case and other health care visionaries, and are lacing up their boxing gloves. However, after more than 40 years of playing a role as the black hat—the unfriendly deniers of health care services and reimbursement, traditional health plans are facing significant hurdles in their attempt to win the hearts and premium dollars of individual consumers.
Negative baggage notwithstanding, a growing number of large plans are moving quickly to short-circuit the emerging role of new intermediaries. The industry´s unintentional response to this threat began around 2000, with forwardthinking, consumer-direct strategies such as BlueCross BlueShield of Florida´s (BCBSF) creation of an independently branded Web and phone-based sales capability that enabled individual consumers to transact business whenever and however they wanted, on a 24 hour/365-day-a-year basis.
At a time when most competing plans were either joining health insurance portals or delaying Web-based initiatives altogether, and well in advance of Steve Case´s creation of Revolution in 2005, BCBSF launched its own health care industry revolution: a technology-based, consumer-direct, transaction platform intended to supplement, rather than to replace, the plan´s traditional field sales force.
BCBSF´s early foray into direct-to-consumer distribution was soon followed by other plans including Aetna, Definity Health and Humana. It broke new CDHC ground in several respects, including:
• customer-friendly access, featuring multi-channel options including phone, email and online interactive "click to chat;"
• seamless integration of customer relationship management (CRM) technology, which captures customer information to facilitate sales and improve a member´s experience; and
• telephone-based licensed agents, available to assist with any portion or all of the sales and customer service processes.
These first direct-to-consumer initiatives have delivered tangible results. Over the past seven years, the health care industry´s early movers in multi-channel distribution have significantly increased their plan volume and brand presence with individual consumers, delivered a more professional, consistent customer experience, and shortened speed to market.
Unearthing the Holy Grail of Health Care Economics
Perhaps most importantly, in the course of building out their multi-channel platforms, those insurers may have unintentionally unearthed the holy grail of health care economics: lower customer acquisition costs relative to traditional, feet-on-the-street sales methods. As plans seeking individual members have increased the consumer-direct portion of their distribution channel mix, they have realized significant balance sheet savings through lower operating expenses, particularly involving sales commissions. In the 65-years-and-younger individual policy market, for example, traditional broker commissions typically range from $400 to $800, with ongoing trails. This compares with average one-time costs from $150 to $300 for policies sold on a direct-to-consumer basis over the phone or Internet, with no trails.
The potential for multi-million dollar savings in operating expense captured through lower customer acquisition costs has fueled the industry´s current rush to develop its consumer-direct capabilities; which in turn has spawned two CDHC game-changing trends:
1. Distribution Channel Inversion
A number of large plans are moving aggressively to reduce their reliance on field agents who service the individual and small group markets. In some instances, plans are working toward a channel mix ratio of 70 percent consumer-direct versus 30 percent traditional broker, which reverses the current distribution ratio at most plans. Ironically, this trend likely will accelerate consolidation of independent insurance agencies (which have declined in number by 15 percent since 1996), and also will incent the large agency survivors—similar to Hamilton Insurance—to align with new disruptive intermediaries such as Revolution Health.
2. The Emergence of CDHC 2.0
Increasingly, health plans with a real commitment to consumer-direct delivery are reinvesting the savings generated by lower member acquisition costs back into second-generation, or CDHC 2.0, technology-based customer sales, service and retention programs, as a means to increase competitive advantage. In her most recent book, Who Killed Health Care?, Herzlinger fingers health insurers as Killer Number One. This trend will not only provide a tangible advantage over emerging intermediaries, but also create a significant competitive advantage over plans that have been unable or unwilling to get out of the CDHC starting block. In other words, plans that do not get into the consumerdirect game soon may be locked out altogether as the hurdles to market entry increase in cost and sophistication.
Does Technology Trump the Face-to-Face Card?
In the rapidly emerging world of CDHC 2.0, Web and telephony capabilities are being integrated with more sophisticated, second-generation software-as-a-service-based CRM technology platforms. These platforms provide plans with features and benefits such as:
• user-friendly elements, including click-to-talk and co-browsing;
• customer data, collected at every touch point, that facilitates the sales process and builds brand loyalty by delivering a positive customer experience;
• data analytics that provide critical insights into customer demographics, preferences and behavior, enabling insurers to design, price and rapidly bring to market tailored plans for specific market segments; and
• quantitative evaluation of marketing spend, including which methods (direct mail, TV, Internet, etc.) messaging, creative and timing have the most impact, thereby ensuring a higher return-on-investment ROI in future campaigns.
Most significantly, CDHC 2.0 involves the application of advanced CRM technologies that can harvest, analyze and apply plan member data on a real-time basis. Applying the data well helps improve the personal wellness of unhealthy individuals, rewards members who maintain a healthy lifestyle and delivers perceived value to members with no claims experience. These CRMtailored communications, incentives and rewards deliver better wellness outcomes and lower costs, and also demonstrate a plan´s concern for its members´ quality of life, which generates customer loyalty, retention and referrals.
Technology-driven communication rarely beats face-to-face interaction, in terms of "high touch" relationship building. A recent IBM survey, for example, showed that 75 percent of consumers are willing to pay a premium for the trust and advice that insurance agents deliver. However, only technologybased multi-channel distribution enables health insurers and agencies alike to consistently apply the most immediate, appropriate and cost-efficient means of establishing and maintaining long-term customer relationships. More importantly, it provides health care consumers with true choice regarding how and when they wish to gather information and transact business.
Market Necessity Delivers on Herzlinger´s Dream
If "necessity" represents supply chain disruption, then the health insurance industry´s "invention" appears to be its rapid transition from a B2B to a B2C orientation, and the godmother of consumer-driven health care may be well served as a result. In her most recent book, Who Killed Health Care?, Herzlinger fingers health insurers as Killer Number One in the dysfunctional culture that has helped to destroy our nation´s health care delivery system. In his recent film, "Sicko," corporate gadfly Michael Moore effectively popularizes the notion that health plans are indeed guilty of Herzlinger´s murder rap.
But unrelated to this tsunami of bad press from academia and Hollywood, it appears as though American capitalism—with help from the technology geeks—ultimately will be responsible for reconfiguring the role and economics of the health insurance industry. As insurers struggle to meet the expectations of a consumer-driven retail world, and as entrepreneurs with big ideas and deep pockets continue to nip at their heels, meaningful change in health carecoverage appears to be on the horizon.
The larger question is whether the industry´s response to the current disruption in the health insurance supply chain will have a domino effect; generating similar levels of beneficial reform from the other institutions on Herzlinger´s list of murder suspects, which includes general hospitals, employers and the U.S. Congress. What´s occurring in the health insurance industry certainly will not provide the complete solution to Herzlinger´s consumer-driven challenge, but it´s a very healthy step in that direction.
Gordon G. Andrew is responsible for marketing and communications at Connextions Inc. (www.connextions.com), a business process outsourcing firm that is helping many of the nation´s health insurance plans to build their consumer-direct capabilities. He can be reached at 407-563-4440, or at gandrew[at]connextions.com.
