Five Macro Trends Driving Healthcare Industry Investment in 2011 and Beyond

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Here are five industry trends that will strongly influence where and how healthcare ecosystem participants will invest business development and technology dollars this year and into 2012.

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Five Macro Trends Driving Healthcare Industry Investment in 2011 and Beyond

  1. 1. • Cognizant 20-20 InsightsFive Macro Trends Driving HealthcareIndustry Investment in 2011… and Beyond Though healthcare reform remains a matter of which could become an Orbitz or Travelocity political debate at the national and state levels, model for healthcare. With the commoditiza- we have identified five broad industry trends that tion of insurance products, health plans on should hold true regardless of political maneuvers. the exchanges will differentiate themselves These trends and their implications will strongly through such measures as price, service, influence where and how healthcare ecosystem quality and breadth of network. participants will invest business development and technology dollars this year and into 2012. • Minimum medical loss ratios (MLRs). In a mandate to reduce administrative expenses, reform has reset MLRs to 85% for the large 1 Trend 1: The Public-Sectorization group market and 80% for the small group of Healthcare in the U.S. and individual markets. If unable to meet Government involvement and influence in health the MLR requirements, plans must refund a insurance markets and healthcare delivery is portion of premium dollars to members. Many expanding dramatically. The Patient Protection individual and small-market plans are not and Affordable Care Act introduced sweeping meeting the new required MLRs. Doing so will provisions that will have a significant impact require revamped cost structures. during the next 10 years and beyond. • Millions of new members. Health reform will The Patient Protection and Affordable Care Act result in 32 million more Americans having affects all industry segments to varying degrees. insurance coverage. Individual membership While shifts in the political environment will will increase dramatically, from 11 million today affect healthcare reform’s evolution and imple- to nearly 20 million, post-reform. mentation, the overall impact of the act will be a • Medicaid expansion and growth. Medicaid significant increase in the government’s role over recipients will increase by more than 16 million all aspects of healthcare. It will influence supply new members. Revenue is likely to increase for and demand equilibrium within the healthcare Medicaid health plans, but margins on this new system while driving significant changes in that business will be low. system, including: • Medicare Advantage challenges. Cuts in • Health benefit exchanges. Exchanges in each Medicare Advantage reimbursements will state are to be in place by 2014, with all partici- strain plan profitability and drive some plans pants offering four standard benefits packages. out of this business. Medicare Advantage plans Insurance markets could be transformed as have about 11 million members today; post- new business moves to these exchanges, reform, that number could decrease by 15%. cognizant 20-20 insights | july 2011
  2. 2. • Accountable care organizations (ACOs). Trend 2: Redistributing These encompass a spectrum of models 2 Accountability and Risk Across involving physicians, hospitals, payers and vendors, under a basic premise of sharing risks Payers, Providers and Consumers and rewards based on patient outcomes. Shifting risk from payers to providers and from groups to individuals is reshaping accountabil- • Administrative simplification. If efficiencies ity and delivery models. New delivery models are gained, these could be significant for both providers and plans. Yet implementation will be include ACOs and the Patient-Centered Medical expensive and difficult, coinciding with ICD-10 Home. Financial risk is also shifting from health remediation efforts and expenditures. plans to providers, convergent with a move from episodic to continuous care. Related new reim- • Risk adjustment in individual and small bursement models and capitation are emerging, group commercial markets. Insurers with such as pay for performance, outcomes-based higher risk will receive additional payments; contracts, global pricing strategies and risk-based those with lower risk will pay a penalty. These capitation. adjustments could have dramatic operation- al, revenue and profit implications for health A major question is how widespread and suc- plans. cessful the adoption of ACOs will be. The Afford- able Care Act includes a new Medicare shared • Outcomes- and quality-based reimbursement. savings program, to launch in 2012, that “pro- The Patient-Centered Outcomes Research Insti- tute, the CMS Innovation Center and the Inde- motes accountability for patient populations and pendent Payment Advisory Board all share coordinates items and services … and encourages the mission of driving down cost trends and investment in infrastructure and redesigned