As Healthcare payors face up to seismic change, can outsourcing provide answers?


I swear by Apollo to meet all service levels…

At HfS Research (sorry, we have to start using that acronym – if I have to keep spelling out “Horses for Sources” every five minutes…), we’re focusing our microscope on the healthcare industry with our new research agenda (drop us a note if you’d like more details on our research coverage).  Our resident healthcare analyst, Anthony Calabrese, has a pretty decent point of view here… 

Healthcare Payors Reshuffle Their Priorities

Unlike medical product manufacturers and pharmaceutical companies’ industries, healthcare reform will absolutely transform the healthcare payor industry.  Mandated medical loss ratios, state-run insurance exchanges, guaranteed coverage, and required purchase requirements will restructure the payor’s business models.  The trickle-down impact on operations will be significant, shifting priorities in a manner that will eventually impact outsourcing priorities.  

Healthcare Reform – The Big Changes 

Few people understand the healthcare reform laws signed by President Obama.  While the laws are lengthy, the list of major changes is not: 

  • Consumers must purchase insurance and companies with more than 50 employees must provide insurance.  Those who fail to do so will be subject to fairly substantial fines. 
  • Insurance companies cannot deny coverage or price individual policies based on prior medical conditions. 
  • State-run exchanges will be created to directly offer individual policies. 
  • Federal electronic enrollment protocol standards will be developed to allow consumers to enroll, view, and manage their enrollment in insurance. 

Healthcare companies have mandated medical loss ratios (MLRs) of 85% for large groups of more than 100 and 80% for small groups and individuals.  If payors manage to generate lower MLRs, they must refund the difference to enrollees. 

What does this mean to the heathcare payor industry?  

The changes are substantial: 

First: payors can expect to compete for over 30 million new enrollees that are required to purchase insurance.  While some of this business will be generated by small groups who previously did not provide insurance to employees, the bulk of the 30 million new enrollees will come through individual insurance.  As witnessed by the payors go-to-market implementation of Medicare Part D, the enormous spike of sales and new customers requires significant planning and operational bandwidth.  This impact sales and customer service activities, requiring substantial investment in customer service teams, technology readiness, and enrollment processes. 

Second: transactional workflow associated with individual enrollment will need to be completely reengineered.  Prior to reform, transactions flowed through underwriting groups who priced each individual plan.  With the advent of state-run exchanges, insurance plans will be codified in just four basic formulas (Platinum, Gold, Silver, and Bronze) and offered through online exchanges.  There will no longer be a need for underwriting to review enrollments for pricing or previous medical conditions.  Furthermore, the implementation of federal standards for electronic enrollment transactions will require investment in transaction gateways and internet portals. 

Third: state exchanges will likely greatly reduce the role of the middle men – the insurance brokers.  Individual will be able to browse available rates and compare products online – and then purchase plans directly from payors.  Without the ability to incentivize brokers on the profitability of different enrollees, broker compensation models will change dramatically.  However, the need for payors to compete directly changes their consumer sales operations significantly.  Expect more direct marketing investment, greater focus on churn management, and larger investments in direct and indirect sales operations. 

Fourth: the implementation of state-run exchanges will also incentivize payors to invest in competitive intelligence systems to track competitive activity, similar to the investment of the airline industry to track similarly complex airfare changes and offerings. 

Fifth: the implementation of compulsory MLRs will cause a seismic shift in the industry.  While the standard calculation to be used by insurers has yet to be written, the current results are eye opening. 

The Outsourcing Buyers Should Brace for Strategic Changes 

Outsourcing governance organizations will need to reassess existing relationships and the scope of potential opportunities.  Here is some advice as to where they should begin: 

Prepare for Significant Change Orders and Terminations – One way or another, the law is going to impact existing operations.  It will change how enrollment occurs, at a minimum.  It may materially change the size of your programs, causing a need to change locations.  Existing inbound customer service suppliers may be needed to provide inbound sales support duties.  Margin pressures may create opportunities to renegotiate contracts.  Regardless, use these changes to your strategic advantage – map the planned changes comprehensively and prepare you negotiation strategies in advance. 

Review Existing Contracts for “Change of Law” Clauses – Depending on how your contract is written, changes caused by health care reform laws could be the buyer or the vendor’s burden or could create unplanned termination options for either party.  Ensure you understand the your contract’s specific handling of changes in law. 

