Cutting it costs and improving business performance

Cutting IT Costs and Improving Business Performance
Conversations with Leading IT Executives

Reducing the Cycle Time for Change in Health Care Insurance
A Conversation with Kelly Cannon, former Vice President, Shared Application
Services at Kaiser Permanente, CIO, Enterprise Infrastructure at Nationwide
Insurance, and CIO at Wausau Insurance.

Mr. Kelly Cannon has over 20 years experience in all aspects of
technology leadership, including direct delivery experience in health
care, property/casualty insurance, life & health insurance, and
manufacturing. He is currently a principal at Kelly Cannon and
Associates. For additional details, please see Mr. Cannon’s
biography at www.linkedin.com/in/kcannon.

Introduction

The authors of a recent McKinsey Global Institute study on health care∗
summarize their findings as follows: “[T]he United States spends $650 billion
more on health care than might be expected given the country’s wealth
and the experience of comparable members of the Organisation for
Economic Co-operation and Development (OECD). …Roughly two-thirds of it
pays for outpatient care, including visits to physicians, same-day hospital
treatment, and emergency-room care. The next-largest contributors to the
extra spending are drugs, and administration and insurance.”

The CAST Research team recently caught up with Kelly Cannon, former Vice
President, Shared Application Services at Kaiser Permanente, one of the
largest health care insurers in the U.S. We talked about the current state of IT
in the health care insurance sector, the major initiatives underway, and how
senior IT executives are responding to the tough economic conditions by
rapidly delivering business benefits.

∗
http://www.mckinseyquarterly.com/Why_Americans_pay_more_for_health_care_2275

REDUCING THE CYCLE TIME FOR CHANGE IN HEALTH CARE INSURANCE
AN INTERVIEW WITH KELLY CANNON

CAST Research: Before we focus on the health care insurance sector, tell us a
little bit about the different types of insurance companies and how they are
feeling the effects of this recession.

Kelly Cannon: Sure. There are three major sectors in insurance – life insurance,
property and casualty, which is insurance for automobiles, homes, etc., and
health care insurance. The insurance business generates two kinds of
revenue: underwriting income, which comes from the policies we write, and
investment income which comes from investing the monies from premiums.

You’ve probably read recently about how life insurance has been affected
by the current economic downturn – their investment portfolios have suffered
large losses in the financial markets. In general, life insurance companies rely
heavily on investment income and their fortunes are closely tied to the state
of the financial markets.

Property and casualty revenue streams are tied to natural calamities which
are hard to predict and can trigger huge outflows of cash. It’s a very
competitive business where transaction volumes are large and margins are
thin. IT is a key driver of business innovation in this sector.

Health insurance is not directly tied to the financial markets or natural
disasters. It is affected by the rapidly escalating costs of health care in the
United States.

CR: How so?

The current recession squeezes health KC: The basic cost of health care
– what hospitals and physicians
care insurance from both sides.
charge – continues to escalate.
But health care insurers can’t raise their premiums at the same rate.

In fact, the current recession squeezes health care insurance from both sides.
On the one side, hospitals and physicians are pushing for higher rates of
reimbursement. On the other side, large customers and corporations are
pushing us to reduce premiums. Our customers are saying, “Here are the
prices we are willing to pay, take it or leave it.” The competition to win
business is intense.

CR: How are health insurance companies responding?

KC: You wouldn’t be surprised to know that we’re cutting costs – it’s not
uncommon to hear of cost cuts in the hundreds of millions of dollars. Our

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business model is stable, but we need to generate more revenue from this
model, cut costs, and improve efficiency. And we need to do this much
faster than before.

The silver lining in these difficult economic times is that we’re able to partner
with our vendors to drive down unit costs, cut down on the number of
projects we launch, and retire systems at a higher rate. The economic crisis
has also enabled us to make some internal cost cuts that would have been
difficult even a couple of years ago.

CR: Tell us how this translates into IT initiatives.

