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President's Vision for Healthcare Reform Could Define Winners and Losers Among Insurers, Financial Services Firms

Posted on: Wednesday, 22 February 2006, 12:01 CST

CHICAGO, Feb. 22 /PRNewswire/ -- President Bush's recent State of the Union address outlined three vital themes for the nation's healthcare that could have a significant impact on health insurers and financial services firms, cautions management consulting firm DiamondCluster International .

Specifically, the President proposed increasing the portability of health insurance across state lines and job changes; making health insurance more affordable through health savings accounts and health association plans that would give small business owners more buying power; and funding initiatives to broaden the use of electronic healthcare records.

"In 2005 healthcare spending was 16 percent of U.S. gross domestic product (GDP) and that percentage will only increase as the baby boomer generation ages," said Patricia O'Brien, M.D., who leads DiamondCluster's healthcare industry practice. "While the administration's proposals seek to address that problem by making healthcare more affordable, they also create challenges and opportunities that insurers ignore at their own risk."

Aamer Baig, a partner in DiamondCluster's financial services practice added: "Financial services firms are being presented with the opportunity to be in middle of the healthcare equation by providing services through health savings accounts (HSAs). But while there's opportunity there, capturing a profitable position will also require significant upfront investments in technology and process improvements."

A complete copy of the DiamondCluster white paper, "Winners and Losers at Healthcare's Last Frontier," can be obtained sending an e-mail request to healthcarepolicy@diamondcluster.com .

The Impact on Health Insurers

In his State of the Union address, the President proposed making HSAs and health insurance "portable, so workers can switch jobs without having to worry about losing their health insurance. The administration also proposed that the insurance component of an HSA plan would become permanently portable with tax-free premiums that would "not increase based on a (worker's) health status at the time they changed jobs, left the labor force or moved." The ability to lock in an insurance premium would also apply for those individuals with traditional healthcare plans, regardless of changes in health status.

"The President's proposal implies price controls by forcing insurers to continue to provide coverage, regardless of whether an individual becomes chronically ill," said Dr. O'Brien. "We would expect the effect of this change to be higher premiums for group policies. Portability may also increase an insurer's administrative costs by changing the way they manage member records and plan pricing. And it may well require new technology investment to manage relationships with members as they move from job to job, or state to state."

Allowing consumers to purchase insurance outside their home state likely would encourage a flurry of industry consolidation among insurers, so as to eliminate price-based competition across states and to create economies of scale to spread higher fixed operating costs across a larger customer base.

"Interstate competition will eliminate some of the complexity of doing business by enabling insurers to standardize processes, pricing policies and negotiated arrangements," said Dr. O'Brien. "But the barriers to competition that regional health insurers have enjoyed will fall as standardization emerges. Not-for-profit and mutual Blue Cross and Blue Shield plans that are unable to consolidate will see this proposal as a serious threat."

The President also called for making "wider use of electronic records and other health information technology to help control costs and reduce dangerous medical errors." This could be a shot-in-the-arm for health insurers who can develop new information based services. WebMD, for example, reported total revenues of $1.16 billion in fiscal year 2004.

"Health insurers, more than any other participant in the healthcare value network, have the activity and efficacy data that consumers, physicians and other providers need to make informed healthcare decisions," said Dr. O'Brien. "Information could be the basis for redefining the health insurer's value proposition, such as helping consumers select the best and most cost-effective treatment."

How should insurers respond if the President's plans come to fruition?

"Health insurers will need to succeed on the basis of customer service, scale, efficiency in investing in new information technology capabilities, and be able to adopt new technology more quickly than their rivals," Dr. O'Brien contended. "For example, by providing planning and decision support tools to consumers, and more robust pay-for-performance metrics for physicians and hospitals, insurers can develop sizable new revenue streams and make a valuable contribution towards improving the quality of healthcare."

Implications for Financial Services Firms

The President's push for permanently portable HSA accounts could make those plans more attractive and potentially alter the role of banks and other financial services firms in the healthcare equation.

DiamondCluster conducted an economic analysis to project the cumulative revenue impact of HSAs over the next five years and expects that HSAs will account for more than 10 percent of insured lives by 2010. This means that there may well be 15-25 million individual HSA accounts holding more than $75 billion in assets within five years. Financial institutions have the potential to capture $3.5 billion in revenues driven by account and asset management fees.

"The President's proposal further opens the door for financial services firms, particularly in serving the largest and most sophisticated employers," said Baig, who has written and spoken extensively on the subject of HSAs.

"These employers will expect best-of-breed benefits, including superior service, real-time claims adjudication, high-quality information and tools for employees to manage their health expenses and medical decisions and a range of funds and services for managing the assets they hold in their HSA accounts."

Financial services firms must decide if they want to play a customer-facing role in providing HSA services to employers and workers, or prefer to be simply a transaction processor or account manager, probably in collaboration with a health insurer.

"Owning the customer experience offers greater long-term profit potential," said Baig, "and puts the financial services firm in a stronger position to provide such issues as healthcare financing, provider bad debt, and claims adjudication. But it won't be easy. As new entrants into the healthcare arena those firms will have to increase their industry knowledge and make meaningful investments and partnerships towards developing new products and distribution channels."

"The Next Frontier"

Summing up the healthcare implications of the President's State of the Union message, Dr. O'Brien said: "The President's proposals are pushing us to the next frontier of healthcare in our nation. No one can accurately predict what lies ahead or just how much progress we will make in improving the quality and affordability of healthcare. But one thing is certain: the President's proposals would create a very different set of healthcare industry dynamics and very few, if any, insurers and financial services companies are prepared to compete in that new frontier."

DiamondCluster International

DiamondCluster International is a premier global management consulting firm that helps leading organizations develop and implement growth strategies, improve operations, and capitalize on technology. Mobilizing multidisciplinary teams from our highly skilled strategy, technology, and operations professionals worldwide, DiamondCluster works collaboratively with clients, unleashing the power within their own organizations to achieve sustainable business advantage. DiamondCluster is headquartered in Chicago, with offices across Europe, India, the Middle East and South America. To learn more visit http://www.diamondcluster.com/ .

Contacts: David Moon Media Relations +1.312.255.4560 david.moon@diamondcluster.com Laura Cinat Investor Relations +1.312.255.6167 laura.cinat@diamondcluster.com

First Call Analyst: FCMN Contact:

DiamondCluster International

CONTACT: David Moon, Media Relations, +1-312-255-4560, ordavid.moon@diamondcluster.com , or Laura Cinat, Investor Relations,+1-312-255-6167, or laura.cinat@diamondcluster.com , both of DiamondClusterInternational

Web site: http://www.diamondcluster.com/

Source: PRNewswire

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