Winners and Losers – Strategy in a Post-Reform World


Most health policy experts are focusing
on the daily ups and downs in the political battles over health reform.
Within the health care industry, however, there is a
about who will be
the winners and losers after health reform passes.  A.M. Best’s U.S. Health and HMO Insurance Index has been
volatile since last November, reflecting high uncertainty about the
effect of health reform.  Earlier this summer, there was some speculative
analysis about the potential impact
of reform
on health care stocks.  Will health insurers come out as winners?
What about hospitals, doctors, drug manufacturers, and insurance agents?

It’s good to look ahead, but I think
most people are asking the wrong question.  Each of these health
industry sectors – in aggregate — will probably do just fine in the
post-reform world, as Bob Laszewski points out in his recent blog post.  The more important question is: who
will be the winners and losers within each sector?

Change is coming.  After all of
the political maneuvering this fall, some kind of health reform bill
is likely to pass.  The basic shape of the post-reform world is
coming into focus, and it is likely to include:

  • Insurance reform: guaranteed
    issue (no medical screening), along with rating rules and standardized
    benefits in the individual and small group markets.
  • Broader coverage: expansion
    of Medicaid, subsidies for low-income people and an individual mandate.
  • New market structures: an
    insurance exchange for individuals and employees of small groups.
  • Cost containment: increased
    attention to costs, transparency and accountability for insurers and
  • Payment reform: a gradual
    shift from fee-for-service to bundled payments, as well as incentives
    for quality outcomes.
  • Emphasis on prevention,
    primary care, chronic disease management, and the use of comparative
    effectiveness research.

These changes in the regulatory and
market environment will create changes in the dimensions of competition
within the health care industry.  In the PRW (post-reform world),
health insurers and providers will require different skills and strategies
to be successful.

Health Insurers: In the
past, the key to financial success was risk management, i.e., making
sure that the expected medical costs of enrollees were predictable and
not too high.  Insurance CFOs focused on the “loss ratio” —
medical claims payments as a percentage of premiums – as a key measure.
Insurers used medical underwriting, targeted pricing and benefit design
to manage the risk profile of their enrollees.  Many insurers also
tried to hold down medical costs and administrative expenses, but it’s
much harder to do that.  (No one likes being yelled at by doctors.)
Most insurers have deep expertise and experience in risk management,
so it’s not surprising that this would be the primary tool for achieving
their financial goals.

In the PRW, however, the usefulness
of risk management tools will be greatly diminished.  Medical screening
won’t be allowed, and insurers will be limited in their ability to
use pricing and benefit design to attract only low-cost enrollees.
Even if they do, risk equalization mechanisms within the new health
insurance exchange will reduce the financial benefits of cherry picking.
Insurers will need to put more effort into managing expenses, for both
administration and medical services.  In other words, insurers
will need to move from risk management to cost management.

The second major change for insurers
will be in the small employer market segment.  In the past, insurers
focused on the employer as the customer, not the employee.  They
worked through brokers to get access to employers, to whom they offered
coverage on a sole source basis.  Insurers – rightly concerned
about adverse risk selection in a multiple choice arrangement within
a small pool – insisted on being the only health plan offered within
a small group.  The employees could only join the plan offered
by the employer, so there was little need for consumer-oriented marketing.

In the PRW, the employees of most small
businesses will purchase their coverage through a health insurance exchange.
The employer will have a minimal role, and the employee will have a
choice of multiple health plan options.  Insurers will need to
focus their sales and marketing efforts to consumers rather than brokers
and employers.  In other words, insurers will need to shift
from employer-based to consumer-based marketing

Health Care Providers:
Hospitals and physicians face similar changes.  The analogy to
insurers’ risk-management strategies is providers’ payer mix strategies.
An important factor in providers’ financial performance has been the
mix of commercially insured, Medicare, Medicaid, and uninsured patients.
Since the payments for commercially insured patients have been much
higher than for the others, many providers have systematically minimized
or avoided patients in the other three categories.  Even not-for-profit
safety net clinics have been forced to increase the proportion of commercially
insured patients to stay afloat financially.  Many providers have
also tried to hold down medical expenses, but it’s much harder to
do that.  (No one likes being yelled at by staff physicians and
nurses unions.)

