disruption of the group health insurance in light of the affordable care act-system approach

IDisruption of the Group Health Insurance in light of theAffordable Care Act - System Approach

By

Shweta Shefali

B.Tech JMI New Delhi (Electrical Engineering)

Submitted to the Faculty in partial fulfillment of the requirements for the degree of

Master of Science in Engineering and Management

at

Massachusetts Institute of Technology

[May, 2014]

© [2014] [S wit ] AD Rights Reserved.

The author hereby grants to MIT permission to reproduceand to distribute publicly paper and electronic

copies of this thesis document in whole or in partin any medium now known or hereafter created.

OF TECHNOLOGY

JUN 2 6 2014

LIBRARIES

Author:Signature redacted

[SHWETA SHEFALI]

System Design and Management Program

Signature redactedCertified and Accepted by: .................................

Patrick Hale

Senior Lecturer, Engineering Systems DivisionDirector, System Design and Management Program

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Shweta ShefaliMIT SDM ThesisMIT SDM Thesis

2

2

Disruption of the Group Health Insurance in light of the

Affordable Care Act - System Approach

By

Shweta Shefali

Submitted to the System Design and Management Program on [MONTH, DAY, YEAR] in Partial

fulfillment of the Requirements for the Degree of Master of Science in Engineering and

Management.

AbstractOur current Healthcare system has multiple problems and it is widely perceived that it is not ableto provide quality affordable healthcare to all Americans; millions of Americans are without HealthInsurance. The Affordable Care Act (ACA) was signed into law to achieve goal of 'qualityaffordable care for all American'. The ACA has focus on Individual Health Insurance and theprovision of Health Exchange Marketplaces to find and purchase Health Insurance.

Disruptive Innovation is a phenomenon in which a new entrant company disrupts the existingestablished company. As ACA and Health Exchanges have provided level playing field for allcompanies - new entrants and established - will this lead to disruption of Healthcare?

Disruptive Innovations is analyzed from System Approach point of view. Disruption is not limitedto two companies; Disruptor System disrupts the existing system including incumbent company.Disruption will be spearheaded by new entrant Disruptor Company and disruption will take placeat system level.

The existing Healthcare System and Possible Disruptor Systems are defined and investigated.Relative advantage and disadvantages to these two systems with regard to ACA regulations areanalyzed. Elements of the healthcare disruptor system are analyzed and information present inthe public domain about Health Exchange enrolment after the end of first enrollment seasons isstudied to find out who could be possible disruptor and whether disruptor system formation hasstarted.

Thesis Supervisor: Patrick Hale

Title: Director, System Design and Management ProgramSenior Lecturer, Engineering Systems Division

Shweta ShefaliMIT SDM Thesis 3

Acknowledgments

It was a privilege to work on this thesis for the past three semesters. It enriched my understandingof the healthcare industry tremendously. While pursuing my graduate studies at MIT, I realizedthe importance of being able to visualize a task or situation at the macro level. For example,viewing a three dimensional pictorial representation always provides greater results as comparedto two dimensional objects, as you are able to see it from different angles. Similarly, being able toview the healthcare system from different perspectives by the systems thinking developed atSDM, provided me greater clarity and enabled me to take a sure-footed holistic approach in myanalysis. The systems learnings in the SDM program with its unique analytical pedagogyapproach with lots of knowledge, discussions and analysis helped me to take an in depthstructured approach to the thesis.

I am thankful to all my batch mates, staff and professors at MIT for making the journey at SDMso enriching and giving me an opportunity to explore and strengthen my knowledge andcapabilities.

The resources and guest lectures offered by the 15.767 course on Healthcare Delivery in the U.S:Market & System Challenges with industry leaders and pioneers such as Richard Baum helpedme tremendously in analyzing such a complex industry with different perspectives. The wonderfullectures and discussions of Dr Vivek Farias were enriching and stimulating.

I want to thank my thesis advisor; Pat hale for being an incredible mentor and it was a pleasureto work with him. I enjoyed and enriched my knowledge deeply with our wonderful conversationsand discussions on the healthcare system. I appreciate his patience, excellent guidance andproviding me with a stress free nurturing atmosphere.

I express my heartfelt gratitude to my husband Himanshu for his tremendous support,understanding and being my rock at all times, while single handedly managing his demanding joband being a wonderful dad to our little son Suraj. I would have never been able to complete mythesis without his support and blessings of my loving family, who have done numerous sacrificesfor me.

Last but not the least I want to thank almighty for leading me to such an opportunity in life, whichhelped me grow tremendously professionally and personally and blessing me with strength andperseverance to deliver under pressure meeting several deadlines simultaneously.


Table of Contents

Chapter 1: Introduction.......................................................................................................11

Chapter 2: Current Health Insurance................................................................................ 13

2.1. Elem ents of Health Insurance ............................................................................ 13

2.2. Functions of Healthcare .................................................................................... 14

2.3. Types of publicly financed insurance ................................................................ 15

2.4. Types of private financed insurance................................................................... 16

2.5. Types of health insurance plans.......................................................................... 16

2.6. Conclusion ............................................................................................................ 18

Chapter 3: System s Thinking ........................................................................................... 19

3.1. Elem ents of System ........................................................................................... 20

3.2. System Boundary ............................................................................................. 20

3.3. Relationship between Entities ........................................................................... 21

3.4. Health Insurance - As a System ....................................................................... 21

3.5. Conclusion ............................................................................................................ 24

Chapter 4: Affordable Care Act ........................................................................................ 25

4.1. The Affordable Care Act, Section by Section ..................................................... 26

4.2. O bjectives of ACA ............................................................................................. 29

4.3. Conclusion ............................................................................................................ 32

Chapter 5: Affordable Care Act - System Perspective ................................................... 33

5.1. ACA System s Perspective ................................................................................ 33

5.2. ACA objectives and their effect on Healthcare System Elements....................... 34

5.3. Conclusion............................................................................................................ 36

Chapter 6: Disruptive Innovation - System Perspective ................................................. 37

6.1. Disruptive innovation......................................................................................... 37

6.2. Disruption - System Approach.......................................................................... 37


6.3. Disruption in Healthcare..................................................................................... 40

6.4. Conclusion ............................................................................................................ 42

Chapter 7: (Ecosystem ) Factors leading to Disruption.................................................... 43

7.1. Health Insurance - A Big Gap............................................................................ 43

7.2. ACA - The new Beginning ................................................................................ 45

7.3. The Penalty........................................................................................................... 46

7.4. Health Exchange M arketplace ......................................................................... 47

7.5. G roup Health Insurance - Health Insurance of Today....................................... 47

7.6. Individual Health Insurance under ACA - Health Insurance of the Future ......... 50

7.7. O ld W orld Vs New W orld .................................................................................. 55

7.8. Dilem m a of Incum bents .................................................................................... 55

7.9. Advantage to New Entrants .............................................................................. 58

7.10. Conclusion ............................................................................................................ 58

Chapter 8: Health Exchange - Sustainability ................................................................... 59

8.1. Insurance M arketplace....................................................................................... 59

8.2. Sustainability of Health Exchange (HE)............................................................. 60

8.3. How the M odel W orks....................................................................................... 65

8.4. Sim ulated Cases................................................................................................ 66

8.5. Conclusion ............................................................................................................ 71

Chapter 9 Disruption of Health Insurance........................................................................ 73

9.1. Disruption - Disruptor System Elem ents............................................................. 73

9.2. Disputed System Issues - Opportunities for Disruptor System ......................... 80

9.3. Conclusion ............................................................................................................ 85

Chapter 10: W ho Could be Possible Disruptor ................................................................. 87

10.1. Desired Q ualities needed in New Disruptor Com pany....................................... 87

10.2. Possible Suitors ................................................................................................. 89


1 0 .3 . C o n c lu s io n ............................................................................................................ 9 2

Chapter 11: Early Trends .................................................................................................. 93

11.1. Provider - CVS Minute Clinic and W algreen Health Clinic ................................ 93

11.2. Health Exchange Marketplace ............................................................................ 95

11.3. Federal Health Exchange Data (March, 2014 Release).................................... 97

11.4. Existing com panies........................................................................................ 109

11.5. Independent New Entity by Existing Insurance Provider ..................................... 109

11.6. CO-OP Com panies ............................................................................................. 111

11.7. Other Com panies on Exchange .......................................................................... 115

11.8. Disruptor System ................................................................................................ 115

1 1 .9 . C o n c lu s io n .......................................................................................................... 1 16

Chapter 12: Challenges for Disruptor ................................................................................ 117

12.1. Challenge for Disruptor System .......................................................................... 117

12.2. Challenge for Disruptor System Elements........................................................... 117

12 .3 . C o n c lu s io n ......................................................................................................... 12 0

Chapter 13: Conclusion..................................................................................................... 121

A p p e n d ix ........................................................................................................................... 1 2 3

1. Maxim us Cost Breakdown of MNSure................................................................. 123

2. Heath Exchange Sustainability Vensim Model .................................................... 126

R e fe re n c e s ....................................................................................................................... 1 2 7

T a b le o f F ig u re s ................................................................................................................ 12 8

T a b le o f T a b le s ............. ................................................................................................... 129

Table of Abbreviation ........................................................................................................ 130

In d e x ................................................................................................................................. 1 3 1




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Chapter 1: Introduction

People use health care services for many reasons: to cure illnesses and health conditions, to mend breaks

and tears, to prevent or delay future health care problems, to reduce pain and increase quality of life, and

sometimes merely to obtain information about their health status and prognosis. America has witnessed

incredible change in healthcare services delivery in recent past and tremendous progress has been made

in the ways healthcare services are provided and delivered.

When we speak about healthcare we include providers, insurance companies, health insurance, and

everyone else related with healthcare - and this makes healthcare into a complex healthcare system. We

will analyze healthcare in America from a systems perspective as healthcare system.

With the recent changes and technological advancements, healthcare services have undergone an

increase in cost and complexity. At the same time, the role of employer sponsored insurance and

insurance companies have taken individuals and the families out of control of their healthcare. The

Affordable Care Act was passed by the congress and signed into the law by president of United States on

March 23, 2010 to put individuals, families, and small business owners back in control of their health care

and provide affordable-high quality healthcare to all Americans.

The Affordable Care Act (ACA) aims to provide affordable and high quality health care to all Americans.

The ACA's health insurance marketplaces are intended to promote price competition in the individual and

small group markets through greater transparency. They will help consumers by presenting all alternatives

under a single window, comparing all plans in terms of cost and value, and helping them to make an

educated decision.

Will this open a window for disruption of Healthcare in America? Or, in other words, will a new healthcare

system will evolve to provide affordable, effective, and quality healthcare to replace the present

healthcare system?

We will try to find out answers to these questions in coming chapters. However, before we jump to these

questions, we will level set our understanding about present day healthcare, healthcare system, ACA, ACA

in system perspective, and Health Exchanges.


Chapter 1: Introduction

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Notes:


Chapter 2: Current Health Insurance

The health insurance is a complex system if systems with multiple stakeholders such as hospitals, clinics,patient homes, doctors (Primary care physicians and specialized doctors), and insurers; and thesestakeholders interact in a nonlinear fashion. The healthcare is dynamic, exhibits emergence, and isgoverned by simple rules.

The main functions of healthcare system include financing, insurance, delivery of services, and payments.These functions are performed by the elements such as payer, provider, beneficiary etc. Interaction takesplace among these elements while they perform the functions enumerated and information, money, andservices flow from one element to others.

Let us analyze the elements of health insurance.

2.1. Elements of Health Insurance

Following are the element of Health Insurance.

Insurance Coverage

Health insurance provides coverage for medicine, visits to the doctor or emergency room, Hospitalstays and other medical expenses. The employee pays a pre-decided monthly premium to theInsurer. The various health insurance plans differ in what they cover, deductible, and/or co-payment,of coverage, and the options for treatment available to the policyholder. The insurance company alsofunctions as a claim processor and manages the funds to pay the providers.

Provider

Health care provider or simply Provider is a person or healthcare facility licensed, certified orotherwise authorized or permitted by the law of the state to administer health care or dispensemedication in the ordinary course of business or practice of a profession. In general terminology,provider includes the physician, specialist, hospital, nurse etc. who provide healthcare tobeneficiaries.

Payer

In simplest words, in the healthcare industry, the payer is an insurance company authorized to providehealth insurance in the state. The payer is also responsible for handling claims for healthcare services,collecting premiums from clients, and paying claims to healthcare providers. Sometimes words Insureror Insurance Company and Payer are used interchangeably and denote the same entity - the payer.In the subsequent chapters, the term Insurer or Insurance Company is used to denote the payer.



Health Insurance Plan or 'Product'

Healthcare Plan is the product of Insurance Company that offers in the market. Health care plans areprograms to which people pay premiums to protect against high health care expenses in the future.There are multiple types of health care plans, though a person will be limited by which plan theiremployer or the government offers.

Employer

Employer is a person or entity that hires individuals - a person, business, or organization that hiresand pays one or more workers - and in healthcare context, an employer is a person or business thatpays for an employer sponsored group healthcare plan. The employer enters into a contract with thePayer (Health insurance Company) and is responsible to pay the premiums.

Beneficiary

The Beneficiary is an individual who is benefited by the health insurance contract by receiving careand medical services / products. For group insurance, the beneficiary is either an employee or his /her family members. Though the beneficiary is not a party who signs the contract in group insurance,

he needs to enroll in the plan in order to receive benefits.

Regulator

The Regulator is a regulatory authority - body of statutory law and administrative regulations - thatgoverns and regulates the healthcare and health insurance industry and those who are engaged in

business of healthcare and health insurance.

2.2. Functions of Healthcare

All these elements provide following functions of healthcare.

Financing

Health care expenditures can be very expensive with all the required tests, doctor appointments and

hospital stays. Financing is necessary to pay for these health care services. Financing is providedprimarily through insurance and generally the health insurance is employer-based, where theemployers buy health insurance for their employees from an insurance company. Dependents of

employee are also often covered under this insurance.

Payments

Providers are reimbursed by the insurer for the services delivered. Each service provided has a pre-

determined reimbursement for the service provided.

Insurance

Insurance is a way of protecting against financial risk. One pays small, fixed amounts in order toprotect oneself from having to pay a much larger amount in the event of an economic loss. An



individual who is protected against the risk, is called the insured and the organization that assumesthe risk is called the insurer. Health insurance pays specific benefits if an insured person becomes illor is injured. A health insurance policy is a contract between an insurance company and individual.

Delivery of Services

Services are delivered to the beneficiary by healthcare provider. These services are in form medicalservices and medical care.

There are two types of insurance coverage in the market - Public Financed Insurance and Private FinancedInsurance. Public Financed Insurance is the insurance that is funded by government using taxpayers'money. There are strict eligibility criteria to qualify for this type of insurance. Privately Funded Insuranceis available to all who can afford it.

2.3. Types of publicly financed insurance

The government has played a key role in expanding healthcare services to those who otherwise wouldnot be able to afford it. Public financing supports categorical programs, each designed to benefit a certaincategory of people e.g. Medicare and Medicaid.

Medicare

The Medicare program finances medical care for people 65 years or older, disabled individuals whoare entitled to social security benefits, and people who are in end stage disease. The federalgovernment is a payer and purchaser of healthcare benefits and various standards have beenestablished for the participation for Medicare providers, federally qualified HMOs, and health plansfor federal employees. The healthcare benefits are provided directly or through grants and areadministered within the Department of Health and Human Services (HHS) by the Centers for Medicareand Medicaid Services (CMS).

Medicaid

It is a joint federal and state program providing hospital and medical expense to low-incomepopulation and certain aged and disabled individuals. The program is jointly financed by the federaland state governments. The federal government provides matching funds to the state. The FederalMatching Assistance percentage (FMAP) is between 50-83% per law. In order to deliver care to eligiblerecipients Medicaid contract with health plans, prepaid health plans, and primary care case managers.

SCHIP (State's Children Health Insurance Program)

SCHIP provides health assistance to uninsured, low-income household children. The program wasdesigned to cover uninsured children in families with incomes that are modest but too high to qualifyfor Medicaid.



2.4. Types of private financed insurance

Private financed insurance is financed by insurance company. Insurance company signs a non-equal valuecontract with premium payer to pay for beneficiary's healthcare cost. Types of private financed insuranceare as below.

Group Insurance

Group insurance is the most prevalent health insurance. It is generally obtained through theemployer, unions or through a professional organization. In a group, the risk is shared within a largepool of people. In most cases the group itself, rather than the individual members of the group mustmeet underwriting requirements. The underwriters determine whether a group of people can beexpected to have a predictable loss rate.

The contract is signed between the premium payer and the insurance company. Premium payer isgenerally the employer and the beneficiaries are employee and their dependents.

Individual Insurance

Most professionals like the family farmer, self-employed, retirees etc., who could not obtain coveragethrough the employer sponsored group insurance get coverage through the individual insurance. Thepremiums are higher, as there is no large group to share the risk. The insurer may require an individualseeking coverage to provide proof of insurability, which consists of the applicant's current healthrecords and the health and illness history and any activities (e.g. smoking) that affect the applicant'shealth.

2.5. Types of health insurance plans

There are various types of health insurance plans available in the market. Most common types of healthinsurance plans are as below.

Indemnity

In Indemnity or fee for service plan, a fixed cash amount is paid to the beneficiary per procedure orservice. The beneficiary is examined by the provider chosen by him/her and he/she is responsible topay the provider. As the more times an insured visits the provider, the more money the providermakes, the systemic error can be an unfortunate scenario where the provider is rewarded for anbeneficiary's excessive utilization of medical services.

Managed Care Plans

Managed care plans generally provide comprehensive health services to the members, and offerfinancial incentives for patients to use the providers who belong to the plan. MCO's provide a rangeof services including preventive care and primary care services.



Various types of managed care plans

There are many types of managed care plans in the market. Following are the most popular managedcare plans.

The HMO Plan or the Health Maintenance Organization

The HMO is a healthcare entity that assumes the financial risk of healthcare as well as co-ordinatesthe delivery of the healthcare, providing comprehensive medical services to the enrolledmembers in return for a fixed monthly premium. There are federal as well as state laws to regulatethe HMO's. To function, the HMO's need to obtain a license as well as they must get a license in

the states in which they have been incorporated and must comply with statuary requirements for

the state in which they conduct business.

The HMO delivers care to members by entering into contracts with providers to form a network.

This network may contain participating physicians, hospitals and other medical ancillary serviceproviders, delivering care in exchange for a pre-determined compensation. The monthlycompensation paid to an HMO generally covers most healthcare services that members mightneed; no matter how often the members use the medical services. HMO's offer individual as well

as group insurance plans, obtained through the employer. HMO members include employees,their dependents, and individuals. HMOs require plan members to choose a primary care

physician (PCP).

The PPO Plan or the Preferred Provider Organization

PPO's combine the advantages of both indemnity and HMO health insurance plans. This model

came about, as a need to expand outside the HMO provider network and provide flexibility to the

consumer. There is a financial incentive for members who opt for PPO in the form of lowercopayments/coinsurance and maximum limits on an in network out of pocket expense. Insurancecompanies own more than half of the PPO plans in the United States.