KC: First, let me say that in these tough times, IT has the attention,
engagement, and support of our business partners. Our business partners are
relying on IT to improve their competitive advantage.

Competitive advantage comes from using the vast amounts of information
we have in our data warehouses to drive business cost reduction and
generate additional revenue. The role of IT is not just to automate business
processes – it is to transform them, and enable new strategies for increased
business efficiency and revenue. IT makes possible successful new business
strategies that would not and could not otherwise exist.

CR: How is IT transforming business processes in health care insurance?

The role of IT is not just to automate KC: The value chain of a policy
begins with underwriting, then
business processes – it is to transform
servicing the policy through its life
them, and enable new strategies for
time, and finally, handling claims
increased business efficiency and on the policy if and when that
revenue. IT makes possible successful happens. At each step of the
new business strategies that would not value chain, IT can drive
and could not otherwise exist. significant business cost savings,
increase revenue or both.

I’ll begin with the servicing of a policy through its life – it’s an area where IT
can have an immediate and significant impact. Providing policy holders
access to their information online allows us to drastically reduce the cost of
servicing a policy.

The things that customers usually call us for – information on fundamental
coverage on the policy, access to policy details, updating personal
information, renewing their policy – can now all be done online without any

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customer service agents. The hard cost savings for the business are
immediate and substantial.

This applies for our internal customers as well. Arming our business customers
with relevant data, and providing them with platforms for quickly analyzing
this data, puts a lot of power in their hands. It enables them to generate
reports, take different cuts of the data, and visualize it, all without sending a
request to IT. Data access leads to better business decisions and tremendous
business productivity.

From the IT standpoint, this requires rock solid web platforms – very high
availability and low latency. It requires us to provide useful functionality that
works very reliably. And we need to be very nimble in developing, deploying,
and enhancing this functionality to serve the evolving needs of our policy
holders and our internal business customers.

CR: What about the other segments of the value chain?

KC: At the very beginning of the value chain is the activity of underwriting –
making the decision on whether to write the policy in the first place, and if so,
at what price.

Enterprise-wide access to well-structured When you write a policy, there
are a lot of unknowns. It comes
digitized data is essential for all our
down to how accurately you can
business initiatives. price the risk of health problems.
Having a lot of information helps, but that’s actually the easy part; the hard
part is figuring out what’s relevant -- getting to the right datasets to uncover
the right patterns.

We use rules engines for underwriting, similar to the ones credit card
companies have to determine customer credit scores and credit limits. These
rules mine data patterns to better quantify the risk of writing a particular
policy or group.

Roughly speaking, the cost of policy underwriting ranges between 10%-15%
of the business cost of a policy. When you use a good underwriting engine,
you save time and money; and if the engine is more accurate than a human
underwriter, you reduce the likelihood of claim liabilities.

Insurance companies have rules engines for pricing as well. Pricing is
becoming very important given the heightened competition we face.
Generating a new price list to match changing business conditions and
customer profiles is a significant competitive advantage.

PAGE 4 OF 9


CR: All this sounds data intensive. How do you manage the vast and growing
amounts of policy information?

KC: Enterprise-wide access to well-structured digitized data is essential for all
our business initiatives.

Of course, the foundation for this is high-quality data -- accurate, complete,
and up to date -- and a practical and useful data model. We’ve all had
sophisticated data warehousing systems for years, but it’s still very hard. For
one thing, the data model is not stable – it keeps changing because health
care is a constantly evolving field – new ways of coding diagnoses, new
medicines, new medical technology. The advent of electronic heath records
has an enormous impact, because it makes so much information available
for the first time in digital form, instead of paper.

And, the nature of the business
The opportunity here is to shape business
is such that data is dispersed
strategy, not simply enable business over multiple business units
operations. across multiple systems. Pulling
this data together is a substantial technical challenge. It’s very IT intensive
and we need to be able to deliver this functionality very rapidly to our
business partners and our customers.

Moreover, the difficulty of implementing such a solution goes beyond the
technical. The data resides in various business silos with their respective
owners who may not need to cooperate with their counterparts in other
business silos – it becomes a political issue of protecting one’s business turf.