Brace for January 1, 2014’s High Volumes and Low Predictability – New market entry of 30 million new members plus the high likelihood that all existing individual policyholders will change policies will create the need to support sales, enrollment, and backoffice transaction processing operations.  How much marketshare your company will win is uncertain – witness the Medicare Part D free-for-all that was accompanied by substantial marketing efforts.  Vendor governance teams will need to develop plans to handle the uncertain volumes, recognizing execution failures could lead to acquisition shortfalls and member churn.  Whatever happens, the bracing will begin long before 2014 as operations must be mobilized and ready in advance. 

Get Comfortable with Federal and State Outsourcing Compliance Processes – CMS leverages offshore subcontacting attestations filed by all payors with a subcontractor (or a subcontractor’s subcontractor, etc.) operating outside of the 50 states or US territories.  You need to seek guidance from Federal and State regulators as to how they will review offshore outsourcing, especially given the difficult economic climate and the negative public attention politicians could attract.  Develop a comprehensive public affairs strategy and leverage your current public affairs and state regulatory relations infrastructures. 

Reassess Outsourcing Opportunities – Payors have been largely shielded from economic drivers of outsourcing resulting in limited outsourcing of core operations and shared services.  Furthermore, the complexity of payors’ claims processing systems means that few companies have entered into comprehensive, transformational application development and maintenance contracts.  Given fixed MLRs and what is expected to be a highly competitive marketplace, payors should comprehensively reassess outsourcing opportunities in operations, shared services, and IT.  Manage transitions in advance of 2014 to ensure success – you have about three years from today to assess, select vendors, negotiate contracts, transition, and stabilize operations.  That isn’t much time, especially in critical medical management outsourcing to disease management vendors and direct sales support operations. 

Understand Your Service Providers’s Industry Intelligence – Across the industry, vendors are salivating at the perceived impact healthcare reform will cause on outsourcing deals.  New service providers in the industry will develop capabilities and existing ones will need to improve the robustness of their operations.  Develop strong relationships with your provider and seek to understand their strategies, their process capabilites, their onshore/offshore models, in addition to what they are hearing from your competitors. 

We’ll be delving deeper into the challenges and opportunities facing the healthcare payor sector in Anthony Calabrese’s forthcoming report, as part of our HfS Research program

Posted in : Business Process Outsourcing (BPO), Healthcare and Outsourcing, IT Outsourcing / IT Services, Sourcing Best Practises



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  1. Anthony,

    The major immediate outsourcing will be through the states as the establish the HIEs to support physician private group EMR adoption; and as they establish their hubs for the NHIN.

    As far as payors are concerned, their primary concerns are not costs (since these remain a pass-through expense), but are control and security – so, no, they will not increase out-sourcing.

    Remaining large multi-specialty practices may increasingly turn to outsourcing and/or SaaS apps such as AthenaHealth rather than large back office operations,


  2. Currently your data is not as safe as you’d think. Doctors are not going to type millions of old records in their new EMR. For that matter their are several doctors that record their evaluations and let someone else type it up. Often this is done currently offshore.

    However, the recent changes in the law are suppost to allow insurance provides form any state to provide coverage in any state. I wonder if this could also be used to allow offshore companies to replace onshore insurance providers.Or teamed with an onshore non profit. A low cost high deductable plan combined with payors own HSA could do well, where major plan-able health care like surgery could even be cheaper do off shore.

    Eric Stephenson

  3. @Eric S. – While the point of these post was focused on Payors, Providers are definitely going to see an uptick in outsourcing requirements. Doctors are going to need to write 30 million more EMRs, which, as you said, are a frequently outsourced function, but is also subject to significant technology investment in search of the illusive “universal electronic medical record.” This expansion will also be the subject of future research.

    The recent law did not change the McCarran–Ferguson Act, which is the law that created state-by-state regulatory environments – even though Obama and the Congress threatened to change this! So, the same state licensing rules will exist in the future. Importantly, remember that 1 in 3 Americans are covered by the plans offered by the Blue Cross Blue Shield Association. These “franchises” specifically prohibit competition. So, Blue Cross Blue Shield of Virginia cannot enter Blue Cross Blue Shield of Louisiana’s market. The “Blues” have significant market share in all states they compete with other companies.

