Health care is the largest industry in our economy. It consumes 17.4 percent of the US gross domestic product (GDP) and is projected to increase to 18.5 percent in the next five years. We need to innovate to break that trend. And, the optimist in me believes that five years is just enough time to create the innovations we need in health care—not only to lower the trend, but even reduce our overall costs.
When I think of innovation, I see it as breaking the constraints of what is possible to get more value for less cost. You might think that the hardest part of innovation is the “breaking the constraints” part. But, after working with very successful health care organizations and leaders for 34 years, I sometimes see that just because an organization needs to change, doesn’t mean it will change—even if it really wants to change. Some organizations may simply lack the ability to change.
There is a fantastic Randy Glasbergen cartoon from 2004 that says it perfectly: A boss gleefully says to an exasperated worker who has both hands shoved in his pockets, “I want you to find a bold and innovative way to do everything exactly the same way it’s been done for 25 years.”
I wrote in the March 31, 2015 Health Care Current that provider-sponsored health plans (PSPs) are an example of how organizations can break constraints by using health care financing as the catalyst to innovate the clinical model in ways that produce better outcomes and lower costs. I warned back then that health plan market leaders might be unseated from their throne by upstarts who serve a niche market largely ignored by the market leaders and build an operating model that finds ways to break the existing constraints to do more with less. And, as the challengers perfect their models, they may move into the market leaders’ most profitable customer segments with a new and more innovative approach that better meets the customer’s unmet needs and ultimately wins the leadership position.
In Provider-sponsored health plans: Positioned to win the health insurance market shift, we wanted to know what characteristics are found in financially successful PSPs. Deloitte researchers looked at financial, market, and operational metrics for PSPs using publicly available information to evaluate their performance.
At last count, there are 213 PSPs in the US and 171 plans not owned or affiliated with a health care provider. Despite this, PSPs only enroll 9 percent of the US market today.1
I believe there are many reasons why this is the case. Inherent conflicts in respective business models, balancing the demand for capital, attracting the talent required to operate a successful health plan, lack of a network outside their service area to compete for multi-site employers, and strong competition from the existing Blues and national players may all be inhibiting these health plans from growing their market share.
But, growth in the individual market through the federal exchanges, Medicaid expansion in 29 states, growth in Medicare Advantage enrollment, and strong employer interest in smaller networks in exchange for lower rates has given PSPs a renewed purpose, role, and set of potential competitive advantages to exploit.
We looked at 86 PSPs that represent 90 percent of the enrolled membership in all PSPs across the country. We narrowed the list to the 25 most successful health plans to understand their performance from 2012 to 2014. We found that:
- These PSPs outperformed their competitors in the market by growing profitably, with margins that were better than their competitors on average.
- These PSPs had strong performance in serving the most challenging patients in Medicaid and Medicare. They also held smaller amounts of capital on their balance sheets relative to their size than their competitors (measured by their risk-based capital percentage).
- Tenure and scale are strongly correlated to success. Older PSPs and those that had at least 100,000 lives had higher profitability.
I can’t tell you how they accomplished this level of performance. But, I can tell you that every successful PSP that I have had personal experience has had a pervasive culture of doing the right thing for the patient, at the right time, in the appropriate setting, without regard to the perverse incentives or constraints of fee-for-service.
I’m not sure where culture fits into the science of innovation, but my guess is that it is fundamental to the ability of an organization and its leaders to make the change by breaking the constraints and seizing the new opportunities.
1 Deloitte analysis of HealthLeaders and AIS Health data