In the PPO model, the providers contract with the insurance company to accept pre-decidedreduced fee for their services and agree not to bill the patients for the differences between the

normal and the reduced fee. The PPO provides medical services at a lower cost than the traditional

health insurance plans. As the doctors are paid for each patient visit, there may be a tendency of

unnecessary doctor / patient encounters. There is no need of a PCP physician in the pan and the

members can see in network as well as out of network doctors.

The POS Plan or the Point of Service Plan

The Point of Service (POS) Plan delivers healthcare services using the both HMO network and the

Indemnity plan, where individuals can utilize services outside the HMO network. When the

members need medical care, they choose at the point of service, if they want to go to the provider

within the plan or seek medical care outside the network.



The Exclusive Provider Organization

The EPO plan is a hybrid of the POS plan. It is a more restrictive type of preferred providerorganization plan in which employees must choose the provider from a specified network ofproviders and hospitals. No coverage is provided for care received out of network. The objectiveof this plan was greater flexibility at a lower price by combining various plans.

2.6. Conclusion

Health Insurance in America is very complex, and serves a vast variety of customers. All this makes HealthInsurance difficult to manage and regulate.

At the same time, health insurance cannot work in a silo; it interacts with other entities to form a systemto deliver healthcare to millions of Americans.

In the next chapter, we will investigate more about healthcare system and will define healthcare systemwith its elements and their form and function.


Chapter 3: Systems Thinking

Systems thinking recognizes when some entities are working as a system - individual entities areintegrated together and working coherently to achieve goals or to produce desired output. A system canreceive input from environment and can send outputs to environment. Entities of system must be relatedeither directly or indirectly and a system has well defined system boundary.

As per Prof. Crawley (Prof. Crawley, 2013) definition of system 'is

"A system is a set of elements or entities, and their relationships, whose functionality is greaterthan the sum of the individual entities."

If we holistically see a system then it is more than its parts. It's similar to the figure below - individualparts of the figure do not make an inverted white triangle; however, when we see this figure as onesystem, we do see the white triangle - the sum of the parts, put together in a systematic way, is morethan the individual parts.

Figure I - Gestalt Psychology Triangle2

1 Prof. Edward Crawley, Systems Thinking, 20132 Gestalt Psychology is an early school of psychology "The whole is more than the sum of its parts":Reference - Introduction to Psychology by Morgan and King 2000: Chapter: The Science of PsychologyShweta ShefaliMIT SDM Thesis 19

Chapter 3: System Thinking

In system thinking, we do not merely look at the individual elements but also about their relationship andinteractions. Once a system is formed, an event in one element of the system will influence the event inanother element of the system and similarly the output from system is not compounded from simpleoutputs of elements of the system, rather, it consists of organizations and patterns of outputs fromindividual elements. This organization and pattern of output makes them more meaningful than just thesum of individual elements' output.

3.1. Elements of System

Systems can be divided into entities or elements and each entity has form andfunction3. These entitiesconstitute the system and can be treated as a smaller system in themselves. All entities must be relatedto each other in some ways and should interact either directly or indirectly.

~iLIII1~/

KIF~~ \II /

qprII /

qp'---- ~/

L

Figure 2: System Breakup - Its entities, and form andfunction of entities

3.2. System Boundary

The system boundary defines the scope of the system - which entities, forms, and functions are partthe system. Everything else is considered outside the system and we can collectively refer to itenvironment. A system may interact one or many other systems outside boundaries.

ofas

To study a system, system boundaries should be well defined, as system boundaries define the scope ofthe system and study. A system will have inputs and outputs; and all elements of system interact with theinput and each other, either directly or indirectly.

3 Prof. Edward Crawley, System Thinking, 2013



Form

Form is what system or its entity is. This exists physically such as provider and Employer. Form is theagent which does the work or on which the work is done.

Function

Function is what system or its entities do. These may not exist physically; in health insurance, theprovider - the form - (does) assumes the risk of health expense for beneficiary and pays for it.

Therefore, thefunction of provider is to assume the risk of health expense for beneficiary and pay forit whenever it occurs. Similarly, function of employer is to buy group health policy for employees andpay its premium.

3.3. Relationship between Entities

Within a system, entities are related to each other - either directly or indirectly - and interact with eachother - either directly or indirectly. If any entity is not related to any other entity then it may not be the

part of the system. These relationships explain the organization of the system and help us in

understanding how they process the input and produce output.

3.4. Health Insurance - As a System

Health Insurance works as a system: elements of the health insurance interact with each other to provide

healthcare services to the beneficiary. Well defined relationships exist between the elements of health

insurance. Using system thinking, Health Insurance or Healthcare can be explained as a system -Healthcare System.

Let us list entities of this Healthcare System in system perspective.

System boundaries, Entities, and Relationships

A pictorial representation of a Healthcare System can be seen in Figure 3. This figure puts all elements

of the Healthcare System together in form of a system. It also represents relationship between entities

clearly defines system boundaries. In Figure 3

Blue boxes denote the elements of the systemPointed (single headed and double headed) arrows denote relationships among entities

The outer dotted line marks the system boundary

Light blue boxes denote other systems outside the system boundary interacting withhealthcare system

With System representation, in Healthcare System, as denoted in the figure

Payer, a part of the system, interacts with other parts of system such as Provider, Regulator,Product, and Technology.Similarly, other entities in system interact with each other.



/ System A, System B, and System C are outside of Healthcare System boundary and interactwith the Healthcare System.

Every entity represented in this system can be represented as a system in itself and can have furtherentities.

Other SystemsInteracting withHealthcare System

I -

System Boundary

Entity

Regulator - Provider Relationship betweenEntities

I I

Healthcare System

Figure 3: Healthcare System from System Perspective

Shweta ShefaliMIT SDM Thesis

I40

22


Healthcare System - Form and FunctionLet us examine form and function of Healthcare System and its entities. Table 1 represents forms andfunctions of the Healthcare System.

Healthcare System

The Healthcare System is Form - a physical entity - in itself and the Function of the HealthcareSystem is to supply Healthcare to the beneficiary.

Payer

The Payer physically exists in Form of the Insurance Company and its Function is to collect thepremiums from the policy owner and pay the provider for healthcare services. The Payer is in theepicenter of the system and it interacts with all other elements of the system directly.

Table 1: Healthcare System Form and Function

Provider

Form - Hospitals, clinics, medical practitioners are provider and their function is to provideMedical Services to the beneficiary.



Product

The Product is the insurance policy or the contract with which these entities are elements.Function of the product is to mitigate the beneficiary's medical expense risk. This risk is assumedby the payer as negotiated in the product (contract).

Employer

The Employer (Form) buys (Function) a group insurance product or policy for its employees orbeneficiaries and pays (Function) the premiums.

Beneficiary

Form - Employee, dependents of the employee; Function -to receive medical healthcare services.Beneficiary is the end user of medical product and services.

Technology

When we speak about technology in context of Healthcare System, we talk about two very distinctdomains of technology - Medical Technology and Information Technology - both complementaryto each other in the system. Therefore, Forms of technology are medical technology andinformation technology.

Function - Technology provides necessary tools for Healthcare System. Medical Technology is thebackbone of medical services - X-Ray, Cardiogram, CT scan, medicines, surgical instruments etc.It provides necessary medical information about patient to the medical provider.

Similarly, Information Technology integrates all entities into a system using power of computing.

Regulator

Government organizations and institutes (Form) which supervise (Function) that rules are beingfollowed and fair practices are used. They also make (Function) new rules and regulation or amendold ones as necessary.

3.5. Conclusion

We have defined the elements, their form and functions, and boundary of healthcare system. Thishealthcare system works to provide healthcare services to America in an organized manner. Thishealthcare system does communicate with its environment and other systems, and exchangesinformation. This interaction and exchange of information makes it a dynamic and open to change system.


Chapter 4: Affordable Care Act

On March 23, 2010, President Obama signed the Affordable Care Act. This law puts in placecomprehensive health insurance reform that will roll out over four years and beyond.

ACA aims to reform all functions of Health Care - Coverage, Cost, and Care. ACA reforms are continuousprocess that started in 2010 with 'Patient's Bill of Right' and will continue in 2015 as well. The timelinebelow gives overview of Health Care Law over time.

The objective of Affordable Care Act (ACA) is to put consumer back in charge of his/her (and of her family)healthcare. Under the law, a new "Patient's Bill of Rights" gives the American people the stability andflexibility they need to make informed choices about their health.

Inc

20122011 Linking Paymt

Medicare 50% Discount on Quality OutcoBrand-Name drugs

2011Medicare Key preventive 2012

2010 Coverage Free EncourageCost Free Preventive Coverage Integrated

begins for many Americans Health Systems

2010Patient's Bill of Rights

2011 2012

2010

reasiAfford

nttomes

2013Open Enrollment in the

Health InsuranceMarketplace Begins 2014

Insurance Coverage2013 begins for Health Insuranceng Access to Marketplace Enrolleesable Care 2014

Establishing Health Insurance Marketplace

v )I2013

IF2014

PromotingIndividual Responsibility

2015Paying Physician Based on Value

Not Volume

2015

2015

Figure 4: Affordable Care Act on Timeline4

4 Information for this timeline was collected from websiteShweta ShefaliMIT SDM Thesis 25

Tod y


4.1. The Affordable Care Act, Section by Section

The ACA is divided in 10 Titles as below. sEach Title has multiple section in it. The ACA, as presented in2010, is a very large document running through 995 pages but these 10 titles give fair understanding aboutthe act and the objectives it is designed to achieve.

Title 1. Quality, Affordable Health Care for All AmericansThis Act puts individuals, families and small business owners in control of their health care. It reducespremium costs for millions of working families and small businesses by providing hundreds of billionsof dollars in tax relief - the largest middle class tax cut for health care in history. It also reduces whatfamilies will have to pay for health care by capping out of pocket expenses and requiring preventivecare to be fully covered without any out of pocket expense. For Americans with insurance coveragewho like what they have, they can keep it. Nothing in this act or anywhere in the bill forces anyone tochange the insurance they have, period.

Americans without insurance coverage will be able to choose the insurance coverage that works bestfor them in a new open, competitive insurance market - the same insurance market that everymember of Congress will be required to use for their insurance. The insurance exchange will poolbuying power and give Americans new affordable choices of private insurance plans that have tocompete for their business based on cost and quality. Small business owners will not only be able tochoose insurance coverage through this exchange, but will receive a new tax credit to help offset thecost of covering their employees.

It keeps insurance companies honest by setting clear rules that rein in the worst insurance industryabuses. In addition, it bans insurance companies from denying insurance coverage because of aperson's pre-existing medical conditions while giving consumers new power to appeal insurancecompany decisions that deny doctor ordered treatments covered by insurance.

Title II. The Role of Public ProgramsThe Act extends Medicaid while treating all States equally. It preserves CHIP, the successful children'sinsurance plan, and simplifies enrollment for individuals and families.

It enhances community-based care for Americans with disabilities and provides States withopportunities to expand home care services to people with long-term care needs.

The Act gives flexibility to States to adopt innovative strategies to improve care and the coordinationof services for Medicare and Medicaid beneficiaries. And it saves taxpayer money by reducingprescription drug costs and payments to subsidize care for uninsured Americans, as more Americansgain insurance under reform.

http://www.hhs.gov/healthcare/facts/timeline/timeline-text.htm

5 Ten Titles of ACA are present at the location http://www.hhs.aov/healthcare/rights/law/index.html.Information present in the box is the summary of information present at this source.



Title Ill. Improving the Quality and Efficiency of Health Care

The Act will protect and preserve Medicare as a commitment to America's seniors. It will savethousands of dollars in drug costs for Medicare beneficiaries by closing the coverage gap called the"donut hole." Doctors, nurses, and hospitals will be incentivized to improve care and reduceunnecessary errors that harm patients. In addition, beneficiaries in rural America will benefit as theAct enhances access to health care services in underserved areas.

The Act takes important steps to make sure that we can keep the commitment of Medicare for thenext generation of seniors by ending massive overpayments to insurance companies that costAmerican taxpayers tens of billions of dollars per year. As the numbers of Americans withoutinsurance falls, the Act saves taxpayer dollars by keeping people healthier before they join theprogram and reducing Medicare's need to pay hospitals to care for the uninsured. And to make surethat the quality of care for seniors drives all of our decisions, a group of doctors and health careexperts, not Members of Congress, will be tasked with coming up with their best ideas to improvequality and reduce costs for Medicare beneficiaries.

Title IV. Prevention of Chronic Disease and Improving Public Health

The Act will promote prevention, wellness, and the public health and provides an unprecedentedfunding commitment to these areas. It directs the creation of a national prevention and health

promotion strategy that incorporates the most effective and achievable methods to improve the

health status of Americans and reduce the incidence of preventable illness and disability in the United

States.

The Act empowers families by giving them tools to find the best science-based nutrition information,and it makes prevention and screenings a priority by waiving co-payments for America's seniors on

Medicare.

Title V. Health Care Workforce

The Act funds scholarships and loan repayment programs to increase the number of primary care

physicians, nurses, physician assistants, mental health providers, and dentists in the areas of the

country that need them most. With a comprehensive approach focusing on retention and enhanced

educational opportunities, the Act combats the critical nursing shortage. And through new incentives

and recruitment, the Act increases the supply of public health professionals so that the United States

is prepared for health emergencies.

The Act provides state and local government's flexibility and resources to develop health workforce

recruitment strategies. In addition, it helps to expand critical and timely access to care by funding the

expansion, construction, and operation of community health centers throughout the United States.

Title VI. Transparency and Program Integrity



The Act helps patients take more control of their health care decisions by providing more informationto help them make decisions that work for them. Moreover, it strengthens the doctor patientrelationship by providing doctors access to innovative medical research to help them and theirpatients make the decisions that work best for them.

It brings greater transparency to nursing homes to help families find the right place for their lovedones and enhances training for nursing home staff so that the quality of care continuouslyimproves. The Act promotes nursing home safety by encouraging self-corrections of errors, requiringbackground checks for employees who provide direct care and by encouraging innovative programsthat prevent and eliminate elder abuse.

Finally, the Act reins in waste, fraud, and abuse by imposing tough new disclosure requirements toidentify high-risk providers who have defrauded the American taxpayer. It gives states new authorityto prevent providers who have been penalized in one state from setting up in another. In addition, itgives states flexibility to propose and test tort reforms that address several criteria, including reducinghealth care errors, enhancing patient safety, encouraging efficient resolution of disputes, andimproving access to liability insurance.

Title VII. Improving Access to Innovative Medical Therapies

The Act promotes innovation and saves consumers money. It extends drug discounts to hospitals andcommunities that serve low-income patients. In addition, it creates a pathway for the creation ofgeneric versions of biological drugs so that doctors and patients have access to effective and lowercost alternatives.

The Secretary of Health and Human Services has the authority to implement these provisions to helpmake medications more affordable.

Title VIll. Community Living Assistance Services and Supports Act (CLASS

Act)

The Act provides Americans with a new option to finance long-term services and care in the event ofa disability.

It is a self-funded and voluntary long-term care insurance choice. Workers will pay in premiums inorder to receive a daily cash benefit if they develop a disability. Need will be based on difficulty inperforming basic activities such as bathing or dressing. The benefit is flexible: it could be used for arange of community support services, from respite care to home care.

No taxpayer funds will be used to pay benefits under this provision. The program will actually reduceMedicaid spending, as people are able to continue working and living in their homes and not enternursing homes. Safeguards will be put in place to ensure its premiums are enough to cover its costs.

Title IX. Revenue Provisions



The Act makes health care more affordable for families and small business owners by providing thelargest middle class tax cuts for health care in American history. Tens of millions of families willbenefit from new tax credits, which will help them, reduce their premium costs and purchaseinsurance. Families making less than $250,000 will see their taxes cut by hundreds of billions of dollars.

When enacted, health reform is completely paid for and will reduce the deficit by more than onehundred billion dollars in the next ten years.

Title X. Reauthorization of the Indian Health Care Improvement ActThe Act reauthorizes the Indian Health Care Improvement Act (ICHIA), which provides healthcare services to American Indians and Alaskan Natives. It will modernize the Indian health care systemand improve health care for 1.9 million American Indians and Alaska Natives.

4.2. Objectives of ACA

The main focus of ACA is to provide affordable healthcare to all American. Currently a large number ofAmerican do not have health insurance coverage and a good percentage of them are young adult (SeeChapter 7 for more details)

No Denial based onPre ExistingConditions

Eliminating AnnualLimits

SNew Consumer

ConsmerProtection

Ass ista nce

Eliminating Uifetime iLimit

Health InsuranceMarketplace

Extending Coverageto Young Adufts i

Access to Healthcare /

Rebuilding PrimaryCare Workforce i

Promoting IndividualResponsibility

Figure 5: Objectives of Affordable Care Act

Small Business TaxCredit

Protect AgainstHealthcare Fraud

Improving Quality and Free Preventive Care

Cost reAdess ar

Lowering Healthcare

Rx Discounts forSeniors

\Improving Efficiency

Linkd ng Payment toQuality Outcome

Bring downHealthcarePremiums

Overpayment toHolding Insurance Insuran ce

Companies Accountable Companies

StrengtheningMedicare

Advanta


29

29


ACA aims to remove all hurdles between this uninsured population and the health insurance. There areseries of measures ACA has started to achieve this goal.

Most important ACA objectives are presented in the figure 5 above - they can be divided in four majorsections: Improving Quality and Lowering Healthcare Cost, New Customer Protection, Access toHealthcare, and Holding Insurance Companies Accountable.

Key features of the ACA 6 are given in the table below. This table is compiled from the information presentat the webpage http://www.hhs.gov/healthcare/facts/timeline/timeline-text.html. More details aboutthese features are present on this webpage.

Table 2: Key Features of Affordable Care Act

1 Putting Information for Consumers Online 20102 Prohibiting Denying Coverage of Children Based on Pre-Existing Conditions 20103 Prohibiting Insurance Companies from Rescinding Coverage 2010

Eliminating Lifetime Limits on Insurance CoverageInsurance companies will be prohibited from imposing lifetime dollar limits

4 on essential benefits. 20105 Regulating Annual Limits on Insurance Coverage 20106 Appealing Insurance Company Decisions 20107 Establishing Consumer Assistance Programs in the States 20108 Prohibiting Discrimination Due to Pre-Existing Conditions or Gender 2014

Eliminating Annual Limits on Insurance CoverageIn 2014, the use of annual dollar limits on essential benefits such as hospitalstays will be bannedfor new plans in the individual market and all group

9 plans. 201410 Ensuring Coverage for Individuals Participating in Clinical Trials 2014

1 Providing Small Business Health Insurance Tax Credits 2010Offering Relleffor 4 Million Seniors Who Hit the Medicare Prescription

2 Drug "Donut Hole." 20103 Providing Free Preventive Care 20104 Preventing Disease and Illness 20105 Cracking Down on Health Care Fraud 20106 Offering Prescription Drug Discounts 2011

6 This information is compiled from 'Key Features of the Affordable Care Act By Year'present at locationhttp://www.hhs.gov/healthcare/facts/timeline/timeline-text.html.

