On July 2014, there were approximately 40 million uninsured Americans. HHS.gov data shows an increase of 5.2% in gaining insurance. Enrollment to the Health Insurance Marketplace totaled approximately 8 million in May, 2014. Out of which 2.6 million signed up on the state-based, and over 5.4 million, on the federally-facilitated marketplace.
The Healthcare Marketplace
Like any other product, part of this may be attributed to the technology, state-adoption, plan-involvement and member inhibition. The “complexity of buying healthcare” still poses a bigger barrier to the enrolment and eventually the coverage rate. Consider the scenario where an individual is looking for the highest coverage for the most economical price in the marketplace. According to traditional economic theories, the “reverse-auction” forces plans compete with each other to acquire the member at the lowest price-point. This assumes a few things – it is a buyer’s market and the sellers do not differentiate their offerings. However, these assumptions are not entirely correct as shown by the HHS adoption rates, and the complex nature of coverage.
Employer-based insurance being the primary revenue stream for plans covering population under the age of 65 years, an exchange is perceived as the ideal shopping ground for those below 25 and above 65 years old. The challenge is to fully understand coverage, premium, deductibles, out-of-pocket expenses, and copayments. What the consumer wants to really know is the “out-of-pocket” and premium for the coverage. Healthcare products are highly fragmented. Orthodontist services vary in price from dental surgery or routine checkups. Coverage on physical therapy, chiropractic services, and acupuncture vary on the number and reason for visits. There is further fragmentation in the variety of products offered in an exchange. Consumers have the option to buy a la carte services – dental, vision, pharmacy, primary care, and alternate therapy, from different plans. This unbundling of healthcare is a primary factor inhibiting adoption and driving healthcare costs down.
Effect on consumers and plans
Dis-intermediation is not an option anymore for insurance plans. Even though we see a surge of retail outlets and private marketplaces by insurance plans, the model is not scalable to attract the desired target consumer segments.
This is primarily due to the following reasons:
- High gestation lag in establishing retail chain due to training and technology challenges
- Using a franchise model for retail outlets may impact time to market and quality
- Buying healthcare is not a “self-service” shopping experience. It is not the same as shopping on Amazon
- High-cost of pre-sales support staff to explain products to consumers
- Increase in service cost to consumers leading to increase in ACR (Administrative Cost Ratio) for the insurance plans
- Pressure on underwriters to assess risk given incomplete or inadequate consumer information
Due to these reasons, exchanges will have slow adoption and insurance plans are not be able to fully disintermediate. As a result, insurance plans pass cost to the ultimate consumers resulting in premium hikes. We clearly see that in the 2015 silver plans. Out-of-pocket increased by 4% for both family and individual (capped at max. allowed by federal law) and deductibles increased by 7%.
Rise of the Aggregator aka Broker
Brokers/agents, traditionally used by small-business owners are the solution to increasing coverage and reducing the overall cost of healthcare. This is due to the following reasons:
- They understand healthcare products and coverage as well as insurance plans
- They are already in the business of “aligning” a consumer’s premium-paying abilities to the most optimum plan
- They have established relationships with several insurance plans
- Large traditional insurance companies who offer life, auto, fire and other types of insurance products, are behind these broker/agent networks. Hence, they can scale with demand.
With insurance-plans, targeting population segments below 25, above 65, small-business, some corporations (this will take time although Walgreen and 17 large corporations asked their employees to buy their own insurance from the marketplace), brokers/agents will be the ultimate catalysts to lowering healthcare costs.
Some argue that intermediation increases transaction costs ultimately passed to consumers. That may not be true in this case. This is because firstly, given the uninsured population the higher volume of enrolment will offset the transaction cost. Secondly, competition across broker/agent networks will generate market forces to reduce overall premiums. Lastly, technology especially analytics will be a key driver in analyzing consumer needs and better align products to the needs resulting in lower time to market and value. Broker/agent networks may gain traction if they simply provide explanation of plans on the exchange to prospective consumers leading them to finally buy coverage through them.