Against the Odds

Healthcare Systems and Services Practice Against the odds: McKinsey Healthcare Systems and Services Practice April 2017 How payors can succeed Artwork by James Steinberg Copyright 2017 © McKinsey & Company www.mckinsey.com under persistent uncertainty Against the odds: How payors can succeed under persistent uncertainty under persistent succeed can payors How Against the odds: How payors can succeed under Executive editor: Shubham Singhal persistent uncertainty is published by the partners of Editors: Nina Jacobi, Ellen Rosen McKinsey’s Healthcare Systems and Services Practice. Art director: Ginny Hull Editorial production: Lyris Autran, Susan Schwartz Copyright @ 2017 McKinsey & Company. All rights reserved. McKinsey & Company Lead reach and relevance partner: Bryony Winn Healthcare Systems and Services Practice External relations: Julie Lane Published by McKinsey & Company, 150 West Jefferson, 150 West Jefferson, Suite 1600 Practice manager: Frances Wilson, MD Suite 1600, Detroit, Michigan 48226. Detroit, Michigan 48226 Against the odds: How payors can succeed under persistent uncertainty meets the Forest Stewardship This publication is not intended to be used as the basis for trading in the shares of any company or Council (FSC) chain of custody standards. for undertaking any other complex or significant financial transaction without consulting appropriate The paper used in Against the odds: How payors can professional advisers. No part of this publication may be copied or redistributed in any form without succeed under persistent uncertainty is certified as being the prior written consent of McKinsey & Company. produced in an environmentally responsible, socially beneficial, and economically viable way. Copyright @ 2017 McKinsey & Company. All rights reserved. Printed in the United States of America. 1 INTRODUCTION Leading in an environment of persistent uncertainty The health insurance industry in the We hope that the insights in the articles Shubham Singhal United States continues to be defined by that follow will provide guideposts to help uncertainty. And, increasingly, it looks like you navigate this uncertainty. In this book, uncertainty is here to stay—at least for the we begin by examining broad shifts in the next several years. The new administration industry. “The next imperatives for US in Washington has promised regulatory healthcare” describes the two central and policy changes with the potential to requirements for ensuring sustainability: significantly alter the healthcare landscape. achieving rapid, dramatic gains in produc New models of care delivery, from retail tivity and improving the functioning of sites of care to virtual visits, are challenging healthcare markets through more effective the centrality of traditional institutions. demand and supplyside incentives. As data becomes more accessible, new “Where to compete in today’s healthcare technologies and analytics capabilities market” provides advice on how health are upsetting old ways of doing business. insurers can best identify where to concen Consumerism continues its march, with trate their resources—both within their core digital technologies providing new fuel health plan business and in adjacencies. for disruption. And the shift of risk across “US health insurers: An endangered the value chain through valuebased care species?” challenges the notion that the continues. All signs point to continued confluence of disruptive forces presents industry uncertainty, though the pace an existential threat to the industry. Rather, of transformation remains unclear. the authors contend that successful health insurers could have their best days ahead. Despite these disruptions, healthcare “Why understanding medical risk is key to remains fundamentally important to our US health reform” argues that our healthcare society. A few core themes will remain system must align risks with the parties best relevant, regardless of what changes lie positioned to influence them. This goal will ahead. Health insurers, like healthcare require payors to develop appropriate financ providers, have an obligation to help keep ing mechanisms and provider reimbursement people healthy and ensure that those models for each category of health risk. who are sick can receive highquality care. The quest for affordability will remain para Following these pieces on macro trends, mount. The need to improve productivity we profile five major forces to watch, and promote appropriate utilization will including the narrowing of networks, the continue to be crucial. Moreover, healthcare movement to valuebased care, the creation will remain a vital cornerstone of the US of a robust market for retail healthcare, the economy. These truths give rise to the transformation driven by digitization, and central task facing all healthcare stakeholders: the growth in spending on pharmaceuticals. to ensure the sustainability of our healthcare We then focus on specific lines of business, system over the long term. Payors will need exploring dynamics within the commercial, to tirelessly pursue this goal if they want to individual, Medicare, Medicaid, and provider succeed in coming years. led plan markets. 2 McKinsey & Company Healthcare Systems and Services Practice Finally, we close with insights about key the ability to adapt quickly to respond to functional capabilities that payors must a constantly changing environment while master to thrive in coming years: consumer maintaining organizational stability. engagement, digital sophistication, and organizational agility. In addition to describing While the uncertainty that defines this time our latest consumer research findings, we can produce heartburn, it has also created debunk common myths about healthcare opportunities for new thinking and new consumers and explain how health insurers solutions. We look forward to hearing your can offer a great customer experience. We reactions to this collection of articles. Please then look at digital from two perspectives: feel free to reach out to any of our authors how consumerfacing digital technologies to discuss the implications of these insights could alter the healthcare industry and how for your organization. health insurers can harness digital to improve operations. Our last article, “Why agility is Shubham Singhal (Shubham_Singhal@ imperative for healthcare organizations,” mckinsey.com), a senior partner, is the leader explores how healthcare leaders can cultivate of McKinsey’s Global Healthcare Practice. 3 Contents FUTURE OF THE MARKET The big picture The next imperatives for US healthcare 11 Shubham Singhal and Erica Coe Two steps—increasing healthcare-sector productivity and improving healthcare-market functioning to better balance the supply of and demand for health services—would likely produce sufficient savings to lower medical cost inflation to the rate of GDP growth. Where to compete in today’s healthcare market 26 Shubham Singhal, Bryony Winn, Kyle Weber, and Susan Nolen Foushee To select which markets to focus on—both within health insurance and in adjacent businesses— payors must have strong market insights, the fortitude to make tough decisions, and the agility to alter course rapidly. US health insurers: An endangered species? 31 Dan Fields, Brian Latko, Tom Latkovic, and Tim Ward Converging trends are disrupting the US healthcare industry. Health insurers are not likely to disappear, however, despite predictions to the contrary. Insurers that can take advantage of these trends are likely to find that their best years are ahead. Why understanding medical risk is key to US health reform 39 Shubham Singhal and Nina Jacobi In our healthcare system, those in the best position to control risks and costs often have inadequate incentive to do so. Refining healthcare financing and reimbursement requires a deep understanding of the nature of medical risk. Forces to watch Atomization of the network: How far will it go? 51 Shubham Singhal Narrowed networks are becoming more common as health insurers look for ways to decrease their cost base and lower premiums, but the strategy raises potential risks for both payors and providers. Value-based care: Is it sustainable? 55 Shubham Singhal Four fundamental questions can help payors and providers improve productivity and better control utilization—the prerequisites for making value-based care sustainable. 4 McKinsey & Company Healthcare Systems and Services Practice Forces to watch (continued) Distributed sites of care: At the tipping point? 57 Shubham Singhal Increasingly, consumers are seeking services at sites of care outside of the traditional health system infrastructure. This shift has important implications for how health systems think about their asset base and scale. Digital healthcare: How disruptive will it be? 61 Shubham Singhal Digital technologies have the potential to improve both productivity and quality of care by extending care delivery to new modalities, making transactions more efficient, and supporting clinical operations. Pharma spending growth: Making the most of our dollars 63 Shubham Singhal Pharmaceutical companies want to be rewarded for innovation, but rising drug costs are straining payor economics. This conundrum must be solved, not for one drug at a time but across the breadth of products in the pipeline. INSIGHTS ON SPECIFIC MARKETS Commercial Growing employer interest in innovative ways to control healthcare costs 69 Patrick Finn, Aditya Gupta, Shelby Lin, and Elina Onitskansky Employers are showing increasing

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