An App a Day
By: Adam Ibrahim & Jeff Hynes
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
The introduction of the Patient Protection and Affordable Care Act (ACA) in 2010 has created a paradigm shift in the American healthcare landscape. Four years later, with regulations coming into full effect, insurance companies are seeking a cure.
Partisan politics and “death spirals” aside, there is a serious concern over the effects of the ACA’s tough restrictions on insurance pools and policy pricing. Healthcare spending exceeded over 17% of American GDP in 2011 (US$2.8 trillion) and is set to rise even further. With an aging population, rising obesity, and other chronic conditions, insurance companies are faced with increasing medical costs. In the past, most of these costs were passed on to the patient, however, with the introduction of the ACA, the burden has shifted toward insurance companies.
WellPoint is largely at risk in this scenario. With total revenues of over $71 billion in 2013, WellPoint is the largest health insurance company to fall under the American Blue Cross umbrella. WellPoint has altered its strategy over the past four years from being a provider of high cost plans for the extremely ill, to receiving almost half of its revenues from government subsidized Medicaid and Medicare programs. To date, this strategy has been successful. However, with a medical loss ratio (MLR: the ratio of medical expenses to premiums) of over 85%, WellPoint faces higher pressures on its margins relative to peers like UnitedHealth, which has a ratio of only 81%. Faced with a difficult future under the ACA, now is the best time for a novel cost cutting approach.
Health Prognosis
The intense bureaucracy and heavy regulation in the American healthcare industry make it complicated and difficult to navigate. Numerous players have differing interests, creating pressure and competition within the value chain. Physicians aim to increase billables, insurance companies look to decrease costs, and patients seek quality healthcare at a reasonable price.
For insurance companies, chronic conditions such as diabetes represent a massive and ongoing expense. The average diabetes patient spends $13,700 on healthcare per year, more than 2.3 times that of a healthy patient. Furthermore, spending on diabetes management is growing at 8.2% per year, faster than the overall healthcare market. This is partly because the healthcare system has been primarily set up to treat acute conditions. The prevalence of such conditions is increasing due to a sedentary and aging population, placing an increasingly heavy load on a system designed for one-time problems.
Within this system, insurance companies have the ability to determine which treatments to cover under a policy. As of 2012, private and government healthcare plans provided coverage to 85% of Americans, which is expected to rise as the ACA comes into full effect. Patients are highly price sensitive for out-of-pocket expenses, especially on preventative care, whereas insurance companies seek value for money spent on patient insurance policies. This means that they are willing to pay upfront in order to reap savings over the lifetime of the patient.
(Un)Affordable Care
The eventual outcome of the ACA’s sweeping legislation is speculative; it is hard to imagine health insurance companies surviving with the stringent restrictions on policy pricing and patient acceptances. These limitations include having a medical loss ratio that exceeds 80%, a prohibition on rejecting those with pre-existing medical conditions, an inability to charge higher premiums for patients with medical conditions, and an inability to charge seniors more than three times the lowest premium.
These limitations will end up shifting WellPoint’s patient demographic. Those with pre-existing problems who were unable to get insurance before the ACA will be the first in line to receive benefits. However, healthy younger patients may decide to test their luck with the fine of one percent of yearly household income rather than sign up for insurance coverage. The result is a tipping of the health insurance pool towards the elderly or those with pre-existing conditions, creating a top-heavy expense pyramid. To date, of the 2.7 million young low-cost adults, ages 18 to 34, needed to balance the expenses of high-cost patients, only about 1.6 million have enrolled. This leaves 55 to 64 year olds representing over a third of the new signups and insurance companies left to foot the bill.
Pioneering A New Solution
Given these restrictions, reducing costs may be the only option for increasing profitability. UnitedHealth, the largest provider in the United States, is attempting to do so by changing its cost system to a “pay-for-care” model, which focuses on quality of care instead of billing by time. Early implementation of the model will be difficult due to the high buy-in required from doctors and uncertainty in defining and measuring quality.
Considering the inherent problems with the pay-for-care model, WellPoint should pioneer a new technique to cut costs and differentiate its offering through the use of mobile health devices (mHealth). The emergence of more powerful mobile devices and constant connectivity has sparked the creation of the mHealth industry. mHealth products range from personal diet iPhone applications to mobile body biometric monitoring devices. Such products offer new and innovative solutions for tackling healthcare issues, especially in the monitoring, treatment, and prevention of chronic conditions. However, many mHealth start-ups lack the resources to obtain FDA approval and penetrate the market. By actively seeking out and collaborating with these small firms, WellPoint can acquire technologies to help cut costs by increasing efficiency and reducing hospital visits.