Shweta ShefaliMIT SIDM Thesis 30


7 Providing Free Preventive Care for Seniors 20118 Improving Health Care Quality and Efficiency 20119 Improving Care for Seniors After They Leave the Hospital 2011

10 Introducing New Innovations to Bring Down Costs 201111 Linking Payment to Quality Outcomes 201212 Encouraging Integrated Health Systems 201213 Reducing Paperwork and Administrative Costs 201214 Understanding and Fighting Health Disparities 201215 Improving Preventive Health Coverage 201316 Expanding Authority to Bundle Payments 201317 Making Care More Affordable 201418 Increasing the Small Business Tax Credit 201419 Paying Physicians Based on Value Not Volume 2015

Establishing the Health Insurance MarketplaceThe ACA mandates establishment of Health Insurance Marketplace - acompetitive and transparent marketplace - where individuals and small

1 business can buy affrodable health insurance plans. 2014Providing Access to Insurance for Uninsured Americans with Pre-Existing

2 Conditions 2010Extending Coverage for Young AdultsYoung adults are allowed to stay on their parents' paln until their 26th

3 birthday. 20104 Expanding Coverage for Early Retirees 20105 Rebuilding the Primary Care Workforce 20106 Holding Insurance Companies Accountable for Unreasonable Rate Hikes 20107 Allowing States to Cover More People on Medicaid 20108 Increasing Payments for Rural Health Care Providers 20109 Strengthening Community Health Centers 2010

10 Increasing Access to Services at Home and in the Community 201111 Providing New, Voluntary Options for Long term Care Insurance 201212 Increasing Medicaid Payments for Primary Care Doctors 201313 Open Enrollment in the Health Insurance Marketplace Begins 201314 Increasing Access to Medicaid 201415 Promotin Individual Responsiblity 2014

1 Bringing Down Health Care Premiums 2011Addressing Overpayments to Big Insurance Companies and Strengthening

2 Medicare Advantage 2011



4.3. Conclusion

Affordable Care Act is an ongoing process- it has changing the face of healthcare in America and its effectwill be more pronounced in the years to come. Most of its regulations are already in force and some other,such as 'Paying Physicians Based on Value Not Volume' will be implemented in 2015. One of the mostsignificant regulation of the ACA is to setup of Health Exchange OR Health Insurance Marketplace whereindividuals will be able to buy Health Insurance for themselves and their family.

We will analyze the effect of ACA on Healthcare System, and its elements, in the next chapter.


Chapter 5: Affordable Care Act - System Perspective

5.1.ACA Systems Perspective

We have seen examined elements of healthcare system in Chapter 3 and listed their form and function.With understanding of System Thinking and knowledge of Healthcare system elements, we can prepareHealthcare System as shown in the in the Figure 6. In this figure, elements of the system are shown assubsystems.

Figure 6: Healthcare System with its elements as subsystem

How will ACA affect the healthcare system? - will it affect the system as a whole touching all (or majority)of elements OR it will just touch one or two elements.



If it touches all elements of the system with considerable impact then its effect on system will be far morepronounced and it will bring some radical changes in the system.

However, if ACA just touches one element (and may be couple of other just marginally) then effects willbe localized to that element itself and ACA will not bring any radical change in the system.

If we study objectives of the ACA and what element of the system that objective would affect, it will giveus an insight into how it is affecting the healthcare system and how much impact it will have.

5.2.ACA objectives and their effect on Healthcare System Elements

As we have seen in Chapter 4, there are 46 major objectives of ACA grouped in four classes, most of theobjectives are already in force, and remaining will be in force soon. Each objective touches and affectssome of the elements of Healthcare System. It is not hard to find what all elements the objective willaffect and all elements the objective affects substantially can be listed.

Following table has list of all objectives taken under ACA and the element of the system they will affect.'Y' in the box corresponding to System Entity means that this particular ACA Objective will affect theSystem Entity. 'Y' is placed only when the interaction is notable and will call for changes in the entity.Indirect interactions with little or no change are not considered for simplicity.

Table 3: ACA objectives and their effect on Healthcare System Elements

NEW CONSUMER PROT ECTIONSPuffing InformTwion for

Consumers Online y y y yProhibiting Denying

Coverage of Children Based onPre-Existing Conditions y Y y y yProhibiting InsuranceCompanies from RescindingCoverage Y y y y y

Eliminating Lifetime Limits onInsurance Coverage y y y y

Regulating Annual Limits onInsurance Coverage Y y

Appealing InsuranceCompany Decisions Y y y

Establishing ConsumerAssistance Programs in theStates y y

Prohibiting DiscriminationDue to Pre-Existing Conditions orGender Y y y y

Eliminating Annual Limits onInsurance Coverage y y y y

Ensuring Coverage forIndividuals Participating in ClinicalTrials y Y y y

IMPROWNG QUALITY AND LOWERING COSTS



Providing Small BusinessHealth Insurance Tax Credits y

Offering Relief for 4 MillionSeniors Who Hit the MedicarePrescription Drug "Donut Hole." Y Y

Providing Free PreventiveCare Y Y Y

Preventing Disease andIllness y y

Cracking Down on HealthCare Fraud Y Y Y

Offering Prescription DrugDiscounts Y Y

Providing Free PreventiveCare for Seniors Y Y Y

Improving Health CareQuality and Efficiency Y Y Y Y

Improving Care for SeniorsAfter They Leave the Hospital y y y

Introducing New Innovationsto Bring Down Costs Y Y Y

Linking Payment to QualityOutcomes Y Y Y y

Encouraging IntegratedHealth Systems Y Y Y Y

Reducing Paperwork andAdministrative Costs Y Y Y Y

Understanding and FightingHealth Disparities Y Y Y

Improving Preventive HealthCoverage Y Y

Expanding Authority toBundle Payments Y Y

Making Care More Affordable y yEstablishing the Health

Insurance Marketplace Y Y Y YIncreasing the Small

Business Tax Credit YPaying Physicians Based on

Value Not Volume Y Y I YINCREASING ACCESS TO AFFORDABLE CARE

Providing Access toInsurance for UninsuredAmericans with Pre-ExistingConditions Y Y Y

Extending Coverage forYoung Adults Y Y Y

Expanding Coverage forEarly Retirees Y Y

Rebuilding the Primary CareWorkforce Y y

Holding InsuranceCompanies Accountable forUnreasonable Rate Hikes Y y

Allowing States to CoverMore People on Medicaid Y y

Increasing Payments forRural Health Care Providers Y y



Strengthening CommunityHealth Centers Y Y y

Increasing Access toServices at Home and in theCommunity Y Y y

Providing New, VoluntaryOptions for Long term CareInsurance y Y y y

increasing MedicaidPayments for Primary CareDoctors Y Y y

Open Enrollment in theHealth Insurance MarketplaceBegins Y Y Y y y

Increasing Access toMedicaid Y y

Promoting IndividualResponsibility _ _y y

HOLDING INSURANCE COMPANIES ACCOUNTABLE

Bringing Down Health CarePremiums y V y Y

Addressing Overpayments toBig Insurance Companies andStrengthening MedicareAdvantage Y Y yScore 23 19 1 10 29 13 27

The table revels that ACA will affect (is affecting) all-important elements of present Healthcare System.

Highest score of the table is 29 which is for beneficiary (end customer), which means out of 46 objectivesof ACA 29 will affect customer directly and the impact is substantial. This is in line with the intent of ACA;after all, it is aimed to remove some major pain point of the customer.

Second best (23) is scored by provider - the insurance company - and definitely, insurance company willneed to accommodate major changes to fulfil objectives of ACA.

Lowest score of 10 is scored by employer, which seems logical, as they are not so active participant inhealthcare system.

Other scores range between 10 and 29 means every element of healthcare system will be affected by ACAsubstantially.

If all elements of the system are affected substantially, then system itself will not remain immune to thechanges. The system will transform itself, although be it some trial and error, and move into the directionwhere ACA objectives are met more effectively.

5.3. Conclusion

All elements of Healthcare System are affected substantially and the healthcare system will see majorchanges due to ACA regulations. Will these changes be able to fuel disruption in healthcare system - wewill examine this in coming chapters.


Chapter 6: Disruptive Innovation - System

Perspective

Disruptive innovation (Christensen, The Innovator's Dilemma, 2000) is a phenomenon in which newentrant in the market creates a value network (and sometimes new market), and eventually,systematically disrupts an existing market and value network.

Does disruption happens to the company only and all other entities interacting with it do not get affectedat all? Alternatively, does it affect everything that interacts with the company? In disruptive innovation,it might appear that one company (entrant) has disrupted the other company (incumbent); however, ifwe see it more closely, it is one system disrupting the other system.

Clayton Christianson, in his book Innovator's Prescription (Christensen, Innovator's Prescription, 2009),has argued about 'Elements of Disruptive Innovation' page xx and he lists -sophisticated technology thatsimplifies, Regulations, and standards that facilitate change, Low-cost innovative business model, andeconomically coherent value network as elements of disruptive innovation.

If we revisit our Healthcare System (Chapter 5, Figure 6), elements discussed above can be mapped withthe elements of Healthcare System. Therefore, the disruption is not only the disruption of the companybut it is the disruption of the system.

Let us check the fundamental attributes of disruptive innovation and examine what it means from asystems thinking perspective. In addition, with our Systems Thinking caps on, we can explore how systemsbehave under disruption.

6.1. Disruptive innovation

The disruptor company, with new technology (or new process, business model) cost advantage, targetscustomers who do not demand very sophisticated product. Sometimes disruptor companies may targetnew customers who never participated in the market due to the high cost of the products (Christensen,The Innovator's Dilemma, 2000).

As argued in the beginning of the chapter, disruptive innovation is not an isolated phenomenon, it is asystem phenomenon - existing system is disrupted by the disruptive new product.

6.2. Disruption - System Approach

In disruptive innovation, two systems- the disruptor system and the disrupted system - are at work andformer tries to replace the later.


Chapter 6: Disruptive Innovation - System Perspective

The pictorial representation of disrupted system is in the figure 7. The existing company is in the centerof the system and it interacts with other elements of the systems such as Customer, Product and Services,Technology, and distributor and supplier.

Figure 7: Existing (Disrupted) System

Note that other elements (apart from company) of the system may interact with each other; thoseinteractions are not shown in this figure for the sake of simplicity.

Pictorial representation of the disruptor system is shown in Figure 8. The disruptor company is at thecenter of the system and is interacting with the other elements. Apart from five elements that were alsothere in the disrupted system, there is one extra element in the disruptor system - New Regulation. Thiselement plays a major role in formation and consolidation of the disruptor system.

As in the disrupted system, in disruptor system also, other elements (apart from company) of the systemmay interact with each other; those interactions are not shown in this figure for the sake of simplicity.



Figure 8: New Disruptor System

Now how do these two systems come together to play game of disruption? In the beginning, the disruptedsystem is well established and has the lion's share of the market. This system is in the nucleus of theindustry, providing product to most of the customers and controlling the market. This system is on thetop of the game dealing with the most demanding customers and earning the highest profit margin.

The disruptor system comes into the periphery of this nucleus system and starts as a marginal playerwithout even attracting or fulfilling the needs of mainstream consumers. The nucleus system does notnotice it or rejects any threat from it until it tries to go up in the value chain and fight for up market share.The peripheral system pushes inwards, towards the nucleus system, with an aim to replace it and reachout to higher profit margin customers.

This process is pictorially represented in the figure 9 below. The peripheral system is pushing the nucleussystem inwards to ultimately phase it out and take its place. Think of it as spiral current or water swirl -the nucleus system is sinking inwards and the peripheral system is taking its place. In some time, from fewyears to few decades historically, the nucleus system of today will disappear or sink and peripheral systemof today will become the nucleus system.

A new wave of disruption will come and there will be a new peripheral system, which will push the nucleussystem towards disappearance ... and so on. The process of disruption will continue from outwards toinwards.



Figure 9: Peripheral Disruptor System in action to Disrupt Nucleus System

In Figure 9, the dark blue inner system is the nucleus system and the light blue outer system is theperipheral system. So disruptive innovation is not only about the disruption of a company but also aboutthe disruption of a system of which the company is a part. Let us examine the two systems and the processfurther.

6.3. Disruption in Healthcare

There could remain one doubt about disruption; all the forgoing examples are about other industries andnot about healthcare. In fact, these industries are altogether different from the healthcare industry.



Industry technology, customers, products, services, delivery models... all these have almost nothing in

common with healthcare industry.

However, disruption is never about the industry, it is about how we - humans - make decisions. All

successful disruption examples shown above are indicative of a pattern in decision-making and if people

are put in similar circumstances, , they will likely make similar decisions. Fundamental drives of human

nature do not change and we can find more examples of disruptions, not only in business but in history

as well -ancient, medieval, and modern history - is full of disruptions.

Thus now, we are left with a big question, whether the Affordable Care Act objectives will be met by

sustaining innovation within the current nucleus system or a disruption will take place and disruptive

innovation will be better able to take care of society's needs?

Sustaining innovation does not seem a realistic possibility to fulfil ACA objectives (outlined in Chapter 5)

- in the first place, ACA came into picture due to perceived issues and inefficacies in the current healthcare

system. This indicates there are some real issues with existing companies and business models that they

are not able to identify and correct. Incumbents are not the favorites to innovate and fulfill ACA objective

- affordable quality Healthcare to all Americans - due to following reasons:

Intense Competition among themselves

Current system companies are in tune with competition within the current business models. This

means they are competing intensely with each other, attracting each other's customers, retaining

their customers in active competition. They are not likely ready for the innovation that ACA demands.

In fact, they are so involved in competing with each other that they may not even pay any attention

to disruptor until it is late in the game.

Individual Health Insurance - low profit margin

Individual health insurance is a low profit margin business compared to group health insurance. This

will be one big deterrent for existing insurance companies to step up and innovate to capture new

market.

Reimagining Healthcare

The healthcare system present today is not able to fulfil the requirement of 'quality affordable

healthcare to all Americans'. There is definitely a need to reimagine healthcare to bring all Americans

under a healthcare net. However, there is very little or no incentive to the existing health insurance

companies to do so.

System Overhaul

In the current Healthcare system, there are major inefficiencies in use of Information Technology from

payer side, such as use of Legacy Hardware; at the same time there are major inefficacies in how the

healthcare provider side is delivering healthcare, such as overpriced and unnecessary services. These

inefficiencies are making system ineffective and healthcare costly. It is not possible to fight these



inefficiencies without overhauling the system. It will not be easy to convince all stakeholders tooverhaul a working and profitable system for less lucrative and not yet fully developed market.

Technological Constraints

These companies have investing aggressively in new technology, they are adopting the innovativetechnology such as mobile aps, cloud computing etc., but this adoption is far from technologicalinnovation for them. It is being added on and patch worked on to the existing technology makingtechnical interface more complex, bureaucratic to change, and costly and difficult to maintain. It willbe much more difficult and costly for them to add new functionalities to cater new market. With lowprofit margin, it will take little sense to make big investment in technology infrastructure.

Not listening to non-customers

They are listening to the customers and even fulfilling their more demanding demands. However, theyhave not paid any attention to potential market that is not currently their customer. Culturally, they

have never competed against non-usage. This will make them less effective in innovation to fulfilneeds of this market.

6.4. Conclusion

From system perspective, it is not just the company that goes thru process of disruption, instead, it thecomplete system that goes thru disruption. Formation of disruptor system starts much before thedisrupted system is disrupted and the new company becomes the leader of disruption.

We will examining in Chapter 7 what ecosystem factors are leading to disruption.


Chapter 7: (Ecosystem) Factors leading to Disruption

This chapter analyzes the dilemma existing players will have in responding to changing scenario anddemand, and most importantly to the emerging new market. The situation will be favorable to disruptiononly if existing players are not able or not willing to offer what the disrupter could. Will they be able to?What constraints and dilemma they face? Let us examine.

Traditionally the healthcare plans have been group insurance plans, purchased by the employers in bulkfor their employees from the healthcare insurance companies. For example, the employer IBM orMassMutual buys health insurance coverage for all its employees from health insurance providers likeAetna, Cigna etc. This has led to a large gap in coverage, population that could not get insurance thruemployer was left out of the healthcare coverage.

7.1. Health Insurance - A Big Gap

Health insurance is traditionally Employer Sponsored Insurance, though a small portion is IndividualInsurance as well. Most of the Americans either have Employer Sponsored Insurance or do not haveHealth insurance at all. A relatively very small population has Individual Insurance.

According to the United States Census Bureau, in 2011 there were 48.6 million people in the US (15.7% ofthe population) without health insurance. 7 The percentage of the non-elderly population who areuninsured has been generally increasing since the year 2000.

The number of people who lack insurance at some time during a multi-year period is greater than thenumber currently uninsured. A study published by Families USA in 2009 'estimated that approximately86.7 million people were uninsured at some point during the two-year period 2007-2008. Thisrepresented about 29% of the total US population or about one-in-three under 65 years of age.

According to United States Census Bureau in 2012, young adults, age 19 to 34 years old, had the highestuninsured rates of any other age group (26.9 percent)9. As per the graph (Figure 10) below, which usesdata from the 2008 through 2012 American Community Surveys (ACS), 18 million uninsured 19 to 34 yearold in 2012 accounted for 40 percent of the uninsured population under age of 65.

Another trend is recorded by United States Census Bureau in the figure 11. Uninsured rate changeddramatically for age group 19 to 25 after implementation of policy change in September 2010 that allowsdependents to remain on their parents' health insurance plan until their 26th birthday. However, therewere no significant changes in 26 to 34 year uninsured rate changes.

7 Information taken from report present at httg://www.census.gov/Drod/2012pubs/60-243.pdf.8 Report is available at location htp://familiesusa.org/sites/defaul/files/product documents/hidden-health-tax.Ddf.9 hftr://www.census.aov/how/infoaraphics/vouna uninsured.html data is obtained from this webpage.Shweta ShefaliMIT SDM Thesis 43


Percent Uninsured by Single Year of Age 0 to 6435%

30

25

20

15

10

5

0 5 10 15 20 25 30 35 40 45 50 55 60 64

The 18 million uninsured 19- to 34-year-olds in 2012 accounted for40 percent of the uninsured population under the age of 65.

Figure 10: Percentage Uninsured by Single Year cfAge 0 to 6410

In addition, we can observe in Figure 10 above that uninsured rate in 18 years old is significantly less thanthe uninsured rate in 19 years old. This indicates following thing -

A significant percentage of population starts loosing access healthcare insurance asdependent to parents' healthcare when they reach 1 9th birthday.

/ Clearly, at 26, more than 30 percent were not able to get employer-sponsored healthinsurance and either could not afford individual healthcare insurance or were not interestedin individual healthcare as suitable healthcare solutions were not available.

