The profound saying in the healthcare realm is that “Everybody wins when the drug prices rise, except the patient”. Even the insurance companies are better off when the healthcare costs rise. They get the allowance to increase the premiums. Medical Loss Ratio rule mandates insurance companies to follow 80/20 ratio. The 80/20 ratio rule generally requires insurance companies to spend at least 80% of the premiums’ collection on the claims and quality improvement activities. The other 20% can go to administrative, overhead, and marketing costs. Thus, higher the overall healthcare costs, higher is the profit window for insurance companies.
Now, there is an Amazon online pharmacy that promises to reduce the cost of generic drugs by 80% and branded drugs by 40%. What does this mean for the health plan payers, in terms of future profitability and strategic priorities? Amazon is on a definitive path to challenge the status quo of broken American healthcare system. First the low-cost Heaven hospital (with Berkshire and JP Morgan), then the acquisition of the Pillpack, and now the online pharmacy. Amazon’s plan to dominate the healthcare (and possibly lowering the cost of treatment and drugs) is becoming evident with every announcement. Large Hospital stocks went down by 20% when the heaven healthcare venture was announced. CVS and other pharmacy shares went down by 8% with the recent announcement of online pharmacies. By a simple extrapolation, the next in line is health and life insurance companies. How much would their stock sink, momentarily? Shhh! Amazon has been hiring rigorously the senior executives from insurance firms, recently.
Few months ago, Amazon was denied access to Surescripts (a monopolised Pharmacy Benefit Management (PBM) software co-owned by CVS, Aetna, and Cigna). While this is hurting Amazon in the short run, it has incentivised Amazon to launch their own PBM. Surescripts has been blamed repeatedly to favour expensive drugs and not letting cheaper generic version to be sold, keeping the drug spend synthetically high. Such monopoly and lobbying driven profiteering practices are not sustainable in perpetuity. Once Amazon has developed its own PBM, it will spare no effort to make the drug marketplace more affordable and open (just like its online shopping portal). Are payers prepared for the day when the informational monopoly in the healthcare industry breaks?
Once Amazon has developed its own PBM, it will spare no effort to make the drug marketplace more affordable and open
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Insurance companies should be asking the following two questions while developing their future strategy:
- Who is the competition? Competition is no more limited to other health insurance companies. The very protected oligopoly of health plan and payers is soon going to be challenged by outsiders. Walmart and Google have already announced their arrival in the insurance space. What’s going to hurt the most is that, unlike traditional mergers and acquisitions, large health plan companies will not be able to buy out the likes of Amazon or Google.
- What does a reduction in healthcare drug costs mean to the insurance business? The most direct impact would be a reduction in overall claims payout, leading to premium cuts (and thus profits). A deeper impact would be that public finds the fading effect on the artificially created demand for health insurance products (because of ridiculously expensive healthcare system). When the drugs become more affordable, the need for umbrella coverages might not be very real, and people will start opting for partial health coverages to save premium costs. When (not if) this trend kicks in, the insurance companies would see a shrinkage in the client base. This would lead to further consolidation or liquidations in the world of health plans.
Recently, payers have been trying to integrate vertically. Aetna teams up with Cleveland Clinic. CVS and Cigna are trying to partner with payers and providers. And at regional level, providers, pharmacies, and payers are coming together. All these partnerships are transpiring to secure a higher user base, keep revenues (and profits) afloat, and insulate the market from innovations and disrupters. Unfortunately, none of these partnerships are aimed at reducing the costs for the patients. In any market, if you do not listen and cater to the customer needs, sooner or later, you will perish. Just think of the insurance companies like the movie store “blockbuster” and somewhere a Netflix for healthcare is being created.
Here is the prophecy:
Health plan payers cannot beat the Amazons and Googles on their home turf, i.e. technology. You cannot sustain and enjoy supranormal profits without adding significant value. The monopolies or oligopolies will soon be challenged. When it comes to lobbying, Amazon, Google, Apple, and Microsoft with outperform the Aetnas, Cignas, CVS, Optum, etc.
Is this the beginning of the end of something? Yes and no. This is a tipping point that marks the end of an opaque healthcare system. But this does not necessarily mean that traditional companies cannot thrive in the new competition. Identifying the need and doing the right thing would do the magic.
Health plan payers cannot beat the Amazons and Googles on their home turf, i.e. technology.
Play on your core competency. The current payers understand their customers better than the outsiders. Cater to the consumer needs like more affordable premiums, price transparency, wider coverage, friendlier call centers, frictionless user interfaces, etc. Make your customers happy, even if it means a dent in the profits. Take it like this, you need shed some weight (profits) to be able to live longer (sustainability). Make investments to move away from the commoditized and monopolized business model. Differentiate the services and offerings enough to be able to face the true market competition. Healthcare is soon going to be a “perfect competition” market (this is pure economics).
Healthcare is soon going to be a “perfect competition” market