In the Age of Health Reform, Healthcare IT to the Rescue?

5/4/11Follow @venturevalkyrie

Talking about health insurance is a good way to clear a room. It is a rare person who is excited to interact with their insurance company or who can understand the explanation of benefits they receive in the mail detailing all of the things that the insurance carrier has decided not to pay on their behalf. According to JD Power and Associates, only four out of ten people fully understand their health benefit plan. No doubt those four are also able to read the Dead Sea Scrolls in their original text.

JD Power also found that consumers rank health insurers at 710 on a 1000-point scale, a number heading downhill faster than Lindsey Vonn. In contrast, consumers rank homeowners insurance carriers at 750 on a 1000-point scale and auto insurers at 837. Nothing like being last place in the league: just ask the Minnesota Twins.

“So what am I supposed to do about it?” you might say. “My employer gives me whatever insurance they want to give me and I have little say in it.” We as consumers have become accustomed to paying (through paycheck deductions and lower wages) for a service we dislike but over which we have little control and even less affection.

Well that world is about to change—maybe not for everyone, but for many. Whereas our selection of what health insurance plan to use has been more like picking which monopolistic cable company to connect with, the advent of healthcare reform, and especially the provisions of the Patient Protection and Affordable Care Act (PPACA) that go into effect in 2014, may well put the consumer in the driver’s seat. In fact, Psilos Group, the healthcare investment firm to which I pledge my allegiance, believes that healthcare reform will have a much greater impact on businesses and consumers than originally predicted, accelerating a sweeping change among health insurers toward consumer-oriented business models and totally different distribution channels, partnerships, and technology solutions. We released a 2011 Healthcare Outlook Report earlier this week that details the expected changes and illuminates the key issues that face the healthcare industry as PPACA becomes reality. You can access the full Psilos Group report for free by clicking here.

One of most significant changes in the health insurance realm will be that more and more Americans—including millions of corporate employees as well as the previously uninsured—will begin shopping for their own health insurance via a new landscape of Internet and call center-based public and private healthcare insurance exchanges. These will function as shopping hubs to connect individual consumers with a choice of insurance products, supported by a broad network of insurance brokers who serve as agents to the consumer. The result is expected to be a doubling or tripling of the market for individual insurance today from about 10 percent to between 20 to 40 percent of the commercial market in coming years, according to industry experts such as McKinsey & Company.

Given this backdrop, health insurers will have to shift their approach from a traditional business-to-business sale to a business-to-consumer model to garner a share of this new market. Like other consumer-oriented companies, health insurers will need to differentiate their offerings based on cost, quality, customization, and service. To survive this paradigm shift and introduce the operational efficiencies essential to avoiding the fate of Blockbuster in a Netflix world, health insurance leaders are going to need to make a quantum leap forward in the use of technology to transform their businesses.

Healthcare and information technology were rarely uttered in the same sentence 10 years ago, unless eye-rolling was involved. While all of the large insurance carriers have a plethora of information systems within their walls, they historically have not been viewed as a core strategic business asset. Rather they are often the outdated systems of 20-30 years ago, focused on paying claims (often inaccurately), performing basic accounting functions, and keeping track of member and provider numbers.

Ten years ago the idea of health insurers using technology to monitor and respond to consumer utilization behavior in order to build personalized products on the fly was about as likely as Donald Trump’s chances of winning the Presidency—could happen, but everyone in Hell would be wearing a snowsuit for the occasion. Ten years ago the idea of applying analytics to the Mt. Everest of data that resides even in these Flintstone-era systems to make individualized clinical and network optimization decisions was just beginning.  If a venture capitalist said at the time that they were focused on investments in healthcare information technology, her peers expressed either horror or sympathy, depending on their level of emotional IQ.

What a difference a decade and a sweeping health reform law makes. Among the tenets of the PPACA are that insurers much spend no less than 80-85 percent of their premium dollars on actual healthcare services (versus administrative overhead). The vast majority of enterprise systems now in place can barely track this statistic on an aggregate basis, much less on the product-by-product basis required by the new law.

The big-ticket expense in health insurance is the cost of providing care to individuals with chronic illnesses (accounting for between 70 percent and 80 percent of all claims costs). In a world where premium increases are regulated and price-performance will matter, insurance carriers and the provider organizations charged with acting like insurance carriers in the newly formed Accountable Care Organizations encouraged under PPACA must adopt software that enables them to proactively coordinate care and engage the consumer in preventative and wellness behaviors.

Perhaps most shocking to the system of some health insurers, they are going to need to fully integrate their functions—claims, provider network, clinical management, finance, underwriting, marketing—in order to undertake the sophisticated and continuous product development. This will be necessary to survive in a world where the sale is to the consumer in an environment that encourages competition based on price, product personalization, and service, as the health insurance exchanges will offer.

Provider organizations are also being dragged into the information age. As both insurers and the government begin to offer new-fangled bundled payments and pay-for-performance incentives, providers are going to have to account for the cost of their services in a way they have long avoided. Just like manufacturing and financial services industries, providers and hospitals will need systems that enable them to deliver just-in-time service on demand with zero defects and rapid feedback mechanisms.

Hospitals can ill-afford to make costly medical errors when carriers won’t pay for either the errors themselves or for the treatment required to fix them, as is increasingly becoming the case. Today hospitals commit about $20 billion worth of medical errors per year; that is about to come straight out of their bottom line. Hospitals will also need technology to help them manage patients’ care upon discharge, since hospitals will be on the hook for many re-admissions that occur within 30 days of checkout. A 2009 study published in the New England Journal of Medicine found that 20 percent of all hospitalized Medicare beneficiaries make a return trip within 30 days, resulting in between $12 and $17 billion in avoidable costs. Hospital margins are already pretty thin. If they have to eat these costs they are going to need to really stock up on those little purple pills.