19 to 25

26 to 34

2008 2009 2010 2011 2012

Change in Uninsured Rates 2008-2012Since the implementation of the September 23, 2010 policy change that allowsdependents to remain on their parents' health insurance plan until their 26thbirthday, the trend in health care coverage for the 19- to 25-year-old age grouphas seen a significant shift, while the trend for 26- to 34-year-olds has remainedrelatively stable.

Figure 11: Change in Uninsured Rates 2008-2012"

As per US Census Bureau, following are the absolute number of 'Young and Uninsured'.

10 http://www.census.gov/how/infoqraphics/young uninsured.html - taken from this webpage.11 http://www.census.gov/how/infographics/young uninsured.html - taken from this webpage.


35%302520151050

44


19- to 25-year-olds 26- to 34-year-oldsuni 4 -u) 8 million -10 million

-uoe( 22 million -27 million

Figure 12: Uninsured Population in USA 2012 Data2

All this indicates a very large uninsured gap. Moreover, the good thing is that ACA has a lot of focus tobring these uninsured under health insurance cover. Obviously, they cannot come under group insurance,neither does ACA encourage them to do so; they will need to come under individual health insurance. TheACA thus is not providing additional customers to existing health insurance companies. Rather, it iscreating a new health insurance customers that have a very different needs form current mainstreamcustomers.

This customer base will go to any company that is able to fulfill their needs and expectations. There arefew major attributes of this customer base -

V' They need individual health insurance.v The majority of them are young adults.V They will be very cost conscious.

Participation form this uninsured population will transform individual insurance market from very smallto a very big market. This big individual insurance market will be available to insurers via marketplace.

7.2.ACA - The new Beginning

If we summarize ACA in one sentence it would be - 'Quality Affordable Healthcare for all American'.Quality Healthcare for all Americans is not possible under the Healthcare system the way it is today. Intoday's healthcare system, there is no focus on individual insurance; a substantial percentage of thepopulation remains outside healthcare coverage.

The Patient Protection and Affordable Care Act (ACA), if enacted as written, could redefine the market forhealth insurance with a speed and significance never before witnessed in this industry, and rarely seen inany other. Power to the People, A Deloitte' s study (Deolitte, 2013) finds that ACA could increase themarket size for individual health insurance by more than five-fold by 2020, raising the number of individualpolicy holders to approximately 72 million in 2020.

Much of this increase will likely be net new consumption as uninsured Americans enter the market. Thelaw will not only encourage individuals to buy health insurance but also punish them if they do not buy

12 http://www.census.-ov/how/infoaraphics/youna uninsured.html - taken from this webpage.



health insurance. ACA does not aim to be a passive onlooker when people are out to buy health insurance.It will establish Health Exchanges (Insurance Marketplace) to buy and cell health insurance.

7.3. The Penalty

Individual mandate of ACA has made insurance an individual responsibility and if someone does not haveinsurance then he/she would be bound to pay the penalty. Penalties will be very small to start with butwill rise steeply in next few years. However, there is a limit; penalty cannot exceed the national averagepremium for bronze coverage, which is the cheapest plan available in Market Exchanges. Penalty for 2014is flat $95 per adult and $47.50 per child up to maximum $285 per family. These penalties will be collectedvia tax return.

This penalty will persuade and somewhat force people to buy health insurance instead of paying it as withpenalty they will not get anything in return. It would make better sense to buy health insurance than topay penalty. And as Health Exchange Marketplace would be most completive place to shop with penaltyof options and comparison among the plans, people will shop at Marketplace instead of going to theinsurer individually.

2014 2015 2016

$95 $325 $695per adult per adult per adult

or or or

1% 2% 2.5%of family income of famiy income Offamiy income

whichever is greater

Figure 13: Health Insurance Penalty from year 2014 to 2016 and beyond 3

The marketplace will be an engine of growth for individual health insurance. This may not make availablethe sizable potential market overnight but in couple of years, it will be the biggest place to buy and sellindividual health insurance. A few years will not be a very big time for insurance marketplace, as the openenrollment will happen annually. Therefore, this wait would mean only couple of buying seasons formarketplace.

13Taken from source http://money.cnn.com/2013/08/13/news/economv/obamacare-penalty/.



There are more benefits of buying plans at Health Exchange - if qualified (based on income and otherparameter) - insured can get tax benefit or advance tax credit, which will lower premiums. Apart fromthis, in terms of coverage, insured can get following advantages

No plan can turn you away or charge insured more because you have an illness or medicalcondition.Plans must cover treatments for preexisting conditions.

v Plans cannot charge women more than men for the same plan.- Many preventive services are covered at no cost.

7.4. Health Exchange Marketplace

One of the provisions of ACA is to setup a Health Exchange Marketplace (simply called Marketplacesometimes; See Chapter 4). The Health Exchange is a place where people can compare and buy healthinsurance.

Healthcare exchange is going to be the biggest change in healthcare industry that is taken place in recentpast. This will change the rules of the game and is beginning of new era in Healthcare.

Individuals desiring non-group insurance or without access to group insurance can participate in theHealth Exchange to buy health insurance for themselves and family. As health insurance will be mandatoryfor individuals, more and more people who do not have health insurance will come to Health Exchange toshop for some sort of Health Insurance Coverage. This will not only increase enrollments in the HealthExchange but also expand the market for Individual Insurance.

Marketplace is for not only people who do not have access to Health Insurance otherwise but also anyonewho has access to employee-sponsored insurance can also buy insurance from marketplace. However,such a person may lose certain privileges to reduce cost and the employer may have to pay a fine.

7.5. Group Health Insurance - Health Insurance of Today

Current business model of (Group) Health Insurance is not end consumer centric. Group Health Insuranceis provided by Employer; and employers need different ways to manage the cost. This leads to theemployer centric (friendly) business model that generally subjugates the needs and demands of endconsumers.

The Group Health Insurance provider ignores the identity of the end consumer. They are treated as agroup with no individual characteristics. Clearly, this does not take care of individual's needs very well andcan cause dissatisfaction.



ID XXX ID YYY ID ZZZ ID AAA ID BBB

Figure 14: Current Group Insurance - Every insured is an ID

Current group insurance can be characterize as complex, with no personal choices, limited options, nocontrol, and accords preference to employer need. Multifunctional chart in figure 15 (next page) describeswhat happens today.



Rules andregulations

Request f Approval App rove

Sumt oEolvr Pu 1ish Plan to Employee Revie Clai Employee Liability C n

Plan olderEmpi Am ousechildren Employee Pays

MIT PDMThes is

Study Patdufts

Submt toEmplver Prepish Claio m poe Subm i ev Climmlye iaiiy li

Figure~~(mp p5:Grop IsurnceMurenCar

ShwetLiabifity

ColeT HeDM Thrsvsd4


7.6. Individual Health Insurance under ACA - Health Insurance of the Future

Health Insurance of the future

As individual insurance will be in focus, individual needs will be more pronounced than ever. This willput the end customer at the center of health insurance and make future model more consumercentric.

New consumer centric view

Claire Ms brown Elena Victor Steve Jason

Figure 16: Individual Health Insurance - Individual Identities Recognized and Acknowledged

In contrast with the Employee sponsored Health Insurance, where end consumer does not shop forthe plan, Individual Health Insurance under ACA will give fair choices to consumer to shop for plan inthe marketplace. This will put consumer in the driver's seat of the decision making process.

Shopping Health Insurance at Health Exchange has become reality. There are variety of options -multiple level of cost and coverage - available at the health exchange.



Figure 17: Health Exchange Marketplace Website Snapshot 4

Four level of plans are available in Health Exchange - Bronze, Silver, Gold, and Platinum - to take careof needs to every consumer.

About Health Connector Plans

To make finding your plan easier, we grouped plans by key design features.

Bronze* Lower monthly

premiumH Higher out-of-pocketcosts when you getmedical care

SA good choice if youexpect to use a lowamount of healthservices during theplan year,

Silvera Monthly premium is

generally higherthan Bronze

-Moderate out-of-

poc ket costs whenyou receive medicalcareA good option If youexpect someservices beyondstandard care

" Monthly premium isgenerally higherthan Silver

* Lower out-of-pocketcosts when youreceive medical care

" A good option lif wantto balance yourmonthly premiumand out-of-pocketexpenses

Platinum" Highest monthly

premium" Lowest out-of-pocket

costs when youreceive medical care

SA goodopton if youexpect to use a lot ofhealth servicesduring the plan year

Figure 18: Types of Plan available at Marketplace. Information taken from https://www.healthcare. gov.

The Healthcare Marketplace is a consumer friendly place to shop for health insurance. It provides allnecessary information to the buyers. It will also inform the the buyer if he/she is eligible for any stateor federal sponsored aid.

If insurance is purchased from Health Exchange then:

14 Information taken from address https://www.healthcare.gov/.



The buyer may qualify for a premium tax credit. These premium tax credits may be awarded inadvance to be applied to monthly insurance premium to bring monthly premium down.If person buys 'silver category plan' he may qualify for out of pocket costs saving depending onfamily income - known as "cost sharing reductions".

Figure 19 snapshot is from the Marketplace website in which it is telling user how many plans areavailable for her in her area. Plans can be sorted and filtered to narrow down the search.

Shop for Plans

Review Plans. Narrow your choices with Plan Filters. You may view plan details by cickIng on the plan name.Select up to 3 plans to compare-

Show Plan filters

Showing 60 plans of BO total, based on your filter settingsSort Plans By

Benefits package v

$576 $42 8?

Show Bronze Plans HighMonthly Premium for Bronze Plans Annual Deductible

SILVER 12 PLANS

$591 43 $1 56 8

Show Silver Plans ModerateMonthly Premium for Silver Plans Annual Deductible

698 83 $1 23993

Show Gold Plans LowMonthly Premium for Gold Plans Annual Deductible

PLAT) NUM 14 PLANS

Show Platinum PlansMonthly Premium for Platinum Plans

LOWAnnual Deductible

Figure 19: Shop for Plans at Marketplace. Information taken from httDs://www.healthcare.gov.


pI CoiPlan


Not only the availability of plans, but the options can be covered side by side - an instrument that willmake Health Exchange better place to shop, as it will promote educated well-informed decisions: seefigure 20 below. Here user has selected two plans to compare them side by side.

This website is lot more convenient than going thru multiple company websites, collecting planinformation, and then comparing them to make a decision.

0:omnxinity

FCHP Select Care Silver

$845.74 / mo IAccess Blue Basic

$908.47 I mo

You have selected2 PLANSview a detailed plancomparison.

Figure 20: Compare Marketplace Plans. Information takenfrom https://www. healthcare. gov.

The multifunctional flow chart below projects the picture of future - less complex, more choices forpeople, better control.


IA

53


RuLes andregulations

Plan Re os itory

Available Plan inL* Marketplace

Revie+ la im

Employer Plans Marketplace Plans Plan older Cost andEmployee/indivi dual Analyze Multiple Choices Em/I ueCide Claim

Collect Health Prvd caxerec

Prepare Claim Submit Claim

Figure 21 Cross-Functional Chart - Insurance with Health Exchange



7.7. Old World Vs New World

From the discussion above, we have seen Individual Health Insurance backed by ACA is much moreflexible, gives enough information to make informed decisions, and empowers people to choose whatthey want. The new world will bring following key differentiators in the way healthcare is done andperceived today.

People with Choices

The people will have choices at hand without any dependence on the employer. This will call for anew marketing strategy on the part of insurance companies - The face of the consumer will changefrom the white collared corporates buying group insurance plans to less sophisticated purchasers ofindividual plans based on what they want specifically for themselves and their families.

Power to the People

In an individual insurance market, people will ask for more power - power to choose from, power tocontrol (change), preference to their needs, and simplicity. Unlike group insurance where 'one sizefits all', individual insurance in the Marketplace will provide customers a customized solution - afterall a healthy person may want a different insurance plan compared to a non-healthy person.

This advantage of the Marketplace over current group insurance will be a factor which will encouragethe disruption of healthcare. People will demand customized, flexible, choice-driven solutions andthat will not be possible though group insurance.

Interest in End Consumer's Health

In the new world, insurance companies will take keen interest in beneficiary's (insured's) health, astheir profit margin (and the cost of the product) will depend on beneficiary's health. The healthier thebeneficiary is the more profitable he or she is for the insurance company. This will generate keeninterest of insurance company in beneficiary's preventive care and primary care.

Better preventive and primary care would mean less healthcare expense down the line. At the sametime, the beneficiaries - end consumers- will feel that insurance company really cares for them. Thiswill be a remarkable difference in beneficiary's perception about insurance company as today it isperceived as passive intermediary.

7.8. Dilemma of Incumbents

If the incumbent is successfully able to rise up to the expectations of ACA and end consumers thendisruptive innovation will become only a remote possibility. However, for incumbents it is neverstraightforward decision - they always have two options - maintain the status quo or disrupt the existingsetup. Conventional wisdom favors maintaining the status quo as it is tried and tested. Let us examinewhat dilemma incumbents may face during next few years while disruption is taking its course.



The first Dilemma

There is clearly a huge gap between the individual insurance seeker's aspiration and current groupinsurance provider's approach. This leaves a bigger question - will current group insuranceproviders be able to bring the cultural shift in their approach to cater to this need? Mostimportantly, they will need to do so while the keeping current group insurance focus intact, asthey would not like to lose the more lucrative group insurance market for the less profitableindividual insurance market.

Initiating this new focus and maintaining two foci in one organization might confuse employees,sales teams, and customers as well. Thefirst Dilemma - whether to shift focus to low profit marginindividual insurance market or maintain focus on high profit margin group insurance?

The second Dilemma

Existing group insurance focused companies will have another Dilemma - whether go back todrawing board and make new innovative plans truly empowering people OR use existing plansand market them in the marketplace. As argued earlier in this chapter, the new individualinsurance consumer will be very cost sensitive and a major percentage of them will be youngadults. Anything drawn on the line of existing group insurance plan may not suit them.

Third Dilemma - Cost/Profit Margin Dilemma

There is a huge difference in revenues and profit margins in selling Group Insurance vs. IndividualInsurance. This difference is similar to the difference between selling Mainframe computers vspersonal computers.

Selling group insurance brings big revenue, sometimes millions of dollars, with high to very highprofit margin, whereas selling individual insurance is few hundred dollars and low profit marginon a per policy basis. Selling one group insurance policy may mean a big business, whereas sellingone individual policy is just peanuts.

As explained in the figure 22, as we move to group insurance number of clients decrease and sodoes the management effort, whereas if we move to individual insurance the number of clientswould increase and so does the management effort. Also, profit per client increases as we moveto group insurance and profit per client decreases as we move to individual insurance.



Large Number of Clientsat individual Insurance

Low profit per client forindividual Insurance

A

\Ciiert Cient Ciet Client Cdent CientCfert Clent Clent Client /

Low Number of Clientsto Manage

OL

0

Figure 22: Group Insurance Vs Individual Insurance

The system is in place to sell group insurance and to deal with group clients. This system clearlycannot take care of individual insurance clients because of two basic reasons - needs are differentfor both and concentrations of clients are very different. In individual insurance system wouldneed to deal with enormous numbers of clients versus some senior professionals of bigorganizations.

Protection of the Status Quo - incumbents are more focused on protecting the status quo, committing alltheir energy to the current Healthcare System. This will essentially mean that they are missing, neglecting,and rejecting the innovations in technology and changes in market sensibilities.


High per client profit forGroup insurance Client

57


7.9. Advantage to New Entrants

The rise of the individual market promises to create a viable foothold for a radically different businessmodel in health care insurance. If this proves true, commercial insurers will likely face the samedilemma that has handcuffed every successful incumbent that fell to a Disruptor: The new gamebegins long before the old game is over. As long as the group market remains large and profitable -which is likely the case for the foreseeable future - it will be almost impossible for incumbent groupcarriers to free-up the resources required to develop viable solutions for the individual market, nomatter how profitable or fast-growing it might become.success in the individual market is based on providing affordable products and services via offeringcustomers the chance to select the product feature trade-offs that best match their anticipated healthcare needs with their pocketbooks. The likeliest path to meet this set of requirements is with processand product configuration innovations at enrollment, supported by customer management,informatics, and segmentation that result in new levels of customer intimacy.All of these innovations are likely to be built on new information technology platforms. This meansthat successful individual carriers are likely to have a business model with a rapidly improving enablingtechnology. Over time, as this new model matures and becomes more sophisticated, it may give theindividual carriers the ability to compete effectively for the group market with higher levels ofcustomization, yet lower costs, than today's dominant group carriers.Change in Consumer Behavior - Movement of market is taking shape. Individual consumer will bewilling to take control of his/her healthcare need. Imagine, if these 16 million age 26 to 35 people getinsurance as individual subscribers deciding what is best form them and choosing what they want.This will bring a change in behavior of these consumers when they are employed and participate ingroup insurance from employer. They will miss the kind of control they had on their healthcare policydecisions and will opt to do so if they had chance and viable alternative. Health Exchange will makethis possible for them. Consumer behavior shift will take place, not so because behavior of consumerwill change but because consumers with changed behavior will enter the market.

7.10. Conclusion

Under ACA and current ecosystem factors, the U.S. Healthcare System is clearly ready for disruption.

Health Exchanges will lead the market to the path of disruption and success of ACA will depend on thesuccess of Health Exchanges. In next chapter we will examine sustainability of Health Exchange to find outhow stable and permanent they will be.

An additional dependency is how much 'young adult - 19 to 34 year old' segment will engage in the ACA.We will check this in chapter 11 - Early Trends.


Chapter 8: Health Exchange - Sustainability

8.1. Insurance Marketplace

The Health Insurance Marketplace is designed to make buying health coverage easier and moreaffordable. Starting in 2014, the Marketplace will allow individuals and small businesses to comparehealth plans, get answers to questions, find out if they are eligible for tax credits for private insurance or

health programs like the Children's Health Insurance Program (CHIP), and enroll in a health plan that

meets their needs.

The Marketplace Can Help Customer:

Look for and compare private health plans.Get answers to questions about health coverage options.

Get a break on costs.Enroll in a health plan that meets customer's needs.

Health Insurance and Marketplaces

Starting 2014, consumers, and small businesses have access to new health insurance marketplaces

(or Exchanges). Consumers in every state are be able to buy insurance from qualified health plans

available through a marketplace and about 18 million Americans are eligible for tax credits to helppay for their health insurance.

There are two types of Exchanges (Marketplaces) proposed in ACA. The first, called the State basedMarketplace where each state creates its own marketplace - e.g. California, Connecticut, and

Massachusetts. Second, called State Partnership Marketplace is a hybrid marketplace in which thestate runs certain functions - e.g. Delaware, Illinois, and Iowa. A Partnership Marketplace allows state

to make key decisions and tailor the marketplace according to local needs and market conditions. Thefederal government will establish and operate a marketplace in those states that do not establish theirown.

All marketplaces have launched open enrollment in October 2013.

Any individual, who does not have insurance coverage from his/her employer can buy healthinsurance in the exchange operating in his/her area. All Health Exchanges have established their easilynavigable website to search, compare, and enroll into the health plan as per customer need. Enrollinginto a Healthcare Plan using HE online website is four step simple process -

Create an account -) Apply -) Pick a Plan -+ Enroll



How the Marketplace works

Create an accountFirst provide some basicinformation. Then choose a username, password, and securityquestions for added protection.

