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A Risky Scenario: Disruption of Group Health Insurance

Deloitte Insights video

The Patient Protection and Affordable Care Act creates, among many other things, a new marketplace for individuals and small businesses to purchase health insurance, and for the first time, the Federal government will provide subsidies to individuals to make it affordable. Watch this episode of Deloitte Insights to learn how the growth of the new individual market could disrupt the existing health insurance industry.


Bill Copeland, Vice Chairman, U.S. Life Sciences & Health Care Leader, U.S. Health Plans Leader, Deloitte LLP

Michael Raynor, Director, Deloitte Consulting LLP


A Risky Scenario: Disruption of Group Health InsuranceSean O’Grady (Sean): The Affordable Care Act creates, among many other things, a new marketplace for individuals and small businesses to purchase health insurance, and for the first time, the Federal government will provide subsidies to individuals to make it affordable. Today on Insights, we are discussing how the growth of the new individual market could disrupt the existing health insurance industry. Joining us for this conversation is Michael Raynor, a New York Times bestselling author, as well as a Director at Deloitte Services LP, and we have Bill Copeland, the leader of the U.S. Life Sciences & Health Care practice and the U.S. Health Plans practice at Deloitte LLP. Bill and Michael recently coauthored the paper, “Power to the People? How health care reform could result in the disruption of the group health insurance industry.” Bill, how large of a market are we talking about?

Bill Copeland (Bill): Well, the individual market, going forward, starts January 1, 2014, and no one really knows exactly what the size is going to be, but it is certainly going to be much larger than it is today, which is about 14 million people. So, depending on how many people decide to sign up for the new insurance products and the subsidies from the Federal government, as well as how many employers -- especially those under 50 (employees) -- who might decide to drop coverage and promote their employees to go to the exchange, we could have anywhere between 25 million and 60 million people inside these individual market exchanges.

Sean: Now what about the big health plans -- are they prepared to get the lion’s share of this business?

Bill: Well, that is the interesting part in the hypothesis of our paper that we wrote. You would think that they are well-positioned. They have been doing this for a long time, but their customers are actually employers, not individuals. The individuals are the benefit of what they are selling to the employers. So they are not really prepared to deal with the individual market, and this marketplace is somewhat unattractive because there are a lot of unknowns and there is a lot of risk. It is also one that is going to be heavily regulated, and so some of these big question marks for health plans make it so that they necessarily don’t want to invest in preparing for the market and really building an operating model that an individual would find attractive.

Sean: Hence the disruption factor and why we have Michael back here on the program. I guess we will just start with table stakes that we have spoken about before when you have come on the program. Can you tee up for us the theory of disruption?

Michael Raynor (Michael): Well, Bill actually started to answer that question. The observation, for example, that the market for individual health insurance is structurally unattractive to the large incumbent group carriers is really the first ingredient of a potential disruption. So, you have a large non-consuming segment of the market that is unattractive to the incumbents despite whatever surface similarities there might be. As a consequence, the notion is that a different set of providers will emerge to provide individual health insurance for this new market, and this is where the danger really occurs. It is not simply a question of will the group carriers capture this growth. People can disagree on that, but that is one question. The other question is that if it turns out that a different group of providers emerges to serve this emerging individual market, will they in fact master the kinds of skills and build the kind of model that not only allows them to capture this new growth opportunity, but in fact sets them up to compete successfully for the group market that the existing carriers currently own. So, not only is there the possibility of missing out on growth, there is a possibility that they may actually find themselves in a fight for the markets they currently have.

Bill: And that is the key ingredient because employers are struggling with what to do with health care costs. The solution that they pick today is an average solution that maybe meets the needs of half of their population. They don’t have a solution that is tailored to the individual. With this individual market that we are talking about -- the winner is going to have something that is going to be tailored to what the person is trying to buy. So, someone who is healthy is probably going to buy something very different than somebody who is sick, and it is that notion of providing something probably very inferior -- could be inferior -- to what an employer would buy, but exactly what they might need. So that ability to provide something that is different, depending on who you are as a person, is what the employer is really looking for, and so if you can do it in the individual market, why couldn’t you go after the lucrative employer group market?