CR: So what should the CIO do?

KC: I think it’s a unique opportunity for CIOs to shine. As a CIO, you’ve built a
relationship with business unit heads founded on trust, respect, and a mutual
understanding of each others’ short- and medium-term needs. Use this hard-
won credibility and knowledge of the business to work with business partners
to integrate your data sources and improve data quality. The opportunity
here is to shape business strategy, not simply enable business operations.

Let me say that again. As IT executives, this is a new and unique opportunity
for us to go beyond automating business process to forging new business
processes that reshape our companies. IT does matter -- now more than ever.

CR: We’ve talked about underwriting and servicing a policy. What about the
claims processing segment of the value chain?

PAGE 5 OF 9


KC: Yes, that’s a very important part of the value chain – about 65% of the
cost of a policy is incurred at this segment of the value chain – from the
handling and the payment of claims.

The basic idea here is called “straight through processing” which is a term
that comes from the financial services industry. The aim is to handle a claim
transaction from start to finish, for example, from the time the claim is filed all
the way through to when the physician gets reimbursed, without any human
intervention. No customer service reps, no human adjudicators.

The economics for doing this are very appealing. We can cut the cost of a
claim by a factor of 20 – from around a dollar to a few pennies per claim.
And this adds up over hundreds of thousands of claims.

As you can imagine, high-quality data is essential for straight through
processing. For example, we can do quite a bit with mining data patterns to
uncover fraudulent claims, but only if the data is accurate and complete.

CR: This sounds like a concrete
The best CIOs know how to take a opportunity for IT to move from
business strategy and put it into practice order taker to order shaper –
in a way that gives their business partners working closely with the business
control over the significant revenue and to improve business productivity.
cost levers.
KC: Yes, that’s right. The best CIOs
know how to take a business strategy and put it into practice in a way that
gives their business partners control over the significant revenue and cost
levers. It requires having deep knowledge and empathy for what business
leaders are facing. Instilling this knowledge and empathy in the IT leadership
team is one of the best things a CIO can do.

CR: How do you deliver this competitive advantage quickly at low cost?

KC: For years mature IT practitioners have been steadily improving the
efficiency of the software development life cycle. But the conditions we face
today require more than incremental change – we need a significant leap in
speed, at lower cost, but without loss of quality.

Outsourcing is a big driver of cost savings, but you quickly hit the limit where
any more outsourcing and you erode quality and productivity. The speed
you gain in delivery can come back to haunt you as increased maintenance
costs. Everyone would like to shorten the testing cycle, but again there are
obvious limits and risks.

PAGE 6 OF 9


CR: Where then do the significant gains come from?

KC: There are no silver bullets. You’ll get significant gains if you’re able to
objectively and consistently measure the progress made towards completing
a software product (as opposed to simply the time spent). You also need to
have a good measure of the quality of software delivered. After all,
productivity without good quality is a waste, and quality without productivity
is costly!

You’ll get significant gains if you’re able to CR: The CAST Application
objectively and consistently measure the Intelligence Platform (AIP)
progress made towards completing a generates objective measures of
software product (as opposed to simply both progress and quality. How
the time spent). You also need to have a do you recommend CIOs use
good measure of the quality of software these metrics?
delivered. After all, productivity without
good quality is a waste, and quality KC: I think CIOs and their IT
leadership teams can use these
without productivity is costly!
metrics in a number of ways. With
vendors, you can write the quality metrics into your SLAs, and use the
productivity metrics to monitor and drive down unit costs. With internal teams,
use these metrics to deliver faster, at lower cost and higher quality. Use the
quality metrics to measure and manage the risk of business disruption in the
legacy portfolio. And finally, use these metrics to get maximum visibility of the
interdependencies in the legacy portfolio.

CR: Can you expand on this last point?