ApplyNext youl enter information aboutyou and your family, including yourincome, household size, othercoverage you're eligible for, andmore.

Pick a planNext you'll see all the plans andprograms you're eligible for andcompare them side-by-side.You'll also find out if you can getlower costs on monthly premiums

EnrollChoose a plan that meets yourneeds and enroll

Find out when coverage can 130#and learn how to complete yourenrollment.

Figure 23: How marketplace works"

Apart from online, one can buy Health Exchange Marketplace plans

By phoneWithin person assistance (Navigators, Application Assistors, Certified Application Councilors,and Government Agencies such as State Medicaid and Children's Health Insurance ProgramOffices.With a Paper Application

8.2. Sustainability of Health Exchange (HE)

To make a lasting impact and become a viable business option, a Health Exchange must be self-sustainable. In the vensim model below we will examine whether Health Exchange can be sustainable andhow much time they will take to become sustairnable. This provide data to study, Minnesota exchangeMNSure and information present in public domain about MNSure was examined. This study takesexchange setup and maintenance cost from MNSure sources.

Following Vension diagram study examines the sustainability of health exchange.

Overview of ModelThis model simulates the Health Exchange System Cost-Revenue dynamics. The objective of thismodel is to predict when a Health Exchange (HE) will be sustainable. HE will attain sustainability inyear i when cumulative Operating Revenue (OR) of HE is greater than cumulative Operating Cost (OC)of HE for that year. Sustainability is measured as cumulative Operating Revenue minus cumulative

15 This figure is captured from http://marketplace.cms.aov/GetOfficialResources/Logo-and-infoqraphics/how-marketplace-works-4-steps.pdf.

Shweta ShefaliMIT SIDM Thesis

660


Operating Cost. This model has capability to predict when a Health Exchange will be sustainable andhow various factors affect its sustainability.

For any particular year, i sustainability will be calculated as below. Where i E I (integer)

10 10

Si = >ORi - >LOCii=O i=0

If Si is greater than zero for any year i (and subsequent years) then the Health Exchange has becomesustainable that year.

Operating Cost (OC) CalculationOC is calculated as sum of operating expenses and the installment of initial investment that is to berecovered. Operating expenses of HE will be incurred in salaries and Health Exchange (IT setup)maintenance. One example of the calculation is as below.

The initial Investment in setting up the exchange = $ 43 Million (first year extra cost $1.44 millionis included in initial investment assuming it is due at the start of the term) 6

Government may fund this setup expenditure totally or partially (Government Contribution ininitial Cost). Let us assume government contribution is zero then -

Assuming this initial investment is to be recovered in next 5 years in equal yearly installment and4% interest.

Yearly recovery installment per year = 9.66 million

Yearly Maintenance cost of the Exchange = $ 2.33 million' 7

Assuming 100 employees are needed to run the exchange and average cost per employee is $80,000 per year (including salary and benefits).

Employee Cost per Year = 8,000,000 = $ 8 million

Yearly Operating Cost = Yearly Recovery Installment + Yearly Maintenance Cost of Exchange +Yearly Salary Cost to run exchange

16 This cost is taken from 'Maximus Cost Breakdown of MNSure'. This is present on MNSure websitelocation https://www.mnsure.orq/about-us/rfp-contractlindex.isp (see under 'maximus, inc' link '1C.MAXIMUS, Inc. Exhibit C'. PDF is copied and pasted in Appendix point 1.17Taken as average maintenance cost form 'Maximus Cost Breakdown of MNSure'



Operating Revenue (OR) calculationPeople enrolled in exchange will pay monthly premium. Accounting annually, these premiums areconverted into yearly premium $. Assume 3% of premium $ will be charged as operating revenue ofthe exchange.

Yearly Operating Revenue = Yearly Premium $ * (0.03)

= (Average number of people enrolled)*(Average Yearly Premium $) * (0.02)

Sustainability of the exchange will be achieved once cumulative operating cost = cumulativeoperating revenue

10 10

Si= >ORi - >LOCii=O i=O

If sustainability Si < 0 for some year i then the model was not sustainable for that year.Difference (deficit) will be carried over to the next year.

If sustainability Si > 0 for some year i than exchange became sustainable that year. Whichmeans its revenue for that year was not only greater than the operating cost that year but alsothe surplus has cleared all deficits accumulated in past years.

The Model

Sustainability calculation is done in the model as explained above. To calculate OR and OC, model usesfollowing formulae.

[ft I"'- L"". M~0Qd. 500- 5

e ~ rQ

A.W Vd s

.. ~ ....

Figure 24: Vensim model showing Sustainability calculation part



Operating Revenue (OR) CalculationOR = Average Premium per person *Number of full Premiums*% of premium towards operatingrevenue"/100

Operating Revenue will come as a percentage of premium $ collected. We can very this percentageto check sustainability at various level.

Average Premium per person = $2988 per year

To calculate average premium per person, average of premium per month of all marketplace Silverplan for adult individual age 21 is multiplied with 12. Raw data is present in Marketplace Excelsheet released in March 2014 (Individual Marketplace Data & https://data.healthcare.gov/, 2014)

Fraction paying full premium = 0.95

Assuming total premium collected corresponds to the full year premium paid by 95% of peopleenrolled. This will happen as people will enter and drop any time in year.

Number of full Premiums = Fraction paying full premium *Number of People Enrolled in Exchange

This is how number offull premiums is calculated.

% of premium towards operating revenue

Only a percentage of premium $ collected will go towards HE operation and maintenance. Thispercentage may vary from year to year. A model could be front loaded (greater percentage goesin initial years) to get sustainability early OR to top competition it could charge less percentage ininitial years. In this model, a lookup graph table is used to control this percentage variable.

xrbalsi .. j a p731 x..w e a J igsi w

XI10o-a u.41s p7.41 i.mjl.-O eJ. _c

Figure 25: Percentage of premium towards operating revenue - Vensim model variable

Number of People Enrolled in Exchange

This variable is driving the revenue of the exchange and itself depends on various other variablesand rates.

Number of People enrolled in exchange



This number will be affected by initial enrollment, yearly enrollment, and yearly drop.

Fiue2:Nme*fpol noldi exchae -Vensi caclto modew

Number f'-1 peop VnA Y. n-xr -P o p(Ok~~~~~~t td 1_WA ado-MA-U

3~~~ ~ ~ ~ W . -----------

C.:.

77

Enrollment~FW = F4. Onli e Appkiatn PaprApiain+ hn plcton+I esnHl

hif ad C hiW. b~

en rol mentC*P) '

Figure 26: Number ofpeople enrolled in exchange - Vensim calculation model

Number of people enrolled in exchange = enrollment - drop

Enrollment = Online Application + Paper Application + Phone Application + In Person HelpApplication + Effective Initial Enrollment

Paper Application = Insurance Eligibility*6000 *(1 Percentage Decrease per year in newenrollment* Time)

Not all applicants will be eligible for insurance thru health exchange. Insurance eligibility is afactorto account for that. For study, we have taken this factor to be 0.9 (or 90%). We have also assumedthat we will get 6000 paper applications in the first year. There will be decrease in new applicationsin subsequent years due to market saturation or other factors. Variable Percentage Decrease peryear in new enrollment is used to account for this decrease.

Similar formulae are used for 'Online applications', 'phone applications', and 'in person helpapplications'

Effective Initial Enrollment = Initial Contributor Constant*lnitial Enrollment

Initial enrollment will take place at the time of launch only (year = 0). To take this into account,'Initial Contributor Constant'factor is used. Value of this factor is 1 for year = 0 and value is O forall other years. Number of initial enrollments is assumed 5000.

Drop = Coverage not needed + Dissatisfaction + Ineligibility



Coverage not needed = 0.03*Number of People Enrolled in Exchange

Assuming that 3% people enrolled in the exchange will drop due to 'coverage not needed' reason.

Ineligibility = 0.02 *Number of People Enrolled in Exchange

Assuming that 2% people will drop, as they will become ineligible for coverage thru exchange.

Dissatisfaction = 0.01 *Number of People Enrolled in Exchange

Assuming that 1% people will drop due to dissatisfaction (and move to other providers).

Now, let us see the calculation of Operating Cost

Operating Cost (OC) CalculationOC will be incurred in salary to employees to run the exchange, yearly maintenance of the exchangeand the yearly initial cost recovery installment.

Operating Cost = Yearly Initial Cost Recovery Installment + Yearly Maintenance cost of Exchange +Yearly Salary Cost

Yearly Initial Cost Recovery Installment = ((Rate of Interest/100)*lnitial Investment to beRecovered)/(1-(1/(1+Rate of Interest/100)ANumber of Years to Recover Initial Investments))

This is yearly installment calculation assuming recovery period = 5 years and rate of interest 4 %.

Initial Investment to be Recovered = Initial Investment in Setting up Exchange-GovernmentContribution in initial cost

Assuming government is also contributing on non-recovery basis. Any residual amount will berecovered.

Yearly Salary Cost = Average Salary of Employee *Number of Employees

Yearly Maintenance cost of Exchange is taken from MNSure (explained under heading 'OperatingCost (OC) Calculation' above) source and it is 2.33 million $.

Model

Hea Ehange Heah EzhangeModel V .mdl Model V 8.2mdl

8.3. How the Model Works

Time step is 1 year and model is simulated for 5 years. Setup all variables and simulate the model. Modelwill first calculate 'Number of people Enrolled in Exchange' based on 'Enrollment' and 'Drop' rates.



This data will be fed into the 'Sustainability' calculation. Sustainability will be calculated using OperatingRevenue and Operating cost.

Various levels of parameters can be selected and 'Sustainability' can be plotted on time scale. Model willpredict when Health exchange will be sustainable on given parameters.

8.4. Simulated Cases

Three cases are simulated - Case A, Case B, and Case C. in these three cases, all other values are sameexcept for number of enrollments. Sustainability graphs are plotted for these three cases.

Case A - has considered value of enrollment numbers from various sources. Case B has considered 25%percent less enrollment than Case A from all these sources. Case C further decreases the enrollmentnumber and has just only 50% of Case A. In these simulated cases, graph is plotted between Sustainabilityand Number of Enrollment. All other factors remain same in these three simulated cases. Note - In thesecases data is selected such a way that no return on initial expense is required (cost to setup exchange =contribution from government to setup exchange).

Values of factors in these three cases are as in the table below. All other variables are calculated in thisvensim model. Row values highlighted in green are same for these three cases. Case B - Red - enrollmentvalues are 25% less than Case A (Yellow) values. Case C - Blue - enrollment values are 50% less than CaseA (Yellow) values.

Table 4: Three simulated case parameters



Government agencies, such asState Medicaid and Children'sHealth Insurance Program(CHIP) Offices"

Hrst year new application trom thissource.



Sustainability Comparison of Case A, Case B, and Case CAs we see in the sustainability graph below, as number of enrollment decreases, the time to attainSustainability increases. It also shows that sustainability is very sensitive to number of enrollments asis reached very late once number of enrollment are less.

Sustainability

50

35.5

21

6.5

-80 1 2 3 4 5

Thme (Year)6 7 8 9 10

Sustainability : Case CSustainability : Case BSustainability: Case A - 3 Year

Figure 27: Sustainability Graph by Vensim Model

Relative numbers for each case are in the table below



3

I C.C .413 41 9 44

4 , -7'W13 4.04~3 9F

4 4V 4144 4 go;~W

Of'.

i 18 9

/CM F.iO'h 2- bwi LSP"K

meedd91/mes"

M.&kdc I..H.. P',3IUP39

Figure 28: Sustainability Values from Vensim Model

We can summarize these results in table below.

Table 5: Sustainability Summary from Vensim model

20000 15000 1uuuu25500 19125 12750

Just after 3rd year

(much before 4th Between 4 and 5 Not even in 10year) years years

In Case C, we are not reaching sustainability in evenvery crucial for sustainability of HE.

10 th year. Therefore, enrollment numbers are

Let us look at the number of people enrolled in exchange in all three cases. The graph below showsthat number of people enrolled in exchange increases in the beginning and becomes almost flattowards the end of 1 th year. This would be due to saturation in market. The Case A number remainshigher than the other two case's number.



Number of People Enrolled in Exchange200,000

150,000

100,000

50,000

00 1 2 3 4 5 6 7 8 9 10

Time (Year)Number of People Enrolled in Exchange: Case C -Number of People Enrolled in Exchange: Case B -Number ofPeople Enrolled in Exchange: Case A - 3 Year

Figure 29: Number ofpeople enrolled in Exchange - Vensim Model

Table values of number of people enrolled for all three cases are as below.

im r

&"W MI 4.35

CC a 31143 3133 *

7 1 43413 256.

Wa

OA/A~k /bp I f

PqA~~~ .

CWAMWIM- ~ "

Ow-/o )b dooks N aS

ftnownC o.

Figure 30: Number ofpeople enrolled in Exchange - Vensim Model


VV-1H""M E.O-V. M.,W V &,,01 V-IA of P-,m E-+W" . 64W


It is clear from this table that Case C only reaches to 63k number of people enrolled in HE (at 1 0 th year)and that is not sufficient to make it sustainable even in 10 years. Case B attains Sustainability in fairamount of time and Case A attains Sustainability just after 3 rd year.

8.5. Conclusion

The number of people enrolled in Case C is (almost) half of Case A at the end of each year. Case A attainssustainability in 3 years, which seems to indicate that Case C will attain Sustainability in 6 years. However,this is not the case. Accumulated losses year after year are affecting Case C very severely and it is not ableto attain sustainability even after 10 years. Case A will remain Sustainable even if it just maintains thenumbers enrolled at the end of 3 years (78K). So large enrollment in first 3 years of the commission of theexchange is the key to sustainability. Exchange will be Sustainable (and will survive) even if it loses somesteam after 3 years of large enrollments.

With the enrollment data available until end of January 2014, enrollments are taking place in far largernumbers. This means there is no threat on the sustainability of the Health Exchange. From chapter 9, wecan see the targeted audience is much larger than what exchange demands for sustainability. At the same

time in chapter 11, we will see the actual enrollments will far exceed these numbers.

In addition, as the major enrollment is expected from relatively young population, internet and HE websitewill play a major role. A walkthrough on couple of HE websites (Massachusetts, California, and New York)gives an impression of easily navigable, information rich, and user-friendly websites. However, there weresome glitches initially, but the gaps were plugged in quickly. These websites will certainly prove critical

success factor for Health Exchanges.




Notes:


Chapter 9 Disruption of Health Insurance

In chapter 7, we have examined what factors, external to the system, may lead to disruption of healthcareindustry. In this chapter, we will be revisiting some of those factors from peripheral or disruptor systemperspective.

While analyzing these elements from the disruptor system perspective, we will try to find out answers toquestions - what the disrupter will be able to do that the incumbent may not be able to do? How disruptersystem may form and emerge as possible leading player in nascent market? What conditions are favoringthe disrupter and what advantage it has on incumbent?

In addition, we will analyze elements of peripheral system as well to find out how they will shape up withnew ACA initiatives and what a disruptor can do with these elements to bring them in line with ACAobjectives.

9.1. Disruption - Disruptor System Elements

In the figure 31 below, elements of disruptor system are listed and we will visit them one by one.

Payer - New Disriuptor Cornpany N wSple itiu

New Dist uptor Techniology New Low Cost Pr oduct Ser vices

New RegLation) - ACA

Non Participantt POtenltial CustornerS

Figure 31: Disruptor System Elements

Non Participant Potential CustomersIn chapter 7, we have seen that there is a potential individual customer market, which is still untapped.The biggest chunk of this market is of 19 to 36 years old. At this age, individuals start losing insuranceprovided by parent's employer due to various reasons such as parents come out of workforce and donot have access to employer-sponsored insurance or individuals become ineligible to get insurancethrough parent's employer on 26 th birthday.

At the same time, this is the age when individuals come out of school and universities and enter in jobmarket. They might not be able to get employer sponsored insurance and could not be able to very


Chapter 9: Disruption of Health Insurance

high rate individual insurance in the market. However, Marketplace will be able to engage them andprovide other alternative.

Table 6: Enrollment in Health Insurance Exchange'8

Table 3.

Enrollment in, and Budgetary Effects of, Health Insurance Exchanges

Total,2015-

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2024Exchange Enrollment

(Millions of nonelderly people, by calendar year)*Individually Purchased Coverage

Subsidized 5 11 19 20 20 20 20 20 19 19 19 n.a.Unsubsidizedb 1 2 4 4 5 5 5 5 5 5 5 n.a.

Total 6 13 22 24 25 25 24 25 24 24 24 n.a.

Employment-Based CoveragePurchased Through Exchanges" 2 2 3 4 4 4 4 4 4 4 4 n.a.

Table 6 lists the numbers of enrollments (in millions) predicted by Congressional Budget Office (CBO)each year in Health Insurance Exchanges. It says 6 million enrollment in year 2014. As of today, March28, 2014, Health Insurance Exchanges have enrolled 6 million with three days still to go 19(enrollmentwill end on March 31, 2014). The size of this market is predicted to be 25 million by 2018 and this willbe an exponential growth - 0 to 25 million in just 4 years.

The disruptor company would need to get creative in providing affordable solutions to theseconsumers. One thing will work in favor of Disruptor Company is that the needs of these newconsumers would be very basic. In addition to that, the low profit margin of individual insurance willmake it less attractive for existing players.

This consumer base is likely to be a low demanding consumer. As a great portion is expected to beyoung adult, a majority of them will not need high skill/high cost care and services. At the same time,the population that currently has no insurance and looking for a low cost product will not be ademanding customer base.

Disruptive new TechnologyIt is not clear at this point what new technology disrupter could bring into the new system tochallenge. However, one thing is clear that whatever it may be it should make healthcare moreaffordable and reachable. Technology may not be a new out of the box procedure to cure mostcomplex medical condition. It could simply be a creative customization of existing technology andprocesses to serve the target segment better, more effectively, and at substantially lower cost.

18 Present at http://www.cbo.qov/sites/default/files/cbofiles/attachments/43900-2014-02-ACAtables.pdf"Insurance Coverage Provisions of the Affordable Care Act-CBO's February 2014 Baseline"19 From Healthcare.gov blog https://www.healthcare.-ov/bloq/6-million-and-counting/



Technology is used everywhere, in most diversified forms, in this healthcare system. It is the blood

that is running in the system to run the system. There are numerous opportunities to creatively

integrate technology with processes to cut down the cost.

As described in chapter 3, in healthcare system, technology can be classified in two different heads -

Medical Technology and Information Technology. Let us check what role technology can play in in

disruption of healthcare system.

Information Technology

Information technology advances will accelerate disruption; companies can leverage the advent of

social media to reach out to this social media savvy segment of prospective customers. The use of

'social media' reinforced by clear pricing edge will move the customer base at very minimal

advertisement expense.

