When Congress Resets the Market, Understanding What the Life Cycle of the Post-Reform Healthcare Market Means for You

In April of this year Aetna Inc. became an unwitting example of what is to come for some health plans after reform. Because of its failure to meet regulatory requirements in the post-reform Medicare Advantage and Medicare Part D Prescription Drug markets, the company has been sanctioned by Federal regulators and temporarily banned from enrolling new members into its Medicare Advantage and Part D plans.

While Aetna reworks its processes to comply with federal regulations, its competitors are signing up new members and solidifying their positions in a rapidly maturing segment of the marketplace. Aetna may also be spending time and money to restore the confidence of customers, brokers and investors, while its competitors focus on growing their market share.

Aetna’s mistake was that it failed to understand the life cycle of healthcare markets following reform. In this case the market is for Medicare benefits. The reforms, enacted in 2003 and largely implemented in 2006, expanded the role of private health plans in Medicare markets. This is a good case study for reform today, as similar forces and market cycles will affect companies as they develop their go-to-market plans for individual and small group products following the most recent healthcare legislation.

Although significant questions about the implementation of healthcare reform remain, an understanding of the life cycle provides some level of predictability. If properly acted upon, that understanding can give companies greater freedom and competitive advantage as they operate in a highly regulated market.

Those companies that understand the requirements of each stage of the life cycle will thrive. Those that don’t will face increased regulatory scrutiny and possibly lost market share and profits.

The Market Life Cycle

Think of Congress as a frustrated computer user who just hit the “reset” button on the healthcare system. With the enactment of the Patient Protection and Affordability Act, as modified by the Health Care and Education Reconciliation Act, Congress fundamentally changed today’s market for individual and small group health insurance benefits and kicked off a new market life cycle. As these new laws become regulations that are implemented, the new individual and small group market will grow and mature.

Like all markets, the new market for individual and small group health insurance will progress sequentially through predictable phases. These will include Start-Up, Growth, Maturity, and Decline. Figure 1, below, illustrates the first three phases of this life cycle.

Start-Up. For the individual and small group healthcare insurance market, this phase began with the enactment of the Patient Protection and Affordability Act, on March 23, 2010. Over the next three to four years, government agencies will develop and finalize regulations to define how government spending under the new reform laws will be administered and overseen. At the same time, health plans will develop and implement go-to-market strategies for new products and required operational capabilities.

Growth. Starting in 2014, the second phase will coincide with the beginning of government spending on benefits. At the same time, individual and small group customers will start purchasing health insurance coverage through state-based exchanges. The growth phase will be further fueled by the premium and cost-sharing credits available to individuals and families with incomes between 133-400% of the federal poverty level. These premium subsidies are expected to assist up to 20 million currently uninsured individuals to obtain health coverage. Another driver of the Growth phase will be the individual mandate, which requires U.S. citizens and legal residents to have qualifying health coverage. Those without coverage will pay a tax penalty of the greater of $695 per year up to a maximum of three times that amount per family, or 2.5% of household income.

Maturity. The market will enter this phase as demand for new individual and small group health insurance coverage peaks and then levels off. The rate of demand will gradually begin to normalize around stable annual growth rates. By the time the market enters the Maturity phase, most of the new individual and small group employer customers will have chosen whether to opt-in to the new market.

Decline. This final phase begins when the size of the market or the underlying demand for products and services starts to shrink. Given the persistence of entitlement programs once they are enacted (e.g. Social Security, Medicare, etc.), ongoing population increases, and a mandate that requires individuals to purchase and maintain health insurance coverage, it is unlikely that the market will move from the Maturity phase to the Decline phase in the foreseeable future.

The Life Cycle Drivers

The rate at which the new individual and small group health insurance market moves through the life cycle will be determined by four primary drivers. Those, illustrated in Figure 2, below, include: 1) the Mode of Regulation, 2) the Maturity of Regulation, 3) the Amount of Spending, and 4) the Political Cycle

1. The Mode of Regulation is the level of scrutiny with which Federal government regulators oversee the operations of private-sector participants.
   
   By necessity, private-sector companies will participate in the new market before the government has fully developed its regulations, oversight capabilities and tools. Federal regulators will also be gathering practical experience with the new market and using that experience to inform the development of regulations. During this formative phase, regulators will treat private-sector participants as “partners” and welcome collaborative efforts to create a practical, responsible approach to operating in the new market. Once mature regulations and regulatory processes are in place, regulators will provide closer oversight and scrutiny and will view private-sector players as “contractors” rather than “partners.” Regulators will also expect companies to implement robust and compliant processes during the Start-Up and Growth phases of the new market. Those that do so and establish a track record of compliance will reap the rewards later, as they will be allowed to operate more freely in later stages of the market life cycle.
2. The Maturity of Regulations is the extent to which the newly enacted laws have been developed into regulations that define the requirements of the new market.
   