care rewarding quality. processes for high-quality and efficient service delivery.” Many of the organizations that want Cognizant’s Perspective to qualify as ACOs under the Medicare shared Reform will reduce overall health industry profits. savings program have already begun prepara- Only the most efficient plans will survive. Increased tions to do so. pressures on profitability will drive plans toward Business models will change with ACOs. Expect economies of scale, so consolidation and M&A new partnerships, acquisitions and/or mergers activity among health plans among healthcare payers and provider organiza- and providers will intensify. Business models Successful insurers will shift tions by year’s end. Another profound question is whether the advent of ACOs could mark the will change with their attention from group beginning of the end for today’s health insurers ACOs. Expect to individual plans. by allowing employers to contract directly withnew partnerships, Remediating systems and providers for medical services, care management, wellness programs and cost control. ACOs also acquisitions and/ applications to support new could have an impact on prescribing patterns. business requirements willor mergers among require significant expense The critical question is which entities will havehealthcare payers and may change technology the ultimate control within the ACO model. Devel- and provider roadmaps and timelines. opments to watch include the timing of payer Administrative simplification organizations by will transform basic trading investments in provider delivery models, as well as shifts among biopharma and life sciences year’s end. partner interactions between companies, from pure vendor models to partnering plans and providers. with providers. We will see renewed interest in transformation, Accountability and insurance risk are shifting outsourcing and/or virtualization of business from groups to individuals. Member account- processes and functions to drive efficiency and ability is growing and being built into product maintain profitability. Managed-care expertise will designs such as value-based benefits. Value- win the day as reform renews the business case based benefits encourage and reward members for innovation centered on the core principles for such behaviors as appropriate use of high- of managed care: improving quality, access, value services, including certain prescription efficiency, patient centeredness, safety and cost drugs and preventive services; healthy living, containment. including quitting smoking and/or increasing cognizant 20-20 insights 2
  3. 3. exercise; and selecting high-performance pro- • The widespread acceptance and adoption ofviders who follow evidence-based treatment standardized, evidence-based medical careguidelines. guidelines, or EBM, for an expanding set of medical conditions. Evidence-based medicalIncentives for members can include rewards, care guidelines are speeding the standardiza-reduced premiums, adjustments to deductible tion and commoditization of components ofand co-pay levels, as well as contributions to fund- the care management value chain, includingbased plans, such as a health savings account. predictive modeling, health risk assessment, stratifica- If ACOs succeed,Cognizant’s Perspective tion, quality reporting and fee-for-serviceProviders and payers will focus on ACO planning in outcomes measurement.2011 and begin implementation later this year and models will decline, • The regulation and stan- dardization of health insur- and capitation-likeinto 2012. The biggest challenges for ACOs will bemanaging patient populations, including retaining ance products, occurring as payments couldmembers and encouraging them to adopt healthy the industry migrates awaybehaviors and make smart medical choices. If become the norm. from its traditional business-ACOs succeed, fee-for-service models will decline, to-business focus on group insurance purchas-and capitation-like payments could become the ing models, toward retail and business-to-con-norm. The role of health plans as “infomediaries” sumer models for individuals making purchaseswill increase. As traditional insurance functions via public health insurance exchanges.are delegated to ACO-like entities, plans will needto refocus on new value propositions. • Commoditization of product development, underwriting and rate quoting processes.ACOs will invest in clinical decision support These trends will dramatically accelerate,and business intelligence tools to provide fueled by the combination of standardizedactionable information and alerts to support products and premium price transparency.care management. The right infrastructure willbe critical to ensure sustainability. Payers will • Increasing quality, cost and efficiency transparency among providers. These viewsleverage their infrastructure and technology into provider results are available throughinvestments to gain entrance to the ACO market. performance networks, report cards and WebACOs will need to invest in or partner for such services such as Subimo, HealthGrades, etc.services as customer relationship managementand revenue cycle management