Company can make intelligent process and layout changes at providers' end to provide maximum

services in minimum visits or movement of customer. Modern technology of movable gadgets and

cloud base computing can really help to achieve this goal. In addition, these technologies can cut down

on traditional ID costs as applications will be more modular and payment will be as per usage instead

of a fixed cost. Software as service will cut down cost at provider end and will be based on volume

instead of just a fixed cost.

Current Insurance companies have their own IT hardware and have developed software in house.

They are maintaining and enhancing this software using vendors and their own IT staff. This strategy

is very inefficient in many ways

- Best management of technology can be done by a technology company. Incumbents are not

technology companies and hence they are not able to take full advantage of modern technical

advancement. Technological enhancements they are going thru are not originating from their

R&D on new technology, instead they are derived by benchmarking - someone else has done

this and seems beneficial to them, so we ought to do this.

- Management and enhancement of IT applications is very costly. However, they have

outsourced support functions to cut down the cost but they are still overspending due to use

of outdated technology.

Big technical savings may come when insurance provider companies will not use Legacy Mainframe

based systems to handle backend batch and online processing. For existing companies, these legacy

based systems are necessary evil - they cannot think beyond these systems as data hosted on them

is huge and converting it to new technological modern modular system will take years of pain and

bundles of money with no seamless transition or even success guarantee.

Legacy systems force companies to 'duct tape integrate' new technologies with the old and the

resultant system becomes more complex and costly to maintain. For example, CICS has become

backbone of online screens for years but customer wants to access data on PC so .Net or Java front



ends are developed that internally call CICS screens or functions and display returned value. Or worse,sometimes the book of records remains on mainframe and another parallel database is maintainedon SQL database that is updated every night from mainframe data. The SQL database feeds PC basedapplications and mainframe CICS based applications. Every night these two synchronize up thenprocess and updates are made at both places.

These unnecessarily complex uses of technology force companies to maintain many technologies thatthey actually do not need and many experts to operate and maintain these unnecessary technologies.It is difficult and expensive to make two or more different technologies work in synergy. They are notmeant to work together - different origin, different companies and software written for differentpurposes.

Additionally, bureaucracy developed around legacy process makes it even more expensive and veryless flexible and responsive. Companies face stiff resistance from internal (employees) and external(auditors) people if they try to make changes to this bureaucratic system. Legacy system also restrictsthe company to make full use of available technology, as new technology does not integrate well oreasily with existing legacy system.

Best strategy for Disruptor Company would be to outsource the IT Software on its own IT hardware.This will give stability and agility to its IT infrastructure that is needed for a modern company. Thereare various options available in the market and it can select best-suited solution depending on desiredfunctionality and number of customers it expects to serve.

- A technology company will manage software at its end and provide latest and greatest to theapplication. This will promote efficient use of technology.

- Maintenance and enhancement of software applications would be less complex and morecost effective.

Use of technology will prompt to take interest in customer's health instead of just being a passiveonlooker. GPS data, Reminders, Automated calls from annual physical for customer from insurancecompany - all these and many more technology enabled can be used to make services more effectiveand efficient. For example, compilation of list of customers who has not gone thru physical after beingdue and sending this list to provider to follow up. These preventive measures will improve overallhealth, reduce risk, and in turn reduce medical expense.

Medical Technology

Medical technology too is fast changing and new, more sophisticated technology is constantly makingits presence felt in healthcare. However, disruptor system does not need to offer the latest andgreatest in the medical technology. The need is to use the technology 'out of the box' to makehealthcare more effective, convenient, and affordable. Technological innovation is not just about thetechnology, it is about how it improves healthcare experience of customer.

Not so long ago, houses were only equipped with a thermometer, and, with a bit of luck, a set of scales.Now it is not unusual for people to have portable equipment for measuring blood pressure or devices



for testing blood sugar levels at home. A disruptor can aim at growing the range of health equipment'sfor individuals. This will enable patient to use them at home and make educated decision whether theywant to consult a doctor.

For example, disruptor may encourage patient to adopt a specially designed medical equipment tomonitor patient's vital signs in domestic environment. This might eliminate multiple visits to thehospital and lab, and would be very cost effective for patient.

Regulation

Affordable Care Act is the new regulation that is acting as catalyst for disruption in healthcare industry.We have already discussed objectives of ACA in detail in chapter 5. With these objectives andinitiatives to achieve these objectives, a new era has started in the healthcare industry. Before ACA,there was no industry focus on individual insurance but ACA has brought this focus. This will be aremarkable change as till today all decisions about healthcare were made by parties other than whosehealth is to be cared for. The beneficiary was never a focal point due to various constraints andinterests of other stakeholders. ACA has not only made individual a focal point for health insurers butalso made individual responsible for getting the health insurance.

We have discussed the ACA and how it is shaping disruption in Healthcare in previous chapters andwe will keep referencing this in coming chapters as well.

New Supplier - Distributer

In the new Healthcare System, the Health Exchange will become the new distribution or marketingchannel. This marketing channel is equally accessible to all including disruptors and incumbents.However, this is advantage to the disruptor as it could participate on equal terms even though it isnew in market. Products of Disruptor Company will be displayed side by side with the products ofproducts of incumbent companies. Incumbents, even they possess greater wealth, market presence,and brand name, will not have any advantage in this market channel, which, in its own way, is adisadvantage to the incumbent.

In Health Care System context, from health insurance company perspective, suppliers are theproviders of the health care services. Definitely, there is a big room for improvements there. Newsuppliers will also emerge with well thought strategy to best fit in and mobilize the peripheral systemto disrupt nucleus system. Some existing providers may tweak their processes and operationalinfrastructure to synergize it with emerging peripheral system so that this system may offer low costand effective services to customers. For peripheral system, for all practical purposes, these existingsuppliers will be considered as new suppliers.

New suppliers will be very crucial for the peripheral system; they will act like blood pumping systemof body and will bring peripheral system to life. The more strength added to supplier entity of thesystem, the more effective and delivering the system would be. Supplier system will have directresponsibility to provide effective care, cut down on over service, and cut down on administrativeoverheads,



Low Cost New Product and Service

Insurance companies offer Plans to customers in Marketplace; these plans are the products of the

insurance company. One attribute of the disruptor is that it brings a new more cost effective product,

which sometime may be lower quality (or not that sophisticated), to the low demanding consumers.

A lower cost insurance plan for the target consumers will be perfect for the peripheral system.

Marketplace will be a very cost sensitive marketing channel as consumer will be able to see pricing of

similar products from all companies at a single window. There are very limited possibilities of

gimmicks by companies as the product line at marketplace will be predefined - just four type of

products - bronze, silver, gold, and platinum. Also, the minimum coverage by the plan is already set

by regulation. Therefore, consumer will really be comparing apples with apples and be able to judge

easily which plan is the cheapest for his needs.

Cost and money considerations are little complex in the HealthCare systems as the path that money

takes is different from the path that services take. Beneficiary is not necessarily paying the provider.

In addition, there is also a flow of internal services, which may not affect the end consumer directly

but surely, they affect the quality of deliverables and cost at which they are delivered.



Internal Services

S Negotiate Fee /Sala

Negotiated FeeNegotiated Cost

* Co Pay / Premmiiun- -

Drug Prescription

'I

7*

Premium

Pre mum Pye rLegends:

L - -- Flow of Mone y -

Flow of se rvice toExtemal Customer

Two way flow of Service toInternal Customer

Figure 32: Flows in Healthcare system

Due to the different routes of flow of money and flow to customer service, customer is not in thebargain position to get better services at lower cost. This has brought a kind of inefficiency in thecurrent nucleus system. In current system, insurance company, which is in the epicenter of thesystem, is indifferent to the cost and to a great extant the quality of services. Cost and quality do notaffect its profitability directly and it can conveniently transfer any cost increase to Employer /premium payer to safeguard its margin.

In the peripheral system, as Health Insurance Company will be in the center of this system, it canimplement checks and balances to contain cost of the services. This will bring cost of its productsdown in Health Exchange. In addition, if it can deliver better quality services at lower cost then it willbe a huge advantage for insurance company in particular and Peripheral System in general as thetarget customer base is expected to be cost sensitive.


79

Prescription Drugs

Co Pay-I

79


New Disruptor Company

The new disruptor company will be in the epicenter of the peripheral system. As we see in the cost-services diagram (figure 32), the insurance company is the hub that regulates the system and controlof the money flow. It is the entity that goes in contract (non-equal value contract) with beneficiary,lists its products in Health Exchanges, sells, and collects premiums, pays to providers for services, andit ultimately becomes responsible for the services provided to the customers.

For peripheral system, the expected entity to lead the disruption is the Insurance Company as it is theentity that is in money in and money out and controls the flow of money. It will have the power andresources to drive the business logic around the peripheral system.

In the chapter 7, we have argued that existing insurance companies cannot disrupt the existingnucleus system. A new company is needed which can disrupt the existing nucleus system - this maybe a brand new company or may be an independent company formed for this purpose by an existingcompany.

9.2. Disputed System Issues - Opportunities for Disruptor System

So far, we have checked whether all elements needed to make disruptor system are present. In addition,we found that these elements are either present or taking shape. Next, we can examine the problemswith the current system that the disruptor system can target to eliminate to be more efficient, reliable,and cost effective.

Cost of Overservice

One of the main reason of high healthcare cost is cost of over service, which comes from unnecessarycare given to the patient. Experts believe the health care system is full of unnecessary care andtroubling variations in care.

Healthcare Cost is one of the main consideration of ACA and it will be one to the main considerationof the new customers as well. Disruptor will need to bring the cost of healthcare substantially down

in order to successfully disrupt the system.

Providers can also utilize for medical practitioner nurses for level 1 services, which are regular andpreventive in nature and do not need expertize. Level 2 services can be provided by medicalpractitioners doctors once referred by nurse practitioner and level 3 by specialists once referred tothem by doctors. Obviously, nurses cost less than doctors do and doctors cost less than specialist do.

The idea is not to cut the quality of the service to cut cost but to eliminate over service and bring

efficiency in system, and still provide the care that customer needs and deserves.

Cost of Quality Healthcare

Cost and quality are two most important points of the healthcare. General perception is - higher costwould mean higher quality service. However, this is not necessarily true. Quality does not depend only

on cost; there are other parameters that effect quality. In other words, reduction in healthcare cost



is very much possible without the deterioration in quality of healthcare; even reduction in healthcarecost is possible with improvement of healthcare quality.

Figure 33 below represents Relationship between 1-year survival rates and total inpatient costs forMedicare beneficiaries with three common conditions.

76

2500'6 '00400

4 7.

1-Yew TO Costs. Fltered and R-AdAtued

Figure 33: Relationship between ]-year survival rate and total inpatient cost.20

In the graph above, a line is drawn at 70 percent rate of survival and if we see the cost axis - horizontalaxis - we do not see any relationship between the cost and survival rate. If we consider below 70percent as low quality and above 70 percent as high quality AND left side of 30000 cost as low costand right side of 30000 as high cost then

Number of low survival case in low cost (low cost low quality quadrant) are almost equal to thenumber of low survival cases in the high cost (high cost low quality quadrant)

Number of high survival cases in low cost (low cost high quality quadrant) are almost equal tothe number of high survival cases in high cost (high cost high quality quadrant)

20 The Healthcare Imperative: Lowering Costs and Improving Outcomes: Workshop Series Summary.Institute of Medicine (US) Roundtable on Evidence-Based Medicine; Yong PL, Saunders RS, Olsen LA,editors. Washington (DC): National Academies Press (US); 2010; Webpagehttp://www.ncbi.nlm.nih.gov/books/NBK53937/figure/ch2.f1/?report=objectonly



If there were any relation between high cost and high quality then we would expect more points inhigh survival high cost quadrant then low cost high survival cases.

This establishes that the quality of service is not driven by cost of the service instead, it is driven byother factors such as process, skill etc. of the provider.

With this learning, we can draw cost and quality matrix as sown in figure 34.

Most Preferred

Hw t 1ilt II etOLllt Highest Qualityit I w Cot iiat Highest Cost

-77

H ghQua IityV a t HR hQ aly High Quality at ( ti'd aLowest Cwst Ho otilgh Cost H t t

Low Quality atLwQaiyaLow Cost HghCs

Lowest Qua lity Lnvt tat Lowest Cost A I , t a i e s rfre

Figure 34: Cost and Quality Matrix

The left top quadrant is the best performing quadrant - it has provided the best service at the lowestcost. Moreover, the right bottom quadrant is the worst performing - it has provided inferior serviceat higher cost. If we can align technology, process, and skill of the worst performing quadrant withthe best performing quadrant then significant quality improvement and cost saving will be achieved.Aligning each quadrants' process, skill, and technology to the best performing quadrant should be thegoal.

If disruptor chooses network providers intelligently from best performing quadrant, instead of justbeing a passive onlooker, it will be able to provide better quality services at lower rates to itscustomers.

Integrated Vs Modular StructureOne of the most fundamental difference between new company and the existing company will be theway it organizes itself. Existing companies are organized in an integrated way; however, to reap allthe benefits of fast changing HealthCare industry under ACA, new company will organize itself in a


11

82


modular way. Similarly, it will build the peripheral structure modularly so that it may respond quicklyand have less bureaucratic framework. Integrated structure has served well the nucleus system tooptimize the system with performance and reliability but at the cost of responsiveness and flexibility.For peripheral system, as a new market is emerging and new regulations are settling down, Modulararchitecture will win with responsiveness, speed, flexibility, and convenience.

win with performanceand reliability

win with responsiveness,speed. and convenience

difference in capability of an optimized intagratedarmhitecture vs. a modular architecture

Time

Figure 35: Shift from integrated to modular architecture2'

System Fragmentation

System fragmentation is one of the hidden problem Healthcare system is facing today. 22 There isfragmentation in every entity of the system - provider, payer, regulators - and this fragmentation hasbecome a fundamental problem for effective and efficient medical services. Fragmentedcommunication between providers and duplicative testing and absence of vital information isaffecting the result and the cost both. Insurance Company is the central hub of this HealthCare systemand if it tries hard to remove fragmentation then it will not only be able to reduce the cost of theservice but also the quality of the service.

As we have seen in the figure 32, the information flows from one entity to other - we can call it asdata hop. It is responsibility of both parties - sender and receiver - to complete 'informationtransaction' effectively without any loss. Presented picture is just a high level and there are many'data hops' involved in one full service. Unfortunately, information is lost between these 'data hops'more than often and sometimes meaning of the information is altered. This pushes for multiple

21 Shift from integrated to modular architecture: Christensen and Raynor. Graph taken from sourcehttp://rainwillow.com/2012/04/integrated-versus-modular-architectures/22 Page 36 of "The Healthcare Imperative: Lowering Costs and Improving Outcomes: Workshop SeriesSummary" report is present at location http://www.ncbi.nlm.nih.gov/books/NBK53920/pdf/TOC.pdf



iterations of 'information transactions' which causes confusion and delay shooting cost and creatingpain for end consumer.

One example of this inefficient and ineffective 'information transaction' is billing. Billions of dollarsare lost in rework on billing 'data hop' every year due to inefficient billing and collection, and bellingerrors. Manual billing process at any side - sender or receiver - bears high probability of errors andinefficiency. This was identified as a major healthcare waste in 'The Healthcare Imperative: LoweringCosts and Improving Outcomes: Workshop Series Summary' report. Table from this report is below(page 150 in report).

Table 7: Examples of Healthcare Waste23

TABLE 3-8 Examples of Healthcare Waste

Intraorganizational Interorganizational

Clinical 0 Unnecessary procedures * Duplicative testing9 Excessive testing e Lost information* Inefficient care delivery * Fumbled hand-offs

processes * Nonstandardized disease* Medical errors management, formularies, etc.

Administrative e Inefficient billing and collections * Redundant provider credentialing* Avoidable * Manual vs. automated processes* Manual vs. automated processes / Patient identification

/ Eligibility/coverage verification/ Pharmacy interactions

* Claims payment processes

Inefficient Primary and Preventive Care"Only six to eight percent of health care spending goes to primary care - less than thepercentage that goes to private insurance overhead." - Health Care Delivery System Reform24(A Report from Senator Sheldon Whitehouse for the U.S. Senate Committee on Health,Education, Labor & Pensions)

Primary and preventive care is facing multiple challenge - shortage of primary care providers (due todisadvantage in earning), low focus of insurance provider towards primary and preventive care (theysimply do not care), ignorance, and inadequate knowledge about primary and preventive care in endconsumers.

23 This table is taken from report 'The Healthcare Imperative: Lowering Costs andImproving Outcomes: Workshop Series Summary' page 150. PDF copy is present at locationhttp://www.ncbi.nlm.nih.gov/books/NBK53920/pdf/TOC.pdf24From Report 'Health Care Delivery System Reform and The Patient Protection & Affordable Care Act'.Report is available at locationhttp://www.whitehouse.senate.gov/imo/media/doc/Health%20Care%20Delivery%20System%20Reform%20and%2OThe%20Affordable%2Care%2Act%20FINAL2.pdf.



With Individual health insurance in focus, the focus will be back on the individual insured and primarycare and things will change for good. This will be an opportunity for disruptor to disrupt theconventional strategy of low focus on preventive care by putting great emphasis on preventive andprimary care. In addition, strengthen the disruptor system network of primary care and preventivecare. This will give a long-term cost advantage as well.

Passive Middleman Vs Active ContributorAnother thrust for ACA is to make insurance company an active contributor in people's health andwellness instead of merely behave as passive onlooker. Existing companies do not take direct interestin beneficiaries' health, as their payment is not directly dependent on the beneficiary. DisrupterCompany will aim to change the behavior of beneficiary to bring cost of its products down. This willgive a winning edge to disruptor and will help system to be a more consumer friendly delivery system.

Change behavior 4 Improve Health + Reduce HealthCare costs

"Unfortunately less than one percent of health care spending in the United States goes toclinically-based, effective prevention strategies." - Health Care Delivery System Reform 25(AReport from Senator Sheldon Whitehouse for the U.S. Senate Committee on Health,Education, Labor & Pensions)

Health insurance companies are acting as passive intermediaries with no real interest in the healthand fitness of the insured. They do not care if the insured's have completed their preventivescreenings and annual health checkups. There is no active reminder system and no persuasion of thecase in most of the companies. They probably do not maintain this database and analyze whether thepopulation has gone thru these preventive cares.

Instead of spearheading the healthy culture, insurers are just acting as intermediary. They classifyinsured's into certain risk categories, collect premium dollars, and pay to providers. A comprehensivenetwork that will reinvent itself as a comprehensive health deliverer will reduce insurance costsubstantially. Insurance provider can better control this instead of care provider. As this will demandin high technical expertise, large setup, and huge data.

9.3. Conclusion

Disruptor system can offer a lot more than the healthcare system today, which will result in improvedefficiency, improved effectiveness, and lower cost of healthcare in disruptor system. There is very bigpotential market, which is aggressively aimed at, by ACA, to be brought under health insurance net. Allother elements needed for disruptor system formation are either available or coming up. We will check,in coming chapters, who could possibly fill in to provide these elements to system.