In the PRW, the effectiveness of payer-mix
management strategies will be reduced.  Most people will have insurance
coverage, which will provide new revenue to providers who had been serving
the uninsured.  There probably will still be payment differences
between commercially insured vs. Medicare and Medicaid patients, but
the importance of payer-mix management will be reduced.  In response,
providers will need to focus more on managing their costs of delivering
care.  In other words, providers will need to move from payer-mix
management to cost management.

The second major change for providers
will be in provider payment formulas.  In the past, the fee-for-service
payment system rewarded a higher volume of services, regardless of the
patient’s health outcomes.  The CFOs of provider organizations
used key indicators such as the number of hospital admissions, the number
of medical procedures, and billable physician time.  There was
increased pressure for improved physician “productivity”, and billing
systems were upgraded to maximize fee-for-service revenue.

In the PRW there is likely to be a
movement away from fee-for-service payments — although it will probably
happen gradually — and the incentives for increased service volume
will be dampened.  Instead, providers will be paid for a “bundle”
of services, and there will be a greater emphasis on quality processes
and outcomes.  Hospitals will not be paid for a patient’s readmission
for the same medical condition or for correcting medical errors (“never
events”).  Physicians will be paid to take care of patients with
chronic conditions via a specialized capitation or case rate.
Providers will need to coordinate their services and improve the management
of chronic disease patients.  There will be stronger incentives
to invest in electronic health records, use evidence-based clinical
guidelines, and develop integrated delivery systems.  Providers
will need to move from increasing service volume to improving patient

These are only a few of the changes
that will be driven by health reform; the effects of reform are likely
to be far-reaching.  The new legislative and market landscape will
be very different from the one that insurers and providers have been
accustomed to.  Smart health care organizations are already thinking
ahead and developing strategies to be successful. The ones that don’t
adapt will be moving against the tide.  Some insurers will gain,
and others will shrink.  Some providers will thrive, and others
will struggle.  Within a few short years, we’ll be able to sort
out the real winners from the losers.

Bill Kramer is an independent health
care consultant, focusing on health care management, finance and public
policy. Bill served as a senior executive with Kaiser Permanente for
over 20 years, most recently as Chief Financial Officer for Kaiser Permanente’s
Northwest Region. More information about Bill may be found at his website. You can read more of his commentaries
on health care management and policy at his blog, Now’s the Time, where this post first appeared.

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Sabastian CurryAsk A DoctorMICHELLE MANCELLThe Mind RelaxerDr. Rick Lippin Recent comment authors
newest oldest most voted

What this website advocates is socialism.
Oh, the horror. The horror!

Sabastian Curry
Sabastian Curry

What this website advocates is socialism. Socialism does not work, read history.
No one has the right to healthcare. Based on what philosophy? If one want’s health insurance they can purchase it. If they cannot afford it then they do not have the right to force someone else to pay, that is called tyranny, stealing via the government.
People need to think about what they are asking for. Obama is a politician! He has never worked a day in his life. To give politicians power over healthcare is dangerous, immoral, and illegal.

Ask A Doctor

Lets hope that the patients should emerge as the real winners in this whole situation.


The winners and the losers, who are they? was the question posed by our author Bill Kramer. I feel between the insurance companies, taxpayers, providers, hospitals, and patients involved in this current healthcare reform debate is like a boxing match. And let’s not forget the government’s control regarding the “public option” plan for universal healthcare to improve healthcare reform. This debate will not be resolved quickly. It will take a lot of time to put the pieces together to make this system better. As we already know, under Bill Clinton’s administration, he tried to resolve this problem for over 15… Read more »

The Mind Relaxer

Hope everybody will become a winner and no loser at all. Nice post and very informative.