    The other large players do not compete in all states, either. For example, Cigna competes in California, New Jersey, Tennessee, and Texas. The state licensing rules have essentially limited large American insurers (like AIG) and the European players from acquiring American companies. There are no players in the rest of the world with sufficient capitalization or industry capability to enter the American market. Rather, companies like Aetna, United, and WellPoint are all entering foreign markets.

  4. @ Marshall – It’s important to note that the legislation recently passed didn’t mandate a universal electronic medical record (EMR). Rather, it addressed enrollment! We can certainly hope for a universal EMR, but it is hard to believe that 50 states will agree on this technology and implement it for providers and payors in the next few years. Maybe a few states will adopt standards, but there is little chance of implementation.

    However, I agree that State Insurance Regulators will be outsourcing the development of the electronic Health Insurance Exchanges mandated by the legislation. This legislation is very specific – it’s all about enrollment efficiencies.

    I do disagree about costs. The changes in mandated Medical Loss Ratios (MLRs) is huge. It will likely remove 300-700 basis points from large payor margins and smaller payors will probably give up 2x this. Look at the BCBS of Michigan who issued a letter to their congressmen in August 2009 claiming, “Our actual medical loss ratio on individual products in 2008 was 127 percent. That means we paid out $1.27 in claims for every $1 we collect in premiums. Compare that to commercial insurers operating in Michigan, and you’ll find a much lower loss ratio, likely between 50 percent and 60 percent. Michigan does not regulate, except for Blue Cross, a minimum loss ratio, whereas many other states have adopted loss ratios between 65 percent and 80 percent for their individual markets.” See how significant the MLR issue will be? It’s a complete game changer.

    Finally, I agree on the reliance on outsourcing in operations and IT. There isn’t a single large Payor that has a technology roadmap that relies on a commercially available claims processing application. It will be fascinating to see if cloud computing options become available!

  5. I agree with the content of your article in regards to the whole payor system. What will be interesting to see is ….will we transition to such a system like canada, where patients have to wait for months before proper care? It makes you think, does this whole system mean all providers in some sort of way will be getting paid capitation. so per capita they will get paid no matter what. The insurance companies even with subsidy and regulation on profits will still find out how to squeeze the dollar. I wrote an article in which some of the big managed care operators were not to pleased with, it shares some of my insights as an actuary with Blue Cross

  6. I believe the Healthcare Reform bill will lead to more outsourcing opportunities primarily because there are areas of the bill that introduce significant changes to the market dynamics and little time for the industry to “naturally” adjust.

    Whenever there are forced alterations to market dynamics that must take place within a short period of time (even a few years), the ability of firms to adapt internally can be difficult…this is where consultants, vendors, and outsourcers are hired to assist in these areas.

    In strong economies, US consultants/vendors are typically hired because companies are more optimistic about the future of their balance sheets and their bank accounts allow these higher priced onsite individuals and teams. Some companies are still fairly conservative to send a part of their operations offshore, so paying this higher price is worth it.

    Fast forward to today’s economy – the slimmer margins of healthcare plans, plus a fairly significant reformation taking place, and plans are looking for companies that can significantly reduce their costs and create entire process teams to handle the changes. Throw in there huge state/federal deficits, and these contracted plans are facing an uphill battle.

    Outsourcers have the advantage when there are industry modifications and cost cutting is mandated above the normal annual enhancements. The ability for offshore (outside the US) firms to hire large teams of individuals with incredible credentials providing compliant dynamic solutions, is an significant advantage.

    From personal experience I’ve been in meetings with health plan executives and there is a significant worry throughout the industry on the upcoming changes and the costs associated. Plans can no longer cut a few percentage points off their operating costs, they are looking for 10%+ in addition improving their efficiencies and disease management; further reducing their costs.

    Also, with the biggest companies in the healthcare industry moving more of the operations offshore, I do believe this will create an greater acceptance of this model and more firms will follow..if not simply out of necessity, which is a study just byself …outsourcing just to stay competitive with your competition!


  7. There is another element to consider in all of this, a very significant one that went down a year ago.

    911, it’s Not Just a Phone Number, it is the Percentage of Increase in US Medical Coding Complexity

    In at least one area outsourcing can provide a vehicle to slow down the escalating costs of health care. Changes to medical coding practices will be disruptive, time consuming, and expensive for the US healthcare industry. Suppliers with knowledge of the new system can reduce the pain and costs of implementation from one to many.

