Outsource Magazine

US healthcare reform, officially titled The Patient Protection and Affordable Care Act or PPACA, became law in the United States on March 23, 2010.  However with the results of this week’s US mid-term elections, many are questioning the fate of healthcare reform.  Opponents note that before the 111th Congress adjourns, several important provisions related to health reform will be up for review on the congressional calendar.  While, others point to the fact that, despite all the political speak and punditry, passing healthcare legislation in the United States is more easily said than done (case in point: the last time the US passed any major healthcare legislation was in 1965 with the enactment of Medicare).  Given the government’s track record on the subject and the difficulty encountered in taking away benefits once granted, the general consensus in the media seems to be that healthcare reform is going to happen, albeit with a few minor modifications. Whatever your opinion of healthcare reform, one thing is certain: it will be a transformative force in the US healthcare market.  Every segment of the US healthcare market will encounter challenges as they try to conform to the new rules and regulations imposed by PPACA.  The question now is: how will firms in each of these segments react to the new environment?  Who will have the strategies, capital, and talent in place to execute the changes that will determine their long-term success?  If you consider PPACA as a great wind of change blowing across the US healthcare market, than, as Catherine the Great is quoted as saying, it will either give you “great imagination or a headache”. 

In this series of articles, I want to challenge our industry’s imagination so as to avoid the headache. This is the first in a series of articles that will address how those of us in the outsourcing industry can take advantage of the changes associated with PPACA that are slated to roll out over the next eight years.  The Kaiser Family Foundation has created an excellent interactive tool for those who want to become more familiar with all the provisions of the Health Care Reform Bill.  I highly recommend visiting their website at http://healthreform.kff.org/timeline.aspx.

The series will look at the opportunities and challenges for each of the three market segments within the outsourcing market, namely suppliers or providers; advisors or consultants; and finally customers (both BPO and ITO).  For each market segment, I will most likely publish one to two articles to provide an overview of the challenges and opportunities that I see based on my research and work in the industry.  I will close out the segment with an interview of prominent executives in the segment.  I want to make this series as interactive as possible so please post your thoughts and comments.  Where possible, I will work to include your questions in my follow up articles and interviews.  Let me know who you like to hear from as well.  I can’t make any promises, but I will do my best.

In this first article set, I will be looking at the outsourcing supplier or provider market segment.  As I see PPACA, there are five primary areas of opportunity, namely:

1. Increased Capacity/Volume Demand
2. Increase G&A Cost Cutting Demand
3. New IT Development Demand
4. Geographic Demand
5. New Product Demand

As one can see, there is far too much to cover in any detail in just one article, so in this first article, I will provide a brief overview of the market since 2007 and then discuss in more detail, the first of the two opportunities list above.  In December, I will discuss the remaining opportunities and include any new developments related to PPACA.

Recent History
Looking at the healthcare outsourcing industry over the past few years, there has been a definite change in tone.  Although revenues have continued to grow overall, the US recession and economic uncertainties of the past years have altered the complexion of most of the business process and IT outsourcing deals in the US healthcare market.  Many customers, faced with falling demand and tighter expense targets, pushed those expense pressures down to their outsourcing partners, calling for contract re-negotiations, reductions in fees, elimination of incentives, increasing penalties, as well as shorter contract lengths thus giving customers more flexibility. 

Two other trends emerged.  Many healthcare insurance companies saw their business volume drop or change.  Healthcare business process outsourcing is traditionally heavily transaction-based, centred on, claim data entry, claim processing, provider data entry, provider matching, and data cleansing - to name a few of the more common transaction types.  As unemployment rose and employers cut benefits to control costs, insurers lost members and transactions dipped.  Secondly,  with the clients feeling the strain of reduced revenues, service providers were asked to assume more complex tasks such as contract loading, benefits management, network loading, platform installation,  and large scale IT web portal projects.