   New regulations will be developed and deployed through a process. Policymakers will start by interpreting the new laws and drafting regulations. Stakeholder input on those regulations will be gathered and considered, and the draft regulations will be modified if necessary.
   
   \ Even as new regulations are finalized, they will be subject to additional change as they are tested in the marketplace. Further enhancement of policies and regulations can be expected as government agencies gain experience in regulating the new marketplace and identifying unanticipated marketplace requirements
3. The Amount of Spending on benefits via subsidies defines the scale of the market.
   
   As the amount and rate of spending increases, so will the amount of pressure that Congress puts on regulatory agencies. In order to demonstrate to Congressional oversight committees that taxpayer dollars are being managed responsibly, regulatory agencies will scrutinize the performance of private-sector health plans and contractors to assess their level of compliance with regulatory requirements.
4. The Political Cycle is the recurrence of the Congressional and Presidential elections, which will continually rebalance political power, reset legislative agendas, and influence the amount of spending authorized in budgets.
   
   Depending upon the outcomes of these elections, the curve of the life cycle may shift, due to changes in authorized spending, laws, policies, and, ultimately, regulations. These shifts may prolong or reduce any phase of the life cycle, or may shift the market to a new life cycle phase altogether.

Lessons for Health Plans, Technology and Services Companies

Applying an understanding of the life cycle of the post-reform individual and small group insurance market will mean the difference between success and failure for health plans. Savvy vendors, such as technology companies, should also use their understanding of the market life cycle to develop turn-key solutions to the needs of health-plan customers.

In practical terms, plans should study the regulatory requirements of each life cycle stage and pay early attention to the regulation development process. They should also invest in infrastructure and training to ensure they have the necessary skills and resources to meet future regulatory requirements. Health plans that do this will earn the trust of regulators, resulting in the ability to compete in the market and grow unencumbered by regulatory sanctions. Failure to anticipate and meet requirements will create a disadvantage, as regulators and their auditors will place those health plans under the microscope. Meaningful deficiencies will draw closer scrutiny and possibly lead to sanctions like those imposed on Aetna or even exclusion from the market altogether. Prospective customers will then be forced to shop elsewhere for their coverage, taking their premiums and subsidies with them.

Fortunately, as it enters the Start-Up phase of the new individual and small group insurance market, the health insurance industry can draw upon the experience it gained during the last major wave of government-sponsored industry reform – Medicare modernization and the implementation of Part D. The lessons learned will help stakeholders to avoid preventable mistakes and arm them with new tools that create competitive advantage.

About The Author

David Goodson, MBA
Contact: dgoodson@pointb.com;
303-974-3033; www.PointB.com

David Goodson is a Senior Strategist and Thought Leader for the Healthcare Payer Markets consulting practice at Point B, an employee-owned management consulting firm that specializes in helping clients execute their strategic initiatives and deliver business results that create transformational change and competitive advantage.

Prior to joining Point B in 2009, David served as Vice President of Compliance in WellPoint Inc.’s Senior Business Division, and in other executive roles within the company where he had P&L, operations, and change leadership accountabilities. He played a key role in the restoration of Federal regulatory relationships critical to over $8 billion in recurring premium revenue, and worked closely with the Centers for Medicare and Medicaid Services to lead the turnaround of a critical national Medicare Part D pharmacy benefits “safety net” for low-income and dual- eligible Medicare beneficiaries. David is an expert in health plan and specialty products business performance improvement, and his related consulting work has been recognized for innovation via a Blue Cross Blue Shield Association “Best of Blue” award. He has presented as subject matter expert to U.S. Senate and House of Representatives staff and to national associations on behalf of the Centers for Medicare and Medicaid Services.

Point B’s hundreds of clients, including The State of Washington, Microsoft, Cisco, CIGNA, The Federal Home Loan Bank, Underwriters Laboratories, and The Children’s Hospital Association have sought out Point B for its objective leadership, deep expertise and ability to transform strategies into reality. Founded in 1995, Point B has since grown into a $90 million business with over 350 associates in Seattle, Portland, Denver, Phoenix, San Francisco, Los Angeles and Chicago. The firm completes more than 800 projects per year, with about 300 of them spanning the healthcare industry. Point B has been honored repeatedly as an exceptional place to work, including being named a “Top Small Workplace” by The Wall Street Journal. In 2008, Consulting Magazine recognized Point B with its “Best Firms to Work For” award and ranked the firm #1 in its Leadership category among 205 consulting firms worldwide.