Insurance Exchanges Give Purchasing Power to Consumers

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Insurers Face New Competitive and Business Risks in Individual and Small Group Health Markets

Millions of Americans will soon gain what they have long waited for in healthcare:  purchasing power that will make health insurers want to work harder to win their business and loyalty. According to a new report published last week by the PwC US Health Research Institute (HRI), insurers will compete head-to-head when state health insurance exchanges begin offering policies to individuals and small groups.  PwC estimates these policies could be worth nearly $60 billion in revenue premiums by 2014 and grow to nearly $200 billion by 2019.

The Congressional Budget Office (CBO) estimates that 12 million consumers will buy health insurance in the exchange market in 2014, rising to a population of nearly 28 million consumers by 2019.  Despite concerns and unresolved legal and design questions, many insurers feel they cannot afford to opt out of health insurance exchanges. Those who participate, however, will face new business risks, stiff competition and millions of consumers newly armed with the power of choice, says PwC.

PwC’s report entitled Change the Channel:  Health insurance exchanges expand choice and competition, is PwC’s most extensive research to date on health insurance exchanges.  It draws on insight from a nationwide survey, commissioned by PwC, of 1,000 consumers and 153 health insurance executives concerning their expectations around health insurance exchanges.  In addition, PwC conducted in-depth interviews with 35 health industry leaders, including those representing state insurance exchanges, health insurers, policy makers, consumer advocacy organizations and independent quality organizations.

While the nation waits for states to declare whether they will develop their own exchanges by the January 1, 2014 deadline, or have the federal government do it for them, health insurers are debating their own decisions on how and where to play in this market.  Those who participate will need to ramp up quickly and make significant changes to their businesses.  This includes selling health insurance to individuals in a retail market and moving away from a reliance on risk selection to a focus on population risk management, since the law requires insurers to accept all eligible members regardless of their health.  

PwC’s research found the following:
• More than half (52 percent) of health insurance executives said their companies plan to compete in the individual or small group exchanges, and nearly one-third are considering it but are still undecided.  Seventeen percent of insurers do not intend to participate.
• Of those insurance executives who said they plan to participate in exchanges, nearly two in five (37 percent) are not active in the individual market today and one in five (20 percent) does not offer small group policies.
• Insurers’ number one concern is the impact of adverse selection on their business if they receive a disproportionate number of high-risk patients.  The second biggest concern is the ability to integrate technology with the exchanges.
• On average, insurers expect it will take approximately 15 months to get their businesses ready for exchange certification by the federal government. Forty percent expect it to take 18 months, and 20 percent believe it will take two to two and a half years before they are ready.
“Health insurance exchanges will be one of the most market-changing aspects in the Patient Protection and Affordable Care Act,” said Jeff Gitlin, U.S. healthcare payer practice principal, PwC.  “Insurers will need to shift from a wholesale approach to more of a retail way of interacting with consumers and compete in ways they never have before to earn consumers’ business and loyalty.   As in all retail businesses, insurers will want to understand who these consumers are, what motivates them and how they behave.”

PwC’s report outlines the key considerations for insurers as they gear up for participation in health insurance exchanges, including the relevant impact of various exchange models on their business. Each state has flexibility in how to design and operate an exchange, which could mean dozens of variations in exchange models across the country.  The differences could make some exchanges profitable for some insurers but not for others, says PwC, and insurers will need to decide which ones they will enter.

Most insurers surveyed by PwC are hoping that states opt for a variation of the open market model, such as the one used in Utah, where any insurer can sell policies on the exchange as long as it meets certain minimum benefit requirements.  Only ten percent of insurance executives surveyed prefer the active purchaser model where the state evaluates and selects insurers in a competitive bidding process.  The active purchaser exchange model was adopted in 2006 by the Massachusetts Health Connector, and PwC’s report includes cost containment lessons from health insurers operating in the Massachusetts market today.  

New Requirements Usher In New Consumers
When exchanges open up to consumers in 2014, nearly all participants (97 percent) are expected to be individuals who currently do not have health insurance coverage, according to PwC’s analysis of CBO projections.  According to the PwC report, health insurers and exchanges will face an enormous consumer education challenge to help individuals understand eligibility requirements, and that one of the first hires exchanges need to make is a communications director.  Moreover, as insurers move from a largely wholesale to retail business model, they will need to become much more user friendly and improve their understanding of consumers’ needs and behaviors so they can tailor communications, products, and services.

PwC’s consumer survey found:
• Not surprisingly, the two most important considerations in choosing a health plan are price and benefits, although preferences vary with income. Thirty-seven percent of upper income respondents ranked benefits as their most important consideration and 23 percent ranked price, whereas 43 percent of those with lower incomes (Medicaid eligible) ranked price as most important and 23 percent ranked benefits highest.
• Three-fourths of consumers said that insurers need to be clearer about what they are selling, particularly about what is and is not covered.  Forty-three percent said they would like a tool that estimates prices for common procedures and 37 percent want a way to easily compare insurance products.  
• Over half (53 percent) of respondents say they would not be willing to pay a higher price for any additional health insurance feature, such as dental coverage, choice of doctors or vision coverage.
• Younger consumers (aged 18 to 34 years old) are three times as likely as consumers over 45 to be willing to give up their choice of doctor for a lower health insurance cost.
• 61 percent of consumers said they think health insurers should offer rewards, such as discounts or gift cards for healthy behavior. Offering rewards was cited as a top loyalty driver, although nearly one-third would forego the reward in exchange for lower cost insurance.
• Current Medicaid recipients are six times more likely than current commercial consumers to prefer companies that offer social services assistance such as transportation to and from the doctor, and those with middle incomes are more than twice as likely to feel the same.  

Insurance Sales Model & Broker Roles To Evolve

Insurance executives surveyed by PwC said they expect sales through brokers to decrease by approximately 20 percent when the exchanges open and that those sales will move to a direct-to-consumer, online sales channel.  

Insurance brokers and internal sales teams currently are health insurers’ primary mechanisms for attracting and retaining customers in today’s individual and small group markets.  In 2014, exchanges will assume responsibility for compensation, and insurers will lose their ability to offer brokers financial incentives for selling their products.

The need for brokers is not expected to go away in 2014, but the functions brokers perform will change over time. PwC’s survey found that 46 percent of consumers think it would be easier to shop for insurance if they had someone to talk to at the insurance company.  Consumers are not yet accustomed to buying insurance online, and it is a complex purchase.  So, while brokers will not be negotiating premiums for exchange-related business, they can play a key role in educating consumers.  Insurers would be well-served by finding new ways of influencing brokers, according to PwC.

A full copy of Change the channel:  Health insurance exchanges expand choice and competition is available for download at www.pwc.com/us/HIX.

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