State of the Industry: 2007

October 1, 2006

Healthcare as a business model defies many typical economic principles, making forecasting somewhat difficult. The federal government is expecting 2006 to end with a slight reduction in healthcare cost growth over last year, and for 2007 to end with a lower growth rate than the previous two years. With an aging population, advances in medical technology and increased utilization, growth is expected to hover at about 7.2% per year.

Healthcare as a business model defies many typical economic principles, making forecasting somewhat difficult. The federal government is expecting 2006 to end with a slight reduction in healthcare cost growth over last year, and for 2007 to end with a lower growth rate than the previous two years. With an aging population, advances in medical technology and increased utilization, growth is expected to hover at about 7.2% per year.

It's no surprise that thought leaders in the industry are concerned about the prediction that current spending levels will result in healthcare accounting for 20% of Gross Domestic Product by 2015. In the meantime, managed care organizations are concerned about competition, profit margins and delivering on customer expectations against a backdrop of belt tightening.

A panel of Managed Healthcare Executive readers recently shared their opinions and predictions, and those data points are collected in the following State of the Industry Report. The largest percentage of respondents categorized themselves as health plans, followed by hospitals and health systems, physician practices, employers, long-term care facilities, PBMs and disease management providers, respectively. Nearly 11% of the respondents conduct business nationwide.

In a fiercely competitive market, MCOs can't rely on past growth strategies, experts say. Consolidation, government influence and rising customer expectations continue to fuel the need to differentiate and deliver while still maintaining reasonable margins.

"Health plans are out of steam with respect to raising premiums," says Dennis Schmuland, MD, Microsoft's health plan industry solutions director and MHE editorial advisor. "If they raise premiums, they're going to lose more members, because now employers are opting out. That leaves their profit margins to be supported only by driving out administrative costs and reducing medical costs."

The MHE State of the Industry Survey reports that increasing efficiencies with technology is the top method respondents will execute in 2007 to remain competitive in the market. More than 56% indicated that strategy as one of their top three.

Some MCOs are trying to squeeze the most out of their existing investments in technology, but increasingly, more are looking to rip out and replace, Dr. Schmuland says. Their reasons for ripping out and replacing existing technology systems include:

While retooling with technology can offer operational gains through streamlining, another rising tide works hand in hand with that effort.

"The flip side is that they're all racing to implement a service-oriented architecture so they can monitize and commoditize what they already have and be able to respond to changing business needs," he says.

Surprisingly, survey respondents gave low rankings to creating pay-for-performance programs and introducing subsidiary businesses. One responding organization indicated "be acquired" as its strategy for 2007.

Reducing costs

Other popular choices selected by respondents included caps on medical liability and reduction of barriers to preventive services.

The ball is in the employers' court, says Shawn Jenkins, founder, CEO, and president of Benefitfocus.

"It's really the employer that controls the spend," Jenkins says. He sees wellness and preventive programs provided by employers as playing a role in the near future, as will the trend toward more consumer-directed healthcare.