    On January 16, 2009 the US Department of Health & Human Services (HHS) mandated that a revision to medical coding standards would become required by October 1, 2013. The International Statistical Classification of Diseases and Related Health Problems 10th Revision (ICD-10) includes more than 155,000 different codes compared to the 17,000 codes in ICD-9, the current US standard. Originally HHS had proposed the implementation date of October 1, 2011.

    It is rather unusual for the US to be a laggard in adoption, but it is in this case. The US healthcare industry has virtually no experience in ICD-10 though most of the world does. By tapping into the global experience of service providers, healthcare organizations can avoid going it alone into an unknown area.

    There are several areas and courses that organizations can consider involving outsourcing as a solution to the challenges of the transition. Consider the benefits that can be reaped in designing and managing the transition project. Whether it is a lone physician in private practice or a goliath health insurance company, outsourcing provides an arrow for every quiver.

    ICD-10 is based on classifications by the World Health Organization and has been in effect in other countries since 1992. Though known to be inevitable for years by the US healthcare industry, it finds itself largely unprepared and facing an expensive and disruptive transition.

  8. Anthony,

    The “electronification of medical records” feeds into the emerging technology of electronic EOB’s or Explanation of Benefits. As most know, companies make money by investing funds while checks covering those funds are in the mail. Currently, the medicare system issues electronic EOB’s and that practice will quickly spread to private insurers as well. There are hospitals and medical practices that currently pay data entry fees for banks to receive EOB’s via mail and data enter that data into the same format an electronic EOB would come in. Obviously, insurance companies will lose out on “playing the float”, but they have no choice when the software companies involved in automation EOB’s work with banks to automate the process. The software is advanced enough to look at rejected claims and determine if the procedure code matches up to the diagnosis code (example). If one needs to be corrected, the software does this and resubmits the claim to the insurance company electronically (no human intervention).
    EOB electronification will play a huge roll in improving and controlling healthcare costs.

    ps. The paper check accompanying the EOB is also converted to an electronic transaction and thus, processed quicker.

  9. […] very good analysis of the impact of the proposed changes to the US health system can be found on: As Healthcare payors face up to seismic change, can outsourcing provide answers? Happy to discuss here too! Dr Stephanie Morgan Crosslight Management […]

  10. This is interesting discussion. The Healthcare reform is expected to bring additional 32 Million under coverage. As the influx of millions of “newly insured” happens into the healthcare system, they will need to be administered. It is going to push Insurance companies and healthcare providers to become more efficient and agile in managing the incremental demand. Immediate provisions like dependent coverage for children until they turn 26, eliminating pre-existing condition exclusions for children, elimination of lifetime or restrictive annual caps on coverage et al is requiring insurance companies to do more with less.

    Beginning 2011, insurers will be required to spend 80-85% of their premium dollars on clinical services and quality services. This translates into increased control on premiums and margins for insurance companies requiring them to significantly reduce administrative spend. And by 2014, when “Exchanges” provision in each state comes into effect, the marketplace will become all the more competitive and regulated.
    All this represent significant opportunities for increased administration requirements, increased adoption of outsourcing model and increased technology spend on enrollments and dealing with new administrative requirements. We expect to see significant spurt in areas of Claims processing, Enrollments, Policy holder Services, Underwriting Support and Customer support that are outsourced today. In addition, we will see increased adoption of IT for process standardization and reduction of paperwork.

  11. Some US Health Plans are strangers to front office or call center BPO, but most are not strangers to Back Office BPO. The pressure to ensure that the MLR floor doesn’t become a “sub-floor” encroaching on ALR and profit is a great impetus to accelerate both front and back office BPO and Application Outsourcing. Other questions – Can the legacy group system support individuals? Can the legacy system be transformed? Can a new application be up and running in time? Is the broker channel critical to supporting and shepherding individuals. This will be an interesting race to the finish line.

  12. […] US healthcare reform calls for innovation in risk/price modeling for insurers who will cater to whole new segments of […]

  13. […] And when any industry gets the squeeze, us sourcing-folk immediately think “hmmm, will they now do some outsourcing…?”.  (Read our earlier piece on the impact of healthcare reform on healthcare payors). […]

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