and analytics • Regulatory agencies and industry groups accelerating, governing and institutionalizingcapabilities and tools. “As a service” models and transparency and standardization. InfluencersACO-in-the-cloud offerings will emerge and gain include the Patient Centered Outcome Reim-traction in 2012. bursement Institute; CMS Innovation Center;Health organizations have new opportunities to the Independent Payment Advisory Board;work together to share financial risks and rewards. and the Comparative Effectiveness ResearchCombining the care management experience of Institute.providers, the analytics and risk management Cognizant’s Perspectiveof payers and the outreach experience of thebiopharma/life sciences industry will enable the Standardization and commoditization of processescreation of new entities among traditional players will lead to increased virtualization in tandemas ACOs grow. with delocalization and disaggregation across the value chain. As standards expand beyond Trend 3: Standardization, administrative data and business functions to 3 Commoditization and Transparency encompass clinical activities, we will see the rapid emergence of software as a service (SaaS),Several forces are rapidly accelerating the platform as a service (PaaS) and knowledge asstandardization and commoditization of core a service (KaaS) offerings in the market. Theprocesses across the health plan industry: business case for health information exchanges• Industry-wide data and transaction stan- will become clearer because the value of conduc- dards adoption. This not only enables greater tivity and data exchange will increase with the interoperability, but it also increases process use of standardized data sets, clinical pathways, portability and automation. outcomes measurement, etc. cognizant 20-20 insights 3
  4. 4. As these trends continue, health plans and “anywhere, anytime worker”) and business health industry vendors can leverage lessons models (anything as a service), concurrent with learned from the financial industry, namely that a decreased emphasis on asset ownership and as processes were com- increased reliance on third-party specialists.Healthcare “unwired” moditized, a plethora of Healthcare payer technology vendors have been will rise, aided by the new solutions, products and services emerged. Health active in acquiring or partnering to position coreproliferation of mobile plans will be driven to distin- applications as BPO platforms (and vice versa, with BPO players investing in platforms), whilehealth applications to guish themselves based on service, brand and quality. large vendors are renewing BPO investments and collect and send vital strategies to meet surging market interest. signs from wireless Standardization, commod- itization and transparency Cognizant’s Perspective and wired remote also will contribute to the Most providers will explore IT as a service this year patient and personal creation of the IT-enabled and next. Electronic health records as a service health monitoring economy. Those stakehold- will attract particular attention because timelines ers who can quickly exploit for American Recovery and Reinvestment Act devices. automation and business (ARRA) implementations are growing short, and solution opportunities will be best positioned for the majority of U.S. physician practices have five accelerated growth in the coming decade. or fewer providers and little to no in-house IT capability. Trend 4: Emergence of Cloud 4 Solutions and “Anything as a The proliferation of telepresence and wireless Service” Business Models and wired mobile health applications will signifi- cantly change how patients, providers and care Rapidly evolving technology — including mobil- managers interact. For example, millennials, who ity, social computing, broadband and cloud-based have essentially been raised using the Internet, computing models — are enabling corporate IT mobile devices and social networking tools, will to transition to a new architecture. However, expect to interact with the healthcare ecosystem the healthcare industry’s flexibility to adapt to in the same way that they interact with all of their a quickly changing environment is significantly other service providers: through Web sites and hampered by heavy on- Cloud technology, premise, often customized, portals, via e-mail, using smartphone and tablet PC applications. combined with CRM and RCM implementa- tions. advances in mobility Healthcare stakeholders will turn to cloud computing solutions to address concerns about and telepresence The emerging technolo- scalability, availability and security. Mobile gies with the greatest solutions, will create devices and consumer connectivity will create disruptive capacity in 2011new unwired business and beyond include cloud new security challenges for CIOs. Virtual ACO solutions will proliferate to provide necessary models capable computing and telemedi- technology to these new entities. Expect “ACO in cine/tele-health. In addition, of providing care a box” offerings from IT consultancies, as well as healthcare “unwired,” or new anywhere. business models delivering software vendors. care