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Redefining the Four P’s: how consumerism is reshaping the fundamentals for health plans in a post-ACA world

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an an often-used descriptor like “the

new normal” adequately characterize the

massive transition facing health plans in the

post-Affordable Care Act (ACA) marketplace? In most

ways, it does. The emerging story line will touch and

alter every major aspect of payer business strategy and

management. The evolution includes:

• Members and prospects with increased

purchasing power. The business-shaping forces of

consumerism clearly have come to health care.

• New and evolving competitors. From crossover

Medicaid plans and risk-bearing providers to co-ops,

public exchanges and private exchanges.

• New and evolving distribution channels. The

business-to-consumer model, employer-defined

contribution plans, and the exchanges.

• Retail-caliber product development.

Differentiation and innovation require rapid and

iterative product design, pricing and deployment.

If there is an area where new normal falls short of

emphasizing the scope of this shift, it happens in

connection with the last item. The product development

and pricing competencies necessary to succeed and

compete in a consumer-centric model highlight a

significant divergence between traditional health plan

approaches and post-ACA challenges.

There are two main complications: a tremendous degree

of marketplace and actuarial uncertainty, and a relatively

short timeframe for study, design, formulation and

deployment. Health plans are keenly aware of the gap

and its implications. An OptumTM payer survey indicated

a majority of health plans see improved product

development and pricing as the top priority on a lengthy

list of essential functions.

Recognizing the new normal is one thing. Lacking

coordinates critical to mapping the best course is

another. What are the solutions for dealing with

uncertainty and taking action?

Where Is the Industry Now? Where Is It Headed?“Health plan product development and product

management require best-practice retail perspectives

that historically have not been strengths in the payer

marketplace,” said Andy Eilert, senior vice president,

Payer Solutions, Optum. “Retail creates and utilizes a

much more consumer-centric understanding of who

buys, what they buy, how they buy and where

they buy.”

The direct-to-consumer shift that is establishing the

individual as primary decision maker significantly impacts

the buying dynamics and trends payers need to address

in go-to-market strategies. The resulting health plan

responses include:

• Invest in technology platforms and processes.

Significant direct-to-consumer infrastructure is

necessary to engage and shepherd individuals

through an end-to-end retail experience, from

targeting and acquisition through onboarding.

• Create a consistent, simplified experience.

Traditional retail sets a high bar for the consumer

experience. The new keys to influencing membership

are “shopping” consistency and simplicity, whether

the channel is direct proprietary, broker-assisted or

an exchange.

• Keep group markets in view. Groups matter,

but the channel becomes more consumer-centric

as defined contribution and high-deductible plans

shift choice and purchasing power to the individual.

Strategies and platforms need to allow product

design flexibility.

Expert presenters

Andy Eilert, SVP, Payer Solutions, Optum

John Lloyd, SVP, Optum

C

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• Leverage retail concepts. Applying essential retail insights

is critical to the consumer scenario. From targeting and

personalizing the shopping experience . . . to using attitudes,

preferences and health risk status to create segment personas

and profiles.

• Integrate and align organization silos. Massive changes

lining up outside the health plan gates require collaboration

across traditional silos like product development, setting

growth strategy, data and market analytics, sales, and

member retention.

• Model, anticipate and forecast segment changes.

Effective product development and pricing require close

attention to emerging, post-ACA market factors, from evolving

regulatory factors to member movement and the implications

for risk in populations.

Evolution of the Basics: The Four P’sThe shift to consumer-centric, retail-oriented business

management requires health plans to form new perspectives

on a wide range of underlying business principles, philosophies,

mechanisms and structures. Within the marketing discipline, the

traditional “Four P’s” framework for attracting customers to a

business and its products provides a useful framework to evaluate

a health plan’s approach to the market evolution taking place.

Figure 1 defines the classic “marketing mix” considerations

within the new context requiring health plans to provide

strategically targeted prospects, and renewing members,

with a health plan experience that is tailored, competitive and

differentiated.

Eilert gave examples, within the Four P framework, of approaches

health plans must take to rapidly and iteratively design product,

differentiate offerings and respond to increasing pricing pressure.

Figure 1The Evolution of the Basics — The Four P’s

Promotion

PriceProduct

Place

Where and how will you sell

your products?

• What geographies and distribution

channels will you focus on?

• Retail or wholesale partner

distribution models?

• Public / private Health Benefit

Exchanges

What are you selling?

• How are you differentiating

your product in an increasingly

price-sensitive market?

• Do you understand the needs of

various consumer segments and

profiles?

• Are you enabling personalized

product education and configuration?

How will you engage

consumers about your

products?

• Are you leveraging multi-channel

strategies and platforms?

• Are you positively and consistently

reinforcing your brand?