25 Same as 28




Notes:


Chapter 10: Who Could be Possible Disruptor

This is the most intriguing question on Healthcare disruption study. There are two parameters that make

it most difficult to identify whether disruption has begun - one, the stage for disruption is set by ACA,

which in itself is a very recent phenomenon: moreover, as open enrollment happens only annually, the

movement and shifts will only be visible annually - second; a peripheral disrupter system has to emerge

to take a clear edge over disrupted system, the formation of coherent, synergized, and spontaneous

system can take around four to five years.

Though entities must have started taking form with open enrollment, it may take time for the system to

form. As the main building block of disrupter system would be the new insurance companies and it will

build the system around itself, we may focus on what are the desired attributes of this new company, who

could be a best fit and what early trends are.

10.1. Desired Qualities needed in New Disruptor Company

Let us check the desired qualities needed in the possible disruptor company.

Information Technology

The new company should have great understanding of Information Technology such as how to

manage technology, what could be a strategic (long term) technology investment and what could be

a tactical (short term) technological investment, when and what to outsource and what to build in

house.

Information Technology is backbone of any insurance company, and a wise investment in and

management of IT is needed. Not only management but also innovative integration of technology is

needed to leverage its full potential and make system more user friendly and cost effective. In current

system, existing technology companies are 1) not able to leverage full potential of modern technology

2) they are not able to use technology efficiently.

Strong Financial Understanding

Insurance company will be deeply involved in the cost monitoring and control of healthcare delivery.

Excellent financial understanding is needed to make the system work at the same time financial

management should be lean enough to do away with overheads and not to keep capital locked

unnecessarily.

People's Trust

If the new company is supported by a group (of people or institutes) or by an existing company then

the group or existing company should have excellent confidence of people. If the new company is a

startup by not so known group or people then it needs to build trust in the market quickly. Ethical



behavior is necessary in market, nothing short will work, and any fumble will erode even the biggestgains company might have.

Financial Sponsorship

Establishing a new company will take a good amount of money. To name the few and cardinalactivities, the company would need to establish operations, get regulatory and statutory approvalsand licenses by fulfilling predefined requirements, attract talent from market to get functional in ITinfrastructure and Healthcare underwriting, build IT infrastructure with strategic long term vision, andget the products listed in Health Exchange. Every activity will cost money and call for capitalinvestment.

Most of the fixed cost spending will occur even before first customer can be enrolled. Which meansstrong financial backing and easy access of capital is essential to establish operations.

Variable cost per customer will not be as high as the fixed cost, and this could be managed out ofpremiums paid by customers. Once steady cash flow is maintained, managing variable cost will havea different challenge - to optimize variable costs to serve customer efficiently at low cost.

Talent Attracter

Every company needs talented resources to succeed but for new startup, it becomes tricky to attracttalent as fear of stability is associated with the company. However, a careful study of talent market toformulate suitable strategy to attract talent for different functions - Information Technology, MedicalUnderwriting, Legal Experts etc. - can establish it as a talent attracter. Unless company becomestalent attracter - which means steady supply of talented people - and gets talented people onboard,

it will not be able to succeed in achieving its functional and in turn its financial goals.

The new entrant could be a talent attractor already but if it is not then it needs to establish it as onefairly quickly.

Some Knowledge of Insurance Business is preferred

Knowledge of Health Insurance (or even Insurance) is preferred to give the company an understandingof what they intend to do. However, this is not must - After all Tesla manufactured and electric carsuccessfully without any previous knowledge of car business or even cars. If the team is passionateand has right mix of people, it will be able to acquire knowledge quickly and build on it.

Think beyond Existing System

The key is to think beyond the existing system. Think beyond how healthcare is being done andmanaged today, what products are being offered in market today, and how services are beingdelivered to customers. The entrant needs to think beyond HMO, PPO, and other similar options aswell.



Do not get trapped in the existing system - if entrant is trapped in existing system then most likely it

will be trapped with the existing system's limitations as well - and form a new system to do what have

not been done till today.

The existing system is very well integrated system that makes it optimized and bureaucratic system.

Whereas to extract maximum mileage from the changing market dynamics and regulations,

modularity of the new system is more than desired.

10.2. Possible Suitors

As argued earlier, there are still no signs of disruptive system formation. However, in the light of the

analysis we have done so far, we can speculate who could the suitors for the role of new companies.

Independent Entity formed by existing Insurance Player

Independent companies formed by the any existing insurance company to take care of emerging

Individual Insurance market qualifies to be the best suitor to be a disrupter company provided they

consciously tackle the retroactive interference2 6 . A very conscious effort will be needed by this new

company to disrupt the current company and system. The biggest asset - the experience in health

insurance business - will pose the biggest challenge as well - what to learn from parent and what not

to learn from parent company.

Altogether, chances would be very good for such new company if they know what they are doing and

do so with commitment.

Financial Institutions such as Banks

Other big suitors are financial institutes such as bank. They have market presence, albeit in a different

genre, which gives them two advantages - a reputation between the market and access to the market

through its pan American network. In spite of being new, they are household names and are trusted

in their ability to do financial business and deliver results. Banks, by the very functioning of it, are

comfortable with technology and have good understanding of financial market.

Pharmacies - CVS Minute Clinic

Pharmacy is one of the providers of healthcare system; they provide customers products such as

medicine and medical supplies and explain about medicine to them. If any pharmacy wants to take

lead, its knowledge of medicine, ability to do routine medical test, presence among customer, readily

available office space closest to customer, availability of human resources, and comfort with

technology can come as very big advantage. Additionally, it would know how to cut down on medicine

cost and medical supplies cost - this will provide them an edge in terms of controlling cost.

26 Retroactive interference - past learning interfering in learning new thing. (From Introduction toPsychology by Morgan, Knight, and King - Retroactive Interference).



To their disadvantage -they may not want to upset their partners from existing system by competingwith them. Prescription drugs are a big part of sales that a pharmacy makes and if any big existinginsurance company takes it off network drug provider list then they will lose existing business in bulk.Large organization, such as Caremark (parent CVS) has influence, though keeping existing partnershappy and entering into new model to compete with them will be a challenge.

Additionally, almost all pharmacies cell tobacco product in their premises, which may not go well withthe customers. Pharmacy may need to stop selling tobacco products under its roof it wants to enterin healthcare service market. CVS pharmacy has already announced that it will take all products offthe shelf by October 2014. 27

Message from Larry MerloPresident and CEOCVS/pharmacy will stop selling cigarettes andall tobacco products at its more than 7,600 storesnationwide by October 1, 2014.

Figure 36: No tobacco message from CVS website

Technology Company - AmazonTechnology companies such as Amazon, Oracle, and eBay are other big suitors for this job. To theiradvantage, they are household names and trusted, they have successfully established businessmodels in past, and they have or can access sufficient financial backing. They are very comfortablewith IT technology and technology in general, and they will be attract partners to form a disruptivesystem.

Their major disadvantage is their lack knowledge about Health Insurance, Medical services, andmedical underwriting, however, this is not something that is impossible to fix. A determined,structured, and well-planned approach can attract talent to fill knowledge gaps in these areas.

Until this time, there is no such information in public domain that indicates that technology firms aretaking interest in healthcare industry.

27This message is present on their website www.cvs.com as of 3/9/2014.



A Medical Group - Hospital Group

It is not a requirement for a disruptor to be present nationwide and launch services in all HealthExchanges; a beginning can be regional and services can be launched in the area of presence only suchHealth Exchange of one state. Hospital group, which has good presence in the area or the state canfrom a firm to offer health insurance in that area. This small beginning will give them chance to focuson customers and better handle iterative learning process, as stakes will be much lower.

Hospital groups, to their advantage, will have knowledge of medical services and internal coststructures, existing patrons who can be potential customers, and people's trust as medical serviceprovider. As a disadvantage, they need to get knowledge and acquire talent in field of IT and Medicalunderwriting. Also, they would need to get more creative to bring down the cost of medical care,which will not be a very easy thing to do - as a Medical service provider they receive servicing costfrom insurance company, the more they serve the more revenue (and profit) they will generate. Ifthey are the insurance company as well, they would want to cut down the medical service charges bycutting down the over service and by other measures. Whereas if for a patient, they are not theinsurance provider, then they would like to provide the normal level of services to maximize revenueand profit. This will be very contradictory for the staff and organization as a whole. If they provide thelean service to other insurance company patient, they will not only leak revenue but also giving awaythe competitive edge that they might have due to reduced cost.

As a healthcare services provider, to come out of this dilemma and contradiction, they would need topursue their values instead of pursuing profit. The key to be a successful disrupter would lie in making

a disruptive system that will offer more than what its components can offer individually.

A Combination of Above - New Investment Vehicle

If there is a start from any combination of firms above, it will indicate that a system formation is takingplace. Any such firm that is promoted by a combination of firms above will have advantages morethan they individually can offer - an attribute of the system. Obviously, any combination will formbased on strengths of the partners and ability to fill each other's weakness. This may have someperceived problems - such as different partners may have different financial and strategic goals andmay push its personal agenda within the new firm. This may cause failure due to implosion.

From Scratch - a new company

An entirely new company without any experience in IT, Healthcare related technology, financialservices, and pharmacy. In principle, this entry may seem illogical or impractical but TESLA, withoutany experience in car making and marketing or even any related field, has built cars successfully,marketed then and has become a hot stock in share market and has proved that it can be done.

Field for disruption is open to all yet and any such firm will not have any huge disadvantage, howeverit would need to find partners quickly and bridge knowledge gaps swiftly and effectively. New firmwould need to offer insurance products and collaborate with other firms to form healthcare systemto provide end-to-end services to its customers.



10.3. Conclusion

Emergence of disruptor new company is very first crucial step for formation of disruptor system and

disruption itself. There are many possible suitors with their own advantages and disadvantages. The best

suitor is an independent entity formed by existing insurance company. In the next chapter, we will analyze

the early trends and find out who it could be. There could be more than one most suitable, and we could

have missed some suitable in our analysis - early trends will provide us some concrete information.


Chapter 11: Early Trends

This is the first enrollment season for Health Exchanges and ACA plans. This is the very beginning of thenew era in individual health insurance. In this chapter, we will look for and analyze early trends that arevisible in the market today. In doing so, we will keep our system approach on check for trends for eachelement of disruptor system.

Let us start from provider side. We have already checked few facts about CVS Minute Clinic (and similarclinics) in chapter 10; we will check what trends suggests and if it can make an impact as provider.

11.1. Provider- CVS Minute Clinic and Walgreen Health Clinic

One more interesting service CVS has in its service mix is Minute Clinic (started in 2000)- the medical clinicin CVS/Pharmacy - which treats minor illness such as allergy, ear infection, cough, common flu, bug biteetc. and provide some basic lab tests. The services these minute clinics provide and their cost is welladvertised on its website. They are open off office hours including weekends no appointments arenecessary.

Minute Clinics provide healthcare services by engaging medical nurse practitioners (instead of doctors)which has twin advantage of lower cost and greater availability. As they treat very basic medical conditionsand treat minor conditions, nurse medical practitioner are best suitable for the job - this is addressingone big problem of current healthcare - over service - and result is reduction in cost. CVS has demarkedspace for minute clinic in every CVS location; however, minute clinics are functional at very few locations

only currently.

Minute clinics are engaging people on social media such as youtube.com as well. They have small, basic,but very informative talk shows on most common health problems such as cold, allergy, ear infection etc.This may not be very best use of social media for preventive healthcare (one-way communication only)but it is a very good step in right direction.

Similarly, Walgreens Pharmacy - healthcare clinic, target pharmacy - clinic, rite aid pharmacy - NowClinicalso have clinics in their premises. Services and offerings are very similar to the minute clinic.

With clinics and medicine available in house, pharmacy companies become great suitor to be a disruptor.However, with the information available in public domain, there is no sign of a system formation (or itsplanning) by any pharmacy.

Walmart have slightly different idea of clinics at its store, clinics are independently owned and operatedat Walmart. Services and offerings are quite similar to the CVS minute clinic. As per their website, none ofWalmart locations in Massachusetts has clinics2". Walmart approach does not appear to be medical

28 This information is present at this location htt://i.walmart.com/i/if/hmD/fusion/Clinic Locations.odfShweta ShefaliMIT SDM Thesis 93


services centric; it appears more like extension of 'everything under one roof'. However, this does nottake Walmart out of consideration.

In this - http://money.cnn.com/2013/08/13/news/economylobamacare-penalty/ - August 13, 2013article of CNNMONEY (money.cnn.com), Geoff Colvin, CEO of Walgreens, indicates that he is takingprimary care business very seriously by utilizing his healthcare clinic. He also sees larger role forpharmacists in healthcare well beyond pharmacy and into the space of primary care and preventive care.

Similarly, CVS is also planning to offer primary care at its minute clinic29; these clinics are already offeringpreventive care. In this newsletter, president of MinuteClinic -- Andrew Sussman - declares"The innovations we are employing at MinuteClinic to deliver easily accessible, low cost, evidence-basedcare are applicable to health systems outside the United States,"

Table 8 below lists all services advertised on its website. Clearly, it covers most common health issues ofday-to-day life and preventive screening lab tests as well. The advertise cost is very reasonable too.

)TaP (diphtheria, tetanus, pertussis) $99.99:lu - Seasonal (preservative-free available) $31.99:lu - High Dose (ages 65+) $49.99

:lu - Intradermal (90% smaller needle) $36.99

29 As per the press release CVS Caremark site webpage - http://info.cvscaremark.com/newsroom/Dress-releases/cvs-caremark-minuteclinic-president-discusses-rimay-care-innovation-london.



Hepatitis A (child) $112.99

Hepatitis B (adult) $139.99

Hepatitis B (child) $112.99HPV (human papillomavirus) - Gardasil* $234.99

Impetigo

Lice

Minor skin infections and rashes

Oral / mouth sores

Poison ivy / oak (ages 3+)

Ringworm

Scabies

Shingles

Styes

Sunburn

-Swimmer's itch

Wart evaluation (ages 5+)Alc check $59

Diabetes monitoring $79

High blood pressure evaluation $79

High cholesterol monitoring $79Hpalth rnnditinn

LTable 8: Services Offered in CVS Minute Clinic

IPV (polio) $109.99Meningitis $144.99

MMR (measles, mumps, rubella) $129.99

PPSV (pneumonia) $84.99

Td (tetanus, diphtheria) $89.99

Tdap (tetanus, diphtheria, pertussis) $64.99

Adeno $21

Blood sugar test $21

Flu test influenza A & B $33 each

Aic $32Mononucleosis (mono) test $22Cholesterol screen (Lipid panel) $37Negative quick strep $33

Pregnancy test $22

Quick strep $30Urine dip stick $28

This new development is not exactly brining a new disruptor insurance company but is extremelysignificant for the disruptor system. As this would be a big leap from the provider side and it will giveoptions to Disruptor Company to tie with these new low cost players to provide services.

If Primary and Preventive care thru these clinics takes shape then it will be a major disruptive step atprovider side. The new Disruptor Company will be able to utilize these clinics to provide primary andpreventive care to customers at lower cost. This will also take disruptor company's dependency on existingproviders, which will remove a major roadblock as existing providers may not be willing to modify theirprocesses suiting new disruptor company as they already have tactical understanding with existinginsurance companies and may not want to jeopardize this understating or relationship.

11.2. Health Exchange Marketplace

Let us check what the early trends at health insurance marketplace are and how did our health exchangeshave done. Health Exchange Marketplace started open enrollment form October 1, 2013 and as it is thefirst year of enrollment, open enrollment will remain open until March 31, 2014. From next enrollmentseason onwards, open enrollment will end on December 31.



As per HHS.gov newsletterO

* More than 4.2 million (4,242,300) people selected Marketplace plans from Oct. 1, 2013, throughMar. 1, 2014

* This includes 1.6 million in the State Based Marketplaces (SBM) and 2.6 million in the Federally-Facilitated Marketplace (FFM).

* About 943,000 people enrolled in the Health Insurance Marketplace plans in the Februaryreporting period, which concluded March 1, 2014.

As per Department of Health & Human Services - USA report (USA, March 1, 2014, p. 5), Marketplaceenrollment has crossed 4.2 million mark (it crossed 6 million on 27th March 2014). These are some vitalstatistics presented in this report.

Marketplace Eligibility Determinations and Plan SelectionV Number of Eligible Persons who have Selected a Plan through the SBMs and FFM: 4.2 million

Number of Persons who have had a Medicaid/CHIP Determination or Assessment through theMarketplaces: 4.4 million (does not include individuals applying through State Medicaid/CHIPagencies.)

Marketplace Plan Selection by Gender45 percent of the persons who have selected a Marketplace plan are male55 percent of the persons who have selected a Marketplace plan are female

Marketplace Plan Selection by AgeV 25 percent of the persons who have selected a Marketplace plan are between the ages of 18 and

34o The percent of young adults who selected a Marketplace plan was 3 percentage points

higher in January and February than it was from October through December (27 percentversus 24 percent). This trend is expected to continue.

V 31 percent of the persons who have selected a Marketplace plan are between the ages of 0 and34.

Marketplace Plan Selection by Metal Level18 percent of the persons who have selected a Marketplace plan have selected a Bronze plan63 percent of the persons who have selected a Marketplace plan have selected a Silver plan11 percent of the persons who have selected a Marketplace plan have selected a Gold plan

V 6 percent of the persons who have selected a Marketplace plan have selected a Platinum planV 1 percent of the persons who have selected a Marketplace plan have selected a Catastrophic plan

Looking at this above statistics, we may conclude that

30 This newsletter dated March 11, 2014 can be seen at locationhttp://www.hhs.gov/news/press/2014pres/03/20140311 a.html



/ Marketplace is getting good response from individual consumers and enrollments are in line (evenexceeding) the estimates.

v One forth enrollees are young adult and young adult enrollment is on the rise. This means thehealthy population of young adult is shopping at marketplace. This is a very good indicator forinsurance companies especially for Disruptor Company.

Approximately One-third enrollees are in 0 to 34 age group, which is again a low risk population.Preventive and primary care will be the main focus of this group.

Silver plans are the more preferred plans in the marketplace (close to 2 third plans were silver).

Catastrophic plan enrollment is just 1 percent.

Note: As per Department of Health and Human Services report, page 1 (Department of Health and HumanServices, 2014), the final percentage of enrollment of young adult is 28. Which is slightly up from 25percentage as reported in March 11 report. Also, total enrollment stands more than 8 million.

Apart from this information which sheds light on the size of the market and how the market is shaping up,there is much more information available that is very vital to analyze about overall ACA initiatives. These

early trends give all indication that healthcare is ready for disruption and making progress towards it. Let

us examine other facts.

11.3. Federal Health Exchange Data (March, 2014 Release)

Federal government has published Individual Market Medical data (Individual Marketplace Data &https://data.healthcare.gov/, 2014) on its website in spreadsheet format listing all plans offered in all

exchanges in United States (name of the file - IndividualMarketMedical_vllc.xlsx). This has planinformation of federally participated marketplace and State Partnership Marketplace. This includes dentalplans as well. This spreadsheet contains all the data - state, county, insurer name, plan name, metallevel, plan type, insurer phone and website, and a lot of other information - spanning across 111

columns and 78,393 rows.