anywhere, will rise, aided by the prolifera- Cloud-based platforms and new IT as a service tion of mobile health applications to collect and models will fundamentally change the software, send vital signs from wireless and wired remote service and hardware business equations and patient and personal health monitoring devices. create opportunities for new players to enter the industry. For example, cloud technology, The combined healthcare reform factors of combined with advances in mobility and telepres- new customers, revamped costs and improved ence solutions, will create new unwired business medical loss ratio performance will drive models capable of providing care anywhere. This healthcare payers to new technology models will allow new entrants to leapfrog brick-and-mor- that promise greater flexibility and cost control. tar and go directly to virtual integrated models of These include virtualization of processes (the care delivery. cognizant 20-20 insights 4
  5. 5. 5 Trend 5: Consolidation, dominate the healthcare market into 2012. Health plans and stakeholders that can accommodate Diversification and Collaboration new business models effectively and rapidly willLines will blur between provider and payer be rewarded. Agility will drive sustainability andsectors as they formulate post-reform strategies. profitability. Integration competencies will bePlayers throughout the health industry have new paramount. Payers and otheropportunities to combine their expertise, sharing health industry stakehold- More health plansfinancial risks and rewards as they develop new ers will need to be proficient will differentiatesolutions. at quickly launching and absorbing new lines of business. themselves based onThese activities include business portfolio realign- Services will expand; for example, their solutions andment, with companies expanding services beyond health plans will offer new outcomes, enabledtheir core offerings. This includes leveraging disease management/caseexisting assets and capabilities in internation- management services or IT by technologyal markets. It also involves the expansion of services to create new revenue and applicationservice lines, with health plans offering diseasemanagement or case management services, channels. ownership.claims processing services and/or business and Healthcare payers will acquireIT consulting services. Health organizations are technologies and software companies to developacquiring software companies for revenue growth new revenue sources. More health plans will dif-and service expansion, along the care continuum. ferentiate themselves based on their solutions and outcomes, enabled by technology and appli-This activity could traverse unlikely terrain, as cation ownership. Payers will acquire providersuppliers buy providers, health plans team up technology platforms and applications to speedwith providers, and pharma and life sciences up vertical integration, further blurring the linescompanies enter more service markets along the between payers and providers. Plans will tapcare pathway. existing IT assets and cost centers to drive newTransaction activity in all health sectors is on an revenue opportunities, including those in interna-upward trend that will continue throughout the tional markets.year. Mergers and acquisitions will bond familiar Adaptive, agile health plan business modelsindustry names, as well as unfamiliar entities, as that can accommodate accelerated transforma-organizations fill their strategic gaps. tion through rapid-cycle change management,Cognizant’s Perspective innovation and virtualization will be best positioned for post-reform opportunities.Vertical market mergers and acquisitions willAbout the AuthorsBill Shea is an Assistant Vice President within Cognizant Business Consulting’s Healthcare Practice. Hecan be reached at William.Shea@cognizant.com.About CognizantCognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered inTeaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industryand business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50delivery centers worldwide and approximately 111,000 employees as of March 31, 2011, Cognizant is a member of theNASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performingand fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant. World Headquarters European Headquarters India Operations Headquarters 500 Frank W. Burr Blvd. Haymarket House #5/535, Old Mahabalipuram Road Teaneck, NJ 07666 USA 28-29 Haymarket Okkiyam Pettai, Thoraipakkam Phone: +1 201 801 0233 London SW1Y 4SP UK Chennai, 600 096 India Fax: +1 201 801 0243 Phone: +44 (0) 20 7321 4888 Phone: +91 (0) 44 4209 6000 Toll Free: +1 888 937 3277 Fax: +44 (0) 20 7321 4890 Fax: +91 (0) 44 4209 6060 Email: inquiry@cognizant.com Email: infouk@cognizant.com Email: inquiryindia@cognizant.com© Copyright 2011, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any cognizant 20-20 insights 5means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein issubject to change without notice. All other trademarks mentioned herein are the property of their respective owners.

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