KC: Certainly. A CIO’s dilemma is that nothing is green field. Your portfolio of
applications evolves in a way that never makes rational sense when you look
at it in hindsight. But this haphazard evolution drives huge maintenance costs.
Few business partners want to hear about the challenge of managing this
legacy code base, much less invest in making it more efficient.

The applications you deliver today become your legacy applications
tomorrow. So be very careful what you deliver today and get the best
visibility you can of interdependencies between your complex application
systems. The more you know where the bodies are buried, the better off you
are.

CR: It’s interesting that you bring in the legacy portfolio and TCO. The CAST
AIP measures the Application Software Quality of a complex application.

PAGE 7 OF 9


We define Application Software Quality as more than just high availability
and low latency in the production environment. It includes the speed with
which the application can be modified to meet a pressing business need,
and the inherent strength of the application to repel security attacks. In other
words, Application Software Quality goes beyond present-day performance
to include a measure of future performance -- how well an application can
meet future business needs.

KC: That’s precisely my point. Speed in IT is not just speed of delivery. It won’t
matter much how fast you deliver something if it ends up costing you an arm
and a leg to maintain or modify in response to the next pressing business
need. The goal is to deliver supportable systems at a reasonable cost.

For an IT executive, the cost to maintain the legacy portfolio is a perennial
challenge. The reality is that legacy maintenance always grows faster than
the rate of inflation. The reason is not hard to understand – every year, more
complex new systems that cost even more to support are piled on to the
legacy portfolio; and we don’t
Speed in IT is not just speed of delivery. It retire enough to balance the
won’t matter much how fast you deliver added costs. Add to this the fact
something if it ends up costing you an arm that new systems cost much more
and a leg to maintain or modify in to maintain in the first 3 years of
response to the next pressing business their life than at any other stage,
need. The goal is to deliver supportable and the rate of maintenance cost
growth quickly escalates.
systems at a reasonable cost.
CR: Which means that if you
wanted to keep the maintenance cost flat, you’d have to retire several
legacy systems for each new one you introduce.

KC: That’s correct. But it’s not possible to do that. So what you need is visibility
over your application portfolio. Where are the real drivers of cost, and how
fast are they growing? To find out, you have to get to the real drivers of risk in
your portfolio. Unfortunately, these are buried deep within the source code of
your applications. The more you can do to find those risk hotspots reliably and
fix them quickly, the better you’ll be at directing your valuable maintenance
dollars to fix the most costly problems. And keep in mind that your most
urgent problems are not necessarily the most visible or costly to address.

Every CIO has been in annual discussions with business partners over where to
allocate IT funds. Should we put it toward maintaining the critical operating
platforms on which the business runs, or build new business functionality? The
business always wins this one - the answer is new business functionality. If you
want to change this outcome, you need to come prepared with objective

PAGE 8 OF 9


data about the quality of your legacy applications, and the effect a new
system will have on the quality and performance of existing applications. The
objective data on quality that the CAST AIP generates is exactly what you
need.

CR: We’ve spoken in quite some detail about IT’s role in reducing business
costs and increasing revenue in
The job of a CIO is not just to deliver fast – health care insurance. As we
it is to reduce the cycle time of change in conclude this conversation, what
the enterprise. To be able to do this well, is your advice for CIOs in these
you have to deliver flawlessly; but that’s difficult economic conditions?
only the first step.
KC: The job of a CIO is not just to
deliver fast – it is to reduce the cycle time of change in the enterprise. To be
able to do this well, you have to deliver flawlessly; but that’s only the first step.
In addition, CIOs have to focus on two things:

Move from detailed business-process knowledge to a detailed
understanding of your organization’s business model – an
understanding of the significant drivers of cost and revenue in
the business model.

Move from detailed knowledge of IT delivery and maintenance
processes to an understanding of the key drivers of TCO in your
application portfolio.

To do these things, you have to make delivery progress and application
quality objectively measureable. These quantities give you the visibility over
the IT factory you need to focus on the real reason for your job – to
significantly increase business profitability.

PAGE 9 OF 9

Cutting it costs and improving business performance

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