Dr. Rick Lippin

The overall winner in the PRW will and should be the American medical consumer-formerly known as patients. This is what real reform should be all about.
My question is how did we stray so far from that basic goal in healthcare?
Dr. Rick Lippin


Insureds don’t submit out of network claims, almost 100% of the time even out of network doctors bill for payment. Doctors want paid so they want the insurance company sending the check strait to them not the member. “unless of course the complexity of forms submission makes it that way” You mean the UB and HCFA that most claims are billed on, I’ll bet you can’t find even one insurance company in the entire company that doesn’t accept those two forms. Do you think before you say this stuff? “need to hire outside claims processors along with the extra staff… Read more »

inchoate but earnest
inchoate but earnest

Jerry wrote “I’d guess that the risk of getting seriously ill or injured at some point in my life is much higher than the risk of my house burning down. It’s probably even a lead pipe cinch.” So much depends on your definition of “seriously” but it’s likely you’d be quite surprised to learn that your “cinch” is not so certain – better than the odds of your house burning down, but not a lock. The readily available data only hint at the probabilities, but for example, people 65+ # about 40 million, and account for about 13 million hospital… Read more »

Jim Bertsch
Jim Bertsch

Nate, My personal experience with insurers is similar to Barak Obama’s mother. When she was dying of cancer, they were fighting her over their liability for her care. I suffered an injury that required me to have daily treatments and make weekly insurance claims. My claims were initially denied (for duplicate biling) every week. I had to plan to spend 2-4 hours every week while at work to get the insurer to pay. This lasted for six months. I was recently on COBRA. I was paying $900 per month, but paying the bill was not enough. They would cash the… Read more »


Jerry, when Nate and insurance companies talk about risk they are talking about cherry-picked risk. When the risk is too high they simply off load it to government (Medicare), the un-insured (creating more of them) , the under-insured (more of them too), pre-existing (don’t really want the business) and high decutible plans. Insurance is not healthcare and “reforming” insurance will not reform healthcare. You are right that a larger pool divides the costs and expenses, that’s why universal single-pay is the best system if you want to control and spread costs – one big pool.

Jim Bertsch
Jim Bertsch

Jerry, You ask what value do insurance companies bring to the process. Their most important role is to manage risk for the general public. In theory, their is universal access to health care and everyone is covered for any medical condition. Insurance companies spread the cost of taking care of a few by having everyone make monthly payments. The goal of health care reform is to come closer to achieving the above ideal. Another key role of insurance is to design health care products that give different levels of access to the system. Consumers of insurance pay a monthly insurance… Read more »

Mike Stollenwerk

Thanks, Nate. I’m still not clear on your assertion that “The (insurance) Industry does a great job of education.” You described some activities associated with your own practice and customers (how do you describe your job? are you a broker? salesperson? customer service rep? some other role?), so it sounds like you believe that you do a “great job of education.” But that seems like an entirely different thing to me. As for your comment about transferring risk – I’m not sure how that model applies to health care. The risk of my house burning down seems pretty remote, but… Read more »


Nate, I didn’t assert any percentage on denials, I only said that insurance companies can just deny the claim and let the provider/insured struggle with the paperwork to get paid. Obviously I don’t consider when the claim was submitted as an insurance problem, unless of course the complexity of forms submission makes it that way. But you seem to hold that all the efforts taken to process claims, including the need to hire outside claims processors along with the extra staff needed to pass paperwork to multiple insurance companies, as a strength of the system. First pass payment rates may… Read more »


And when there are denial most of the time it is the doctors office fault. There is an entire industry that helps doctors clean up their billing becuase some suck that bad at it. http://www.physicianspractice.com/index/fuseaction/articles.supplementDetails/articleID/1242.htm “For example, the St. Louis consulting firm LarsonAllen surveyed 23 practices that submitted accurate claims to their clearinghouse 99 percent of the time. Those practices had average days in A/R of 40 and a net collection ratio of 97 percent. They posted bills within a day and payments within two days, and they worked denials within 48 hours. They had processes in place to understand… Read more »