• What new/different methods will

you need to reach the evolving

consumer segments?

How much will you charge for

your product?

• How price-sensitive are your target

consumer segments?

• Do you have insight into risk modeling

to price profitably?

• Can you support a stronger value

prop by packaging value-added

products or services?

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Product

• Understand your consumers. Align product definitions and consumer population groups.

• Configure products — individual or employer-defined contribution — on 1:1 basis.

• Add new products to the portfolio; extend previous product definitions.• Link product management to all areas: strategy, network, finance,

sales and support.

Place

• Business-to-consumer is a new normal; there is much to consider and solve.• Evaluate and assess opportunities. Examples: engage proactively with

exchanges; leverage outsourced consumer engagement firms; evaluate retail online stores; and even consider “brick & mortar” and/or retail partnerships.

• Online and mobile presence requires new technology, new processes and new resources.

Promotion

• Create and leverage brand recognition to create trust and differentiation.• Plan and deploy proactive (not passive) and multi-channel strategies. • Differentiate through strong education and simplistic decision support.• Shepherd consumers through confusion to find and prefer your product.

Pricing

• Know the rules. The new regulatory environment will be a challenge to navigate.

• Be smarter than your competition in the areas of risk modeling, risk adjustment.• Offer intelligent incentives to buy up to more profitable products and

extensions.• Recognize that against new competition, and in a health care

commoditization environment, pricing can be a differentiator or a barrier.

Pricing Uncertainty Changes Everything

In the product development and pricing realm, citing the

new normal only begins to capture the departure from historical

go to market strategy and tactics. The reasons: unprecedented

uncertainty when it comes to known and unknown variables,

along with considerably less clarity on how markets,

competitors and consumers are going to behave. “Clearly, the

traditional processes — pricing in particular — are going to be

challenged,” said John Lloyd, senior vice president, Actuarial and

Underwriting, Optum.

Lloyd isolated three overarching pricing issues driving the

uncertainty that will dominate post-ACA health care evolution.

Lloyd stated the broad questions and commented on

related implications:

• What is the cost of the newly insured? Payers lack a

clear actuarial consensus on how this population is going to

behave. “Many think individual morbidity increase for this

segment will be somewhere between 25 and 75 percent.

But you also hear people who think it’s going to be

twice as much.”

• What constitutes a competitive rate? The pricing

context used to be known opposition and a somewhat

rational marketplace. “The changing rules mean a new

set of challengers, and different strategies from the

known competitors.”

• What happens when premium no longer equals

revenue? The ACA, at least through 2016, promises

financial results adjusted on the 3 R’s: reinsurance, risk

corridors and risk adjustment. “Your revenue not only

changes, it changes relative to all the competitors in

your market.”

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Because of the unknowns there is no right answer, Lloyd noted.

The new pricing dynamic requires sorting through market and

competitive outcome simulations to identify the best solution.

“Previously, we used a deterministic pricing process aimed at

getting the right answer,” said Lloyd. “Going forward, we really

have to look harder at a range of scenarios and quantifying a

range of risks.”

There is one certainty, of course. Despite everything that health

plans can’t know — including rules not yet defined — payers

have to file their programs and rates. Submissions to state

exchanges are due mid-2013, followed by outreach, and then

open enrollment that begins October 1, 2013. “Relative to

the historical product development and pricing process — and

without normalized pricing, in particular — there is much work to

be done,” said Lloyd.

Traditionally, a plan collects the linear inputs — from market

demand and competition to the look of its provider network

and the distribution system. The actuarial exercise considers that

experience base, tweaks it for the cost of care, and determines

how much margin and surplus is available to establish a

competitive rate and still meet the long-term surplus demand.

In post-ACA product development and pricing, historical

precedent loses a significant amount of predictive value. A look

at the new pricing schematic (Figure 2) indicates the addition

of many more moving parts and essential influences. Exchanges

and regulators, for example, drive market demand. In addition,

providers will act differently in this market, the distribution

scenario is new, and operations will change.

Figure 2Product Development and Pricing — Post-ACA Process

Strategic Connections

• New customer expectations• HBE and new competitors• ACA regulations

• New population demand & access• Stratified networks and new

risk-sharing arrangements

• Simulations of likely enrolled membership• Simulation of risk mix of enrollees• Simulation of competitive market outcomes• 3-R Revenue and risk load requirements

• Modeling post-ACA Margin Mix• RBC Simulation of post-ACA Risk Profile

• Consumer engagement• Interface with HBE • Cost of new distribution • ACA admin needs

MarketDemand

ExperienceBase

ProviderNetwork Distribution

Margin/Contrib.Surplus

Operations

P R I C I N G E X E R C I S E

Exiting the Base

New Entrants

Adjusted Base Cost of Care Admin

Cohort & ProjectedTrend Analytics

Quoting and Underwriting

Underwriter

Rate Engine

Rating Systems Processes

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The simulation modeling approach that Optum takes on behalf

of clients (Figure 3) starts with considering the entire population

— the insured, uninsured, Medicaid. Next, based on variables like

available alternatives and response to subsidized care, the model

projects what member movement will look like. Who is going

participate? The simulation process is similar with the competitive

scenario. Who are the players the plan is likely to face? How are

they going to behave?