Opportunity 1 – Increased Capacity/Volume Demand
Why talk about recent history, when this article is about the future of the healthcare outsourcing industry?  I share these thoughts because; I believe this period truly enabled many service providers to be uniquely positioned to take advantage of healthcare reform today.  Service providers used the opportunity to truly streamline their operations and apply lean principles.  They retained only the best talent and that talent has been exposed to more complex aspects of the health insurance delivery model.  Service providers are well positioned to take on the number-one need arising from healthcare reform – increased capacity demand.  The primary driver for the passage of the PPACA was to increase insurance coverage rates across America.  Estimates vary as to the number of new covered lives that will be added to the healthcare rolls, but it will be significant.  Conservatively, 16 million more people will be injected into the system; however some analysts project as high as 43 million. The average number expected by 2014 is 30 million new citizens with access to insurance.  
Contrary to popular speculation that employers will be dropping their coverage and these covered lives will be in state-run exchanges, a study completed by the RAND Corporation and published in the New England Journal of Medicine indicated just the opposite. The RAND simulation exercise predicted that 95% of all US workers would have access to health insurance through their employers, up 10% from today’s levels.  Janet Trautwein, Executive Vice President of the National Association of Health Underwriters pointed to the small business tax credits provided through PPACA, “provides an incentive for small employers to stay in the game”¹.  For large employers, the traditional reasons for providing health insurance benefits will remain, attract and retain the best talent.  At the Health Care Reform Conference in Los Angeles this year, benefit managers from Microsoft, Black & Decker and other well known companies talked about how important benefits were as part of the overall compensation package of their employees.  More importantly they spoke to the perceived value employees placed on the quality of the health insurance provided in choosing or staying with an employer.  Combine this with the penalties imposed on large employers that do not provide insurance or pass along to much of the expense of insurance in the form of co-pays and co-insurance; and most experts predict little change in the number of large employers providing health coverage. 

One could argue that this belief is supported by the extremely low number of people seeking coverage in the current state exchanges.  The New York Times reported on November 5th that enrollment in the state exchanges was well below the estimates projected by the chief actuary for Medicare and Medicaid services.  Original estimates put nationwide enrollment at 375,000; however as of today only 8,011 have enrolled.  While the cause for the shortfall could be attributed to many factors, such as a lack of education or high costs exchange plans, no hard evidence is available. 

Any way you look at it, volumes will be increasing.  There will be a steady increase and customers will have little insight as far as predictability of volume.  There are several other provisions of PPACA that are likely to increase transaction volumes as well.  For example, the law changes the definition of dependent eligibility such that adult children may now be covered on their parent’s insurance up to age 26.  Further expanding the volume of claims, lifetime-benefit maximums and denials or exclusions for pre-existing conditions have also been removed.  While these changes specifically drive up volumes in traditional categories such as claims transactions, other provisions, such as the Medicare Medical Home or Accountable Care Organisations (ACOs) have the potential to drive up volume in other categories such as contracting support services and physician data management.  We will address these topics in more detail in the new product discussion.  As service providers, it is imperative that you are operationally ready; you understand your contracts and have provisions to protect your company.

Opportunity 2 – G&A Cost Cutting Demand
Probably one of the most challenging provisions of the PPACA is the MLR (medical loss ratio) benchmarks established in the Act. The MLR is the percentage of premium dollar spent on actual healthcare expenses.  General and administrative overhead costs and profits typically make up the rest. Per PPACA, healthcare insurance companies have mandated medical loss ratios (MLRs) of 85% for large groups of more than 100 and 80% for small groups and individuals.  If payors manage to generate lower MLRs, they must refund the difference to enrollees.

Weiss Ratings, an independent insurance rating company, conducted a study looking at small and large plans for the plan year 2009² and found that plans meeting the PPACA MLR standard had net profit margins of 0.7%, while firms spending less than the standard averaged profit margins of 6.3% - or nine times more.  The study included 543 insurers of which 317 were already compliant and 226 were not.  The study results also showed that smaller insurers had less room for error in their underwriting operations and were usually unable to make up their losses with investment gains like their large insurer counterparts.   

What does this mean for outsourcing suppliers?  One, the pressure to reduce operational costs will continue to grow so suppliers must be vigilant in looking for ways to drive out costs in their own operations, either through continued lean process design or by taking advantage of lower-cost labour pools.  Second, given the costs pressures on small employers, one can expect there will be consolidation in the insurer market place.  Suppliers need to be looking at their client base to identify at risk customers and developing appropriate sales strategies.

PPACA is a great wind of change blowing across the US healthcare market.  It has the opportunity to raise companies to new heights and the power to blow some to the ground.  Before it is fully implemented, the US will have another presidential election and the US House and Senate may change hands again.  The blogosphere continues to be awash in commentary on the subject and the number of voices keeps increasing.  When I attended the Health Care Reform Conference, I heard fifty percent of the people expressing hope that the US would be able to stop any changes.  The other fifty percent were wide-eyed with anticipation of the new opportunities healthcare reform created.  Over the four-day period, it was a panel of doctors that said it best; we support this legislation because it will provide the best care for the most people.  All of the above holds true for healthcare outsourcing suppliers.  One can hope that it will not come to pass, or one can proactively plan for both contingencies with great imagination.
¹ “HHS Offers Employers Financial Incentives”, Jill Wechsler, Managed Health Care Executive, p. 4
² “MLR Benchmarks Leave Small Plans Virtually No Wiggle Room”, Shelly Reese, Managed Health Care Executive, p 6