The popular press says that scale, cost synergies and technology leverage are the three main drivers of the insurance merger wave—and of course all three are crucial.
But there is something else going on. Below the surface, market share and strategic competency in Medicare Advantage (MA) may be equally significant. Aetna seeks Humana, which is a force in MA. Anthem pursues Cigna in part to get Healthspring, another MA powerhouse.
Medicare Advantage has become a financial lodestone because of the fortunate intersection of powerful demographic trends and brilliant program design. No other health insurance sector can match its secular growth and robust reimbursement. But executives at major insurers, advised by their actuaries and line-of-business leaders, also see in Medicare Advantage both the shape of things to come and the skills needed to survive and thrive through reform.
Demographically, the swelling Medicare Baby Boom will persist at CMS for two or three decades. Medicare Advantage reimbursement is based on Medicare Fee-for-Service costs, averaged at the county level. Because care costs for the elderly are substantial—roughly $10,000 per person per year annually—and because Fee-for-Service care is unmanaged and highly inefficient—there is plenty of premium and profit to work with.
The particular nature of the MA population rewards the investment of these dollars to drive strategic learning and transformation. Medicare Advantage customers are extremely valuable as a statistical population—large enough to reflect the U.S. population overall, yet concentrating the effects of multiple chronic conditions and lifestyle choices as these factors combine in the aging process.
As for program design, no other program or commercial phenomenon is close to providing the kind of at-scale closed-loop continuous learning that MA provides. Risk adjustment rewards prospective diagnosis, early intervention, and coordinated care. Star ratings and the CAHPS consumer survey ensure that financial success is linked directly to clinical outcomes and consumer satisfaction. Financial rewards are delivered both in profit and market share, since high Star ratings enable benefit “bids” that are superior to offerings from lower-rated MA plans. Payers (and, increasingly, providers) have developed the capacity to respond proactively and programmatically to the regular ratcheting up of the Star rating metrics each year.
Payers have noticed that the roster of 5-Star plans is dominated by plans integrated with, or owned by, health systems. They need the active engagement of primary care providers and good contracts with hospitals to succeed in the annual goal-setting and learning processes—and they have financial incentive to offer clinicians a good share in the rewards. Thus, MA is in the forefront of new payer-provider models that reflect collaboration and shared responsibilities, as opposed to the antagonistic “win-lose” contracts that dominate Fee-for-Service.
There are five key skill areas for which MA provides the best current learning and at-scale skill development:
1) Population health management: This overworked phrase is meant to capture the profound shift needed to effect reform, a shift in which our healthcare system will evolve from reacting to individual patients who need attention, and instead begin to reach out programmatically to multiple individuals as part of well-defined populations—before they need attention. Successful MA participants are well down the learning curve in this transition, developing broadly extensible capabilities:
- Attribution: As patients evolve from chronic conditions to acute events, it is important to attribute the patients to those doctors who are best equipped to function as the driver of the patient’s care plan; this mundane-sounding skill is surprisingly difficult and far advanced in MA;
- Data management and analytics: often used too broadly as a synonym for the entirety of population health management, “Big Data” skills are critically important in the characterization of the population and early identification of its needs, preferences, and receptivity to engagement;
- Network design and management: MA regulations and economics are leading the way in defining populations and insurance products that create networks narrow enough to manage, yet broad enough to satisfy consumers.
2) Excellence in consumer sales and marketing: analysts have largely missed how valuable this aspect of MA has become. Given the growing consensus that consumers will be the most powerful force in shaping the new healthcare industry, MA has funded the development of powerful consumer marketing organizations within successful payers:
- Recruitment: MA payers have learned how to market to a demanding population in a highly competitive sector, under the tight control of regulators at CMS who exhibit a level of fact-checking and field-leveling few consumer marketers could survive;
- Customer service: all aspects of the consumer experience with health plans (and many with providers) are carefully tracked and embedded in Star ratings and CAHPS survey results;
- Customer retention: the brilliant decision to defer risk adjustment revenue, typically for more than a year, has driven payers to focus on long-term trust relationships with each consumer—if the consumer walks away, she takes her risk-adjusted revenue with her to the next payer;
- Consumer engagement in wellness: Life choices in nutrition, exercise, medication adherence, and social engagement are essential to the mitigation of multiple chronic conditions and the avoidance of acute episodes that explode cost, erode quality of life, and guarantee expensive and lengthy “maintenance” of people who are sicker than they need be; successful MA plans attract elders into dialogue and commitment via programs (often executed in partnership with providers), coaches, etc.
3) Risk adjustment and prospective health status assessments: the MA risk adjustment system (often called “HCC coding” for its way of categorizing diagnoses) corrects the worst defect in the original HMO model. In the 1980’s, the first wave of HMOs paid payers a “capitated rate” that was typically the same for every patient. This created economic incentives for the payer to deny or defer care and to “slough off” patients who would cost more than the average—horrific behaviors that damaged U.S. healthcare for nearly half a century. By contrast, MA makes all segments of the population potentially profitable—chronic conditions rarely go away, so a high-risk patient will generate higher-than-average premiums indefinitely—and incentivizes the healthcare system to promote wellness and patient self-management. A core mantra for successful MA is “code them accurately, get them healthy, and keep them healthy.” Excellence in prospective health status assessments is now recognized as a core competency in MA and is spreading into Managed Medicaid, Duals, and Exchanges.
4) Care planning and team-based coordinated care: as seniors age from 65 to 85, chronic conditions advance, requiring contact with multiple clinicians in different care settings and rewarding proactive plans to diagnose, monitor, and mitigate co-morbidities regularly across those care settings. MA is a principal driver and funder of actual interoperability across health system participants.
5) Soft skills and hard discussions: by painful experience, MA plans have learned to encourage more consultative, personal relationships between patient and doctor than were promoted by procedure-driven Fee-for-Service. For example, sensible end-of-life decisions are essential to all three elements of the Triple Aim, but are extremely difficult if trust and familiarity have not been established in advance. These soft skills and hard discussions are increasingly important in all populations, from Medicaid to the dependents of Cadillac plan commercial members.
Critics decry the merger wave as evidence that the Patient Protection and Affordable Care Act (PPACA) is driving consolidation of payers and providers, creating a handful of healthcare superpowers who will strangle innovation and ensure the reappearance of runaway cost growth. This dire prediction may yet prove true.
On the other hand, the key role of Medicare Advantage in these proposed mergers may tell a more positive story. Whether they are approved by regulators or not, the mergers tell us that major insurers see the future of healthcare as close collaboration with providers, strong consumer marketing and customer service, and the core competencies of population health management.