A plus: there has been a proliferation of companies willing to brave the newly boiling ocean to sell advanced technology solutions to the health insurance and hospital markets. Companies such as HealthEdge and Click4Care offer the kind of enterprise-wide administrative and clinical management systems that enable both operational efficiency and product innovation based on data analytics. Patient Safe Solutions provides hospitals with an iPod Touch-based system that dramatically reduces common medical errors, such as medication mistakes and the occurence of hospital-acquired infections, patient falls and bedsores. Extend Health, the nation’s largest private health insurance exchange, has proven that consumers can evaluate and select insurance plans that are highly tuned to their individual needs while saving money for both consumer and plan sponsor.

Even better: we private equity and venture capital people who make our living in healthcare information technology have recently taken on a certain cachet, allowing us to emerge from the dark, shady corners of our industry to share the tiniest bit of the limelight with our colleagues in the “real” technology world. Granted, games and social networking are far more sexy than claims processing innovation and clinical analytics. But with more than 20 percent of our economy being spent on healthcare costs, there are not enough Angry Birds in the world to fly us out of the pit of despair we will dwell in if we fail to capitalize on this opportunity to modernize our healthcare system.

Lisa Suennen is Managing Partner at Venture Valkyrie Consulting, a firm providing advisory services to companies, organizations, and private equity firms in the healthcare field, and the co-author of Tech Tonics: Can Passionate Entrepreneurs Heal Healthcare With Technology? Follow @venturevalkyrie

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  • http://ducknetweb.blogspot.com/ Barbara Duck

    Health IT will make a lot information system work better and make us smarter but we are reaching a certain saturation point with how much doctors can learn and about the investments of insurance companies in the data aggregation side who want to be in the consultant arena where the big bucks are now to make data communicate. If this does not work, it’s the next bubble as hospitals are having hard financial times and CIOS are burning out.

    http://ducknetweb.blogspot.com/2010/12/health-it-next-bubble-and-how-long-will.html

    Something is going to have to give…stressed CIOs..

    http://ducknetweb.blogspot.com/2011/04/survey-shows-cios-stressed-about.html

    Also experts still miss the boat on how to engage consumers with gluts of software nobody uses or wants, they just write it because they can so innovation without collaboration is fouling up the US healthcare system.

    http://ducknetweb.blogspot.com/2011/05/new-report-on-engaging-patientsstill.html

  • http://iMedExchange Tobin Arthur

    Lisa –

    Your article was both cleverly written and insightful. I look forward to reading through the full outlook report you made available.

    There is certainly growing momentum behind consumer directed health options…a trend that started a decade ago with the first concierge practices, HSAs, groups like Carol etc…perhaps we’ll see increasing momentum when PPACA kicks in. I am not immediately bullish on the free flow of data, more efficient medical banking etc given that there are deeply entrenched issues and groups like the Medical Banking Institute (now part of HIMSS) have been working to facilitate innovation in this space for years. Will the pressure on insurers central to reform force the issue downstream in a positive way? I am hopeful, but highly skeptical. Lots of churn is still in the cards.

    I am also hesitant to place any certainty about where the ACO model will ultimately end up given a long history of dead models (ex. RHIOS) that had similar life-cycles and objectives and died on the “good intention” grape-vine. Obviously there is movement in the space, but hitting a trifecta at Santa Anita Racetrack is a safer bet.

    As for providers, you point out a very interesting metric around hospital re-admissions. The well-worn stat that gets tossed around far too much in the industry is 100K unnecessary deaths per year. When you review the data underlying that number, it’s a very difficult number to affect, and its probably inflated to begin with. However, readmissions, as you point out, is a costly problem and one that has a myriad of areas poised for improvement and some nice wins ahead.

    That said, we work with providers nationwide in all practice settings and see their EHR and overall technology adoption first-hand on a daily basis. While they are eager to embrace technology that will provide demonstrable ROI, many of the systems on the market are legacy pigs upon which lipstick is being generously applied. Moreover, many of these systems, like the institutions that purchase them when applicable, may talk open standards, web services, free love etc etc…but the political and data silos are still real and still have to be addressed before serious innovation and solid business models can evolve out of the data.

    At a macro level, the coming decade of healthcare IT is going to look like the wild wild west. The large IT orgs will have to innovate at least in part through M&A. The Internet revolution that influenced the banking,supply chain and consumer markets over the past decade is poised to have a major influence on healthcare. There is a positive mix of willpower, capital, political support and increasingly innovative thinking. There will still be lots of well intended efforts that line the roads with their dead carcasses, but we’ll likely see some really solid wins to keep everyone excited enough to get out of bed and go after it again tomorrow.

  • http://venturevalkyrie.com Lisa Suennen

    Hi Tobin, thanks for the note. I think your skepticism on some of the current healthcare IT initiatives is warranted. The industry is going to have to embrace technology as a means to an end rather than accept it because someone else is paying or because they have no choice. While there is tremendous promise in the ACO initiative and also with the widespread adoption of data fluidity, there are many cultural issues that make the outcome in the short term very hard to estimate. The good news is that lots of very well-intentioned and smart people are out there trying and innovating. I think that the realities of the financial marketplace will tell the tale of the tape. If carriers’ and providers’ businesses can’t compete because they haven’t committed to technological advancement, they will probably learn the hard way.

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  • http://venturevalkyrie.com Lisa Suennen

    Barbara, I really agree with you about the consumer data issue. Very few of the applications out there are meaningful enough to consumers to use them as regular tools and the lack of integration with their core data makes most of them weak as tools of overall health improvement. Whoever really cracks this code will make a big difference. Lisa