“We look at those elements several different ways, which

includes role playing and applying comparators based on things

we’ve seen in the rest of the marketplace,” said Lloyd. “The

bottom line in product development and pricing simulation

modeling is creating representations of how markets are going

to evolve. There is not a right answer. The purpose is to create

multiple scenarios, and not only for one year. We’re going

out through 2014, 2015, 2016 . . . the years until this market

stabilizes somewhat.”

Figure 3Product Development and Pricing — Simulation Modeling

SimulationScenarioOutcomes

Competitive Market

Outcomes

3-R Impact / Metallio Pricing Strategies

Available Market

Potential Enrollment VolumesCost of Care PMPM

Risk ScoresChronic Conditions

Geography / Network AccessIncome / Price Sensitivity

Member Movement Simulation

Tool

CompetitiveMarket

Simulation Tool

3-R Pricing Simulation

Tool

Member Movement Database

Competitive Market Simulations

OtherLikely Payers

$

$$ $

$

$

Scenarios:• Available Alternatives

• Response to Subsidized Cost

Scenarios:• Competitive Gaming Exercise

• Most Likely Competitor Strategy

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Product Ultimately Drives Pricing

What does the difficult pricing environment mean for product

development? It emphasizes that product actually drives pricing.

It’s not only pricing complexity; it is about product complexity.

“The change is coming. It’s a new way of thinking about

product,” Lloyd pointed out. “Most of us know we really are

living with a risk selection environment, particularly in the small-

group and individual sectors. We have to run more toward risk

management, or avoidance of risk, because we can’t select

anymore. That environment dictates designing products that help

control costs.”

Equally significant to product development: evolutions like

new distribution systems, retail promotion and consumer

engagement. Those elements — especially in small-group and

individual markets where exchanges happen — are replacing

the previous high reliance on brokerage. In other words, the

distribution systems which compensate people for bringing

“good risk” to health plans.

“We’re moving away from those types of distribution to

multiple channels like the exchanges and direct-to-consumer,”

Lloyd concluded. “The question is how to differentiate product

while, at the same time, a lot of products are constrained to

look somewhat similar. Given that we no longer can guarantee

competing successfully on price, how do payers treat product

design as a differentiator?”

Health plan product development and pricing functions

face unprecedented uncertainty, key basic variables not yet

understood, and many regulatory guidelines still to be finalized.

Why do payers need to move forward now? Lloyd recapped with

the following rationale:

• Direct-to-consumer capabilities are “a must” to lead in

any market over the next two to three years. This requires

alignment on and off state exchange and/or private exchanges.

• Early innovators are already positioned with alliances and

co-branding opportunities. Countering strategies like narrow

networks or other access differentiation take time.

• Rates must be filed and approved. Pricing strategy

needs to be explained, understood and supported internally

and externally.

• Financial projections are complex in the context of working

not only with ACA regulations, but also with long-term

financial viability in the form of surplus impacts.

• Exchanges may penalize health plans/carriers that

don’t participate at the outset. Plans could be fined for

entering after the first year (back-charge to recoup lack of

investment up front), or be assessed a two- or three-year

“delay-to-enter” that keeps them on the sidelines.

Finally, open enrollment on state exchanges is October 1,

2013. This leaves little time to deliver on pricing and strategic

plans that drive performance equal to post-ACA complexity.

“At some point, you have to quantify things,” Lloyd concluded.

“Quantifying uncertainty comes down to running scenarios to

define the market, understanding competitor impact and building

out rates based on those scenarios.”

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Want tolearn more?Visit optum.com

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to learn more about consumerism

in a post-ACA world.

How Optum can help

Optum works with health plans to meet their goals of strategic growth through:

• Consulting on the latest evolution of the 4 P’s — product, place, promotion

and price

• Understanding the implications of ACA Rules and Regulations

• Researching the growth of the individual market and accompanying HBEs

• Recognizing the shifting competitive landscape

• Current assessment and future modeling of the plan’s consumer

base, including mapping of product direction to the expected

changes in population

• Designing and implementing a true retail channel and

direct-to-consumer strategy

• Realizing the impact on pricing of new types of plans, subsidies,

community rating, the 3R’s, risk adjustment and ACA provisions