Sean: So, who are these disruptors and where are they coming from?

Michael: I think they can come from sectors where there are large established incumbent companies already, but for whom the ability, and in fact the necessity, of serving customer segments directly -- individual customers -- is something they are much better at.  So you might see it emerging from retail. You might see it emerging from retailers, and also retail banking, for example, is another possible industry that they might emerge from. So it is not as though we are anticipating sort of garage-based startups coming out of the woodwork, although we don’t want to rule anything out, but you may in fact see large incumbent organizations strongly motivated to pursue this growth opportunity in the individual market.

Bill: It really could be anyone that is already serving individuals in some capacity. Because you can see there are companies today that are serving Medicaid-eligible beneficiaries -- and they are all individual customers -- or Medicare -- they are individual -- as well as these other industries that Michael is talking about.  Because they do something that a group insurer doesn’t do, customer intimacy — really understanding what the customer wants, really being able to tailor something to the customer in a way that is personally mine -- and that differentiation between selling something almost wholesale to selling something at a retail level opens the door for a lot of different players to be potential disruptors.

Sean: And you are touching on it already. So if you are the incumbent, you have got a garage entrepreneur, how are you going to shore up the base and not be disrupted by this threat?

Michael: Well, there is almost a packaged answer for that because the good news, if you will, is that this whole phenomenon of disruptive innovation as a mechanism by which industries get overturned and restructured -- this is a movie we have seen before. We have literally hundreds of examples, spanning literally hundreds of years, where we have seen one disruptor after another enter new markets and really eat the incumbent for lunch. So, we have learned a lot about how to respond, and I think what has almost become the conventional wisdom applies here as well, which is that there is a need to as an incumbent, in this case an incumbent group carrier, to set up an independent arm of the organization that has the strategic mandate of finding a way to build the model optimized for this new segment. You want to avoid what is in many instances the mistake of trying to extend the existing model in some way, thinking that well “it is really not that different, it is after all health insurance,” but simply because it is called health insurance doesn’t mean it is anything similar in the ways you might think. So on a bumper sticker, don’t try and peanut butter your existing model into the new space. You have to build a different solution tailored to the needs of what is fundamentally a different market.

Bill: And right now, if you look at what our clients are doing, they are doing the opposite, not following what Michael is talking about.

Sean: They are going for the peanut butter.

Bill: They are going for “I am going to use what I have. I am going to apply it; it is just health insurance after all. I already understand this marketplace in terms of this geography.” It is not something separate; it is not something dedicated and focused. It doesn’t have the customer intimacy that we are talking about. It doesn’t have the model ability to configure something that you might buy or Michael would buy and I would buy -- we are all separate. So, it is something that obviously is setting itself up for disruption, and it is something that plays out over a while. It is not something that is going to happen overnight.

Michael: That is the other part that is so insidious, right. It is not as though three weeks after the individual exchanges are created, all of a sudden the disruptive potential is realized. Disruptions can take decades in some instances. How long this disruption could take, should it play out, that is something that requires a little extra thought, but I don’t think it is going to take the 60 or 70 years it took for disruption to play out in the automotive sector. It probably won’t take the four to five years that it took for disruption to play out in the search engine and search-based advertising space. It will be somewhere between those two. I think it is a very real possibility, and it is something that I think is not only a threat to the incumbent group carriers, but an opportunity for the organizations and the sectors that we have identified.

Bill: And what is so dangerous about this is that by the time you know that you are being disrupted, it might be too late. Because you need an enabling technology and a platform and an operating model that is designed and developed that way, and the disruptors will start with something that is not very good but does the job -- meaning costs less and gives somebody an option -- by the time the incumbents realize that, it might be too late.

Michael: They will be too far behind. It is kind of like trying to start the race when the other guys have already done the 60-yard mark in a 100-yard dash, and you can’t make up that kind of ground.

Sean: Alright gentlemen. Thank you for that. Good seeing you again Michael. We have been discussing the disruptive possibilities of individual health care on group health plans with Michael Raynor and Bill Copeland. If you would like to learn more about Michael, Bill, or the topics discussed on this broadcast, you can find that information on our website. It is For all the good folks here at Insights, I am Sean O’Grady. We will see you next time.

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