A Possible Antidote
Biosense, an Indian mHealth firm founded in 2008, is an intriguing candidate. The company’s uCheck product allows patients with chronic conditions to accurately test and analyze urine or blood samples within their own home. Priced at only $80, the product uses a smartphone to analyze changes in various indicator strips and provides real time results.
Biosense has had difficulty effectively monetizing its product in the competitive and highly regulated healthcare space. Unexpected enforcement in the FDA’s risk-based rules has forced Biosense to remove its product from the market while it applies for a Class II device approval. The approval process for mHealth devices is faster and less expensive than traditional pharmaceutical products, requiring around one year for FDA approval and costing between $250 thousand and $1 million. Relative to traditional pharmaceutical products, which can take upwards of six years and cost $100 million for approvals. However, for start-ups, these costs are still prohibitive. With limited resources and experience, Biosense presents an ideal opportunity to test the partnership plan.
The estimated reduction in lab visits would significantly decrease costs. A diabetic patient for example, would generally have to submit between two to four A1c hemoglobin tests per year at a lab. Instead, the uCheck could be used to perform the majority of tests, submitting to a lab test only in cases of abnormalities and for occasional verification. Patients with other conditions that require monthly testing, such as those with kidney problems, would benefit even further.
Additionally, uCheck will be able to monitor and discourage medical non-adherence. Surprisingly, an average patient follows only 80% of their medication doses accurately and upwards of 50% of all diabetics fall below this line. The uCheck can perform a number of tests and indicate if a patient is adhering to medication usage and lifestyle choices. Furthermore, test results could be used to prescribe more accurate medication plans and tweak chronic illness management techniques. This allows for a cost efficient method of preventative care, which is far cheaper than treating issues as they arise.
WellPoint had annual medical expenditures of $56 billion in 2013, and diabetes-specific costs of approximately $3.7 billion. Direct savings alone for partnering with Biosense could be up to $283 million, equating to $420 a year per patient. Given that the overall investment cost is approximately $21 million, WellPoint would only require a 10% adoption rate among diabetics to break even within the first year.
WellPoint could achieve considerable savings by extending this strategy to other illnesses, given that chronic diseases account for 75% of all American healthcare spending. Total savings for the company could be as high as $3.2 billion by using mHealth devices to shift towards preventative care for chronic illnesses, reducing WellPoint’s effective MLR to 80.2%. Applying this cost savings model to the whole American healthcare system would result in $160 billion in savings.
Back to Life
The ideal structure for bringing a product like uCheck to market, while ensuring WellPoint can capitalize on the savings, is through the creation of a time-limited, exclusive partnership. The arrangement would allow WellPoint to be the exclusive user of uCheck for a negotiated period of time after FDA approval. The duration of the partnership would be determined in part by WellPoint’s estimation of adoption rates. Biosense would also receive assistance from WellPoint in navigating the FDA, along with testing and improving its products. Additionally, WellPoint would agree to distribute uCheck to a subset of its patients that will benefit the most, including diabetes patients.
Misuse, or lack of use by patients, may destroy much of the value in supplying an mHealth device. WellPoint will need to incentivize patients to use the product by offering yearly rebate checks to patients who follow the usage plan. While this would reduce revenue from premiums, the savings extracted from a higher adoption and adherence rate would offset the losses. Furthermore, resistance to mobile technology may limit adoption among elderly patients, providing a hurdle in tapping into this market that will represent about a third of new signups._
A further barrier to entry may be the physicians themselves, especially if implementing the mHealth device will reduce billable check-ups. A solution to appease this segment is to allow doctors to continue to do the majority of the analysis. Test results would be transferred securely to the healthcare professional, with insurance companies reimbursing them for their work. Therefore, the majority of savings will come from the prevention of far more expensive hospital visits, and from reduced laboratory processing fees.
A final risk is the potential liability on the part of both the manufacturer and insurance company that has yet to be tested in court. Both parties could be held under the same responsibility as the practitioner in the same circumstances. This liability must be limited by ensuring that the device is not used as a diagnosis tool. As such, any abnormalities in testing would be referred to a doctor for further follow-up.
Many insurance companies will struggle to adapt to the post-ACA world. An mHealth solution is an opportunity for WellPoint to come out relatively quickly by breaking new ground on a technological front. Searching for products like uCheck to bring to market will allow WellPoint to better serve patients, differentiate policies, and improve their ailing medical loss ratio. Perhaps this is just what the doctor ordered.