Various filters can be used to extract meaningful reports from this data. Following data analysis reports

are generated based on data from this spreadsheet.

Health Exchange: State and Company

Health Exchanges are offering products and services in 34 states in United States. As shown in Table9, there are total 141 companies offering health insurances in these health exchanges. There are only7 states where more than 10 companies are offering plans and in 21 states there are less than 5companies offering plans.



Health Exchange : State & Company

STATES WITH LESS THAN 5 COMPANIES

STATES WITH 10 AND MORE COMPANIES

STATES WITH 5 AND MORE COMPANIES

TOTAL NUMBER OF COMPANIES

UNIQUE STATE - COMPANY COMBINATION

UNIQUE COMPANIES OPERATING IN ALL STATES

STATES OFFERING HEALTH EXCHANGE PLANS

21

13

34

StatesofferingHealth

Exchange____ Plans

mber 34

UniqueCompanies

Operating inall States

141

0 20 40 60

Unique State Total- Company Number of

Combination Companies

171 141

80 100 120 140 160 180

States with 5 States with States withand more 10 and more less than 5

companies companies companies

13 7 L

U Total Number

Table 9: Companies Operating in Heath Exchange and State of Operation Data Key Points

Table 10 presents number of companies operating in each state. State of Wisconsin WI has the most13 companies operating whereas state of North Hampshire has only one company operating.

This is to be noted that if a company is operating in one state then it does not mean that company isproviding services in all counties of the state. It is very much possible that there is no companyoperating in one (or more) counties of the state even though couple of companies are operating inthe state.


141

141

171

98

I -- I


Table 10: Number of companies operating in State Exchanges

W1VAUTTXTNSDSCPA

OKOH

NJNHNE

ND

,0 NCMT*w MT

MSMOMIME

LAKSINILIA

GAFL

DEAZAR


--- I-

NII " I 1 -I27

99


Table 11: Number of states covered by some companies

No of States by Company

WE0z

MOLINA HEALTHCARE

KAISER FAMILY FOUNDATION

COVENTRY HEALTH CARE (ACQUIRED BY ATENA IN2013)

AMBETTER - CENTENE CORPORATION

HUMANA GROUP

CIGNA

BLUE CROSS AND BLUE SHIELD ASSOCIATIONCOMPANIES

AETNA

Number of States

Table 11 report shows the number of states in which some big companies are operating. None of thebig companies is operating in all states. Best presence is shown by Blue Cross and Blue ShieldAssociation Companies; rest other companies are not even offering plans in half of 34 states. Thisindicates that these companies are not very keen on Individual Health Insurance business.

Following table 12 report is generated by the date provided in this spreadsheet. This table has twoviews - 1) lists companies operating in the states and 2) states in which a particular company isoperating. Name of the company is very important as it will provide vital information about thecompany (internet, website) such as the type of the company, parent company, or group name etc.

Table 12: Company Name and State ofOperation: two views:Company

State View - Pivot on State: Company View - Pivot on

2) Company View - Company operating in1) State View - Companies operating in State statesAK AAA Vantage Health Plan

Moda Health LAPremera Blue Cross Blue Shield of Alaska Aetna

AL AZBlue Cross and Blue Shield of Alabama FLHumana Insurance Company IL

AR OKAmbetter of Arkansas PAArkansas Blue Cross Blue Shield TX


I

100


QualChoice Health Insurance U Aetna Life Insurance CompanyAZ VA

Aetna Alliant Health PlansBlue Cross Blue Shield of Arizona, Inc. GACigna Health and Life Insurance Company Altius Health PlansHealth Choice Insurance Co UT

Ambetter from Buckeye Community HealthHealth Net Life Insurance Company PlanHealth Net of Arizona OHHumana Health Plan, Inc. Ambetter from Magnolia Health PlanMeritus Health Partners MSMERITUS MUTUAL HEALTH PARTNERS Ambetter from MHSUniversity of Arizona Health Plans -

University Healthcare Marketplace INDE Ambetter from Peach State Health Plan

CoventryOne GAHighmark Blue Cross Blue Shield Delaware Ambetter from Sunshine Health

FL FLAetna Ambetter from Superior Health PlanAmbetter from Sunshine Health TXCigna Health and Life Insurance Company Ambetter of ArkansasCoventryOne ARFlorida Blue (BlueCross BlueShield FL) AmeriHealth New JerseyFlorida Blue HMO (a BlueCross BlueShield

FL company) NJFlorida Health Care Plans Anthem Blue Cross and Blue ShieldHealth First Insurance, Inc. GAHumana Medical Plan, Inc. INMolina Marketplace MEPreferred Medical Plan MO

GA NHAlliant Health Plans OHAmbetter from Peach State Health Plan WIAnthem Blue Cross and Blue Shield Arches Health PlanHumana Employers Health Plan of Georgia,

Inc. UTKaiser Foundation Health Plan of Georgia Arise Health Plan

IA WIAvera Health Plans Arkansas Blue Cross Blue ShieldCoOportunity Health ARCoventry Health Care of Iowa Inc. AultCareGundersen Health Plan, Inc. OH



IL Avera Health PlansAetna IABlue Cross Blue Shield of Illinois SDCoventry Health Care Blue Care Network of MichiganHealth Alliance Medical Plans MIHumana Health Plan, Inc. Blue Cross and Blue Shield of AlabamaHumana Insurance Company ALLand of Lincoln Mutual Health Insurance Co. Blue Cross and Blue Shield of Kansas City

IN KSAmbetter from MHS MOAnthem Blue Cross and Blue Shield Blue Cross and Blue Shield of Kansas, IncMDwise Marketplace KSPHP Blue Cross and Blue Shield of Nebraska

KS NEBlue Cross and Blue Shield of Kansas City Blue Cross and Blue Shield of North CarolinaBlue Cross and Blue Shield of Kansas, Inc NCCoventry Health and Life Blue Cross Blue Shield LouisianaCoventry Health Care Of Kansas Inc LA

LA Blue Cross Blue Shield of Arizona, Inc.AAA Vantage Health Plan AZBlue Cross Blue Shield Louisiana Blue Cross Blue Shield of IllinoisHMO Louisiana, Inc ILHumana Health Benefit Plan of Louisiana,

Inc. Blue Cross Blue Shield of MichiganLouisiana Health Cooperative MI

ME Blue Cross Blue Shield of North DakotaAnthem Blue Cross and Blue Shield NDMaine Community Health Options Blue Cross Blue Shield of Oklahoma

MI OKBlue Care Network of Michigan Blue Cross Blue Shield of TexasBlue Cross Blue Shield of Michigan TXConsumers Mutual Insurance of Michigan Blue Cross Blue Shield of WyomingHAP WYHumana Medical Plan of Michigan Inc. Blue Cross of Northeastern PennsylvaniaMcLaren Health Plan, Inc. PAMeridian Choice: Your Connection to

Bronson Healthcare BlueChoice HealthPlanMolina Marketplace SCPriority Health BlueCross and BlueShield of MontanaTotal Health Care USA, Inc. MT

MO BlueCross BlueShield of South CarolinaAnthem Blue Cross and Blue Shield SC



Blue Cross and Blue Shield of Kansas City B BlueCross BlueShield of TennesseeCoventry Health and Life TNCoventry Health Care BridgeSpan Health Company

MS UTAmbetter from Magnolia Health Plan Capital BlueCrossHumana Insurance Company PA

MT CareFirst BlueChoice, Inc.BlueCross and BlueShield of Montana VAMontana Health CO-OP CareFirst BlueCross BlueShieldPacificSource Health Plans VA

NC CareSource

Blue Cross and Blue Shield of North Carolina OHCoventryOne Cigna Health and Life Insurance Company

ND AZBlue Cross Blue Shield of North Dakota FLMedica TNSanford Health Plan TX

NE Common Ground Healthcare CooperativeBlue Cross and Blue Shield of Nebraska WICoOportunity Health Community Health AllianceCoventry Health Care of Nebraska Inc. TNHealth Alliance-Alegent Creighton Health

Partner Community Health ChoiceNH TX

Anthem Blue Cross and Blue Shield CommunityCare HMONJ OK

AmeriHealth New Jersey CommunityFirstHealth Republic Insurance of New Jersey TXHorizon Blue Cross Blue Shield of New

Jersey Consumers' Choice Health PlanOH SC

Ambetter from Buckeye Community HealthPlan Consumers Mutual Insurance of Michigan

Anthem Blue Cross-and Blue Shield MIAultCare CoOportunity HealthCareSource IAHealthAmericaOne NEHealthSpan Coventry Health and LifeHumana Health Plan of Ohio, Inc. KSKaiser Foundation Health Plan of Ohio MOMedMutual OK



Molina Marketplace U Coventry Health CareParamount Insurance Company ILSummaCare MO

OK Coventry Health Care of Iowa Inc.Aetna IABlue Cross Blue Shield of Oklahoma Coventry Health Care Of Kansas IncCommunityCare HMO KSCoventry Health and Life Coventry Health Care of Kansas, Inc.Coventry Health Care of Kansas, Inc. OKGlobalHealth Coventry Health Care of Nebraska Inc.

PA NEAetna Coventry Health Care of Virginia, Inc.Blue Cross of Northeastern Pennsylvania VACapital BlueCross CoventryOneGeisinger Health Plans DEHealthAmericaOne FLHighmark Health Insurance Company NCHighmark Health Services SCIndependence Blue Cross DAKOTACAREKeystone Health Plan Central, A Capital

BlueCross Company SDUPMC Health Plan Dean Health Plan

SC WIBlueChoice HealthPlan Firstcare Health PlansBlueCross BlueShield of South Carolina TXConsumers' Choice Health Plan Florida Blue (BlueCross BlueShield FL)CoventryOne FL

Florida Blue HMO (a BlueCross BlueShieldSD FL company)

Avera Health Plans FLDAKOTACARE Florida Health Care PlansSanford Health Plan FL

TN Geisinger Health PlansBlueCross BlueShield of Tennessee PACigna Health and Life Insurance Company GloballealthCommunity Health Alliance OKHumana Insurance Company Group Health Cooperative- SCW

TX WIAetna Gundersen Health Plan, Inc.Ambetter from Superior Health Plan IABlue Cross Blue Shield of Texas WI



Cigna Health and Life Insurance Company U HAPCommunity Health Choice MlCommunityFirst Health Alliance Medical PlansFirstcare Health Plans IL

Health Alliance-Alegent Creighton HealthHumana Health Plan of Texas, Inc. PartnerHumana Insurance Company NEMolina Healthcare of Texas Health Choice Insurance CoScott & White Health Plan AZSendero Health Plans Health First Insurance, Inc.

UT FLAltius Health Plans Health Net Life Insurance CompanyArches Health Plan AZBridgeSpan Health Company Health Net of ArizonaHumana Medical Plan of Utah, Inc. AZMolina Healthcare of Utah Marketplace Health Republic Insurance of New JerseySelectHealth NJ

VA Health Tradition Health PlanAetna Life Insurance Company WICareFirst BlueChoice, Inc. HealthAmericaOneCareFirst BlueCross BlueShield OHCoventry Health Care of Virginia, Inc. PAHealthKeepers, Inc. HealthKeepers, Inc.Innovation Health Insurance Company VAKaiser Permanente HealthSpanOptima Health OH

WI Highmark Blue Cross Blue ShieldAnthem Blue Cross and Blue Shield WVArise Health Plan Highmark Blue Cross Blue Shield DelawareCommon Ground Healthcare Cooperative DE

Highmark Blue Cross Blue Shield WestDean Health Plan VirginiaGroup Health Cooperative- SCW WVGundersen Health Plan, Inc. Highmark Health Insurance CompanyHealth Tradition Health Plan PAMedica Highmark Health ServicesMercyCare Health Plans PAMolina Healthcare of Wisconsin HMO Louisiana, IncPhysicians Plus Insurance Corporation LA

Horizon Blue Cross Blue Shield of NewSecurity Health Plan of Wisconsin, Inc. JerseyUnity Health Insurance NJ



Humana Employers Health Plan of Georgia,WV Inc.

Highmark Blue Cross Blue Shield GAHighmark Blue Cross Blue Shield West Humana Health Benefit Plan of Louisiana,

Virginia Inc.WY LA

Blue Cross Blue Shield of Wyoming Humana Health Plan of Ohio, Inc.WlNhealth Partners OH

Grand Total Humana Health Plan of Texas, Inc.TX

Humana Health Plan, Inc.AZIL

Humana Insurance CompanyALILMSTNTX

Humana Medical Plan of Michigan Inc.Ml

Humana Medical Plan of Utah, Inc.UT

Humana Medical Plan, Inc.FL

Independence Blue CrossPA

Innovation Health Insurance CompanyVA

Kaiser Foundation Health Plan of GeorgiaGA

Kaiser Foundation Health Plan of OhioOH

Kaiser PermanenteVA

Keystone Health Plan Central, A CapitalBlueCross Company

PALand of Lincoln Mutual Health Insurance Co.

ILLouisiana Health Cooperative

LA



Maine Community Health OptionsME

McLaren Health Plan, Inc.MI

MIDwlse MarketplaceIN

MedicaNDWI

MedMutualOH

MercyCare Health PlansWI

Meridian Choice: Your Connection toBronson Healthcare

MIMeritus Health Partners

AZMERITUS MUTUAL HEALTH PARTNERS

AZModa Health

AKMolina Healthcare of Texas

TXMolina Healthcare of Utah Marketplace

UTMoina Healthcare of Wisconsin

WIMolina Marketplace

FLMIOH

Montana Health CO-OPMT

Optima HealthVA

PacificSource Health PlansMT

Paramount Insurance CompanyOH

PHP



INPhysicians Plus Insurance Corporation

WIPreferred Medical Plan

FLPremera Blue Cross Blue Shield of Alaska

AKPriority Health

MlQualCholce Health Insurance

ARSanford Health Plan

NDSD

Scott & White Health PlanTX

Security Health Plan of Wisconsin,, Inc.WI

SelectHealthUT

Sendero Health PlansTX

SummaCareOH

Total Health Care USA, Inc.Ml

Unity Health InsuranceW

University of Arizona Health Plans -University Healthcare Marketplace

AZUPMVC Health Plan

PAWlNhealth Partners

WY

Websites of all these companies were visited to find out if the company is subsidiary of an existingcompany or is a CO-OP company. Following key points come to the light if we see the company tableabove more closely (Also see table 11).



Only 23 out of 37 Blue Cross and Blue Shield Association companies are participating covering23 states.

Aetna is operating in 7 states and its subsidiaries are operating in 10 states (total 17).

Cigna is operating in 4 states only.

Humana Group is operating in 12 states.

V Newcomer Ambetter (promoted by Centene Corporation) is operating in 7 states.

v 13 CO-OP companies are offering plans in 14 states.

Going thru all these 141 companies we find out following categories of companies are operating.

11.4. Existing companies

There are existing companies already offering employer sponsored group insurance plan in the market.Still, any of these companies is not operating in all 34 states. Blue Cross and Blue Shield Associationcompanies are participating in the most - 23 out of 34 - states. Second most, Humana group is operatingin 12 only whereas Aetna is operating in 7 states and Cigna only in 4 states. Coventry Healthcare (whichwas acquired by Aetna in May 2013) is offering plans in 10 states.

With respect to the market prediction, this participation is very low. What could be the possible reasons?

1. Are these companies are not keen on Health Insurance Marketplace? May be its not thatprofitable business after all.

2. They were not able to put their act together to offer plans in all states.3. They wanted to see if Healthcare Marketplace is going to survive the test and good number of

people enroll. If it looks big, market after first year may be they will participate in more states.

As these are big and resourceful companies, 2 above does not seem to be possibility. All these companieshave dealt with regulatory, compliance changes for years, and offering plans in market place was no bigdeal for them.

For point 3, if they hesitated because of the uncertainty around the marketplace, probably uncertaintywill not turn into certainty completely in coming open enrollment. Increased competition and doubt aboutsignificant increase in enrollment number will be a detractor. Sudden jump in participation may not comein coming year.

Point 1 appears to be the most probable reason and if it is so, this is clear indication that Healthcare ismoving towards disruption.

11.5. Independent New Entity by Existing Insurance Provider



Couple of existing insurance companies have formed new entities solely to offer insurance plans in HealthExchange Marketplace. The frontrunners are Centene Corporation and Cambia Health SolutionsCompany. Both parent companies offer health insurance and both child companies will offer plans inHealth Exchange Marketplace only.

Ambetter

Centene Corporation is offering Ambetter Health Plans (Ambetter, 2014) in 7 states. Ambetter plancoverage has started from January 1, 2014 in all 7 states. Company website sports following message.

"Ambetter is our suite of health insurance product offerings for the Health Insurance Marketplace......Established to deliver quality health insurance through local, regional and community-basedresources, our Ambetter products are offered by Centene Corporation - a Fortune 500 company......deliver high quality, locally-based healthcare services to its members, with our providers benefitingfrom enhanced collaboration and strategic care coordination programs. "

This message indicates that Ambetter is striving to offer something that existing companies do notand its stress on local resources indicates Ambetter's willingness to work with other entities toevolve a new system to provide healthcare.

Centene's keenness to make a new company to offer plans in Health Exchange Marketplace indicatesthat Centene is conscious about difference between Employee sponsored group insurance andmarketplace sold individual insurance and is convinced that it is not best suited to participate inIndividual Health Insurance market under Health Exchange.

If the company itself identifies that an employee sponsored group insurance company is not suitablefor marketplace sold individual insurance then it would be first to identify other components of thesystem, which does not suit the new, company so much. The new company will try to find out otherentities outside the present system to evolve a new system best for individual health insurance.

This makes Ambetter the best suitor to be a disruptor, however, how quickly and effectively it will beable to do so will depend upon its ability to form disruptor system.

BridgeSpan Health Company

Similar to Ambetter, BridgeSpan Health Company is a Cambia Health Solutions Company (a nonprofitcompany) and offers HealthCare Plans through health insurance exchange marketplaces in Idaho,Oregon, Utah, and Washington. The website of the company (BridgeSpan, 2014) states that

"Are you looking for health insurance? Tour our website and learn what BridgeSpan Health has tooffer. We have plans for every budget and optional programs to help you improve your health."

As the company website suggests, the target market for the company is individual health insurancewith an aim to provide new kind of individual health insurance experience. BridgeSpan HealthCompany was formed by the parent company to offer individual healthcare solutions through HealthExchange in Oregon, Washington, Idaho, and Utah beginning Jan. 1, 2014.



There is not much information present about the mission and vision of the company, however, it theinformation present gives an impression that cost is not a major factor company is focusing on, insteadit is focusing on quality and attempting to use the brand name established by parent company. Thoughwebsite claims that company is offering plans through Insurance Exchange in four states, however,Marketplace Plan spreadsheet (Individual Marketplace Data & https://data.healthcare.gov/, 2014)shows plans for state of Utah only.

It does not seem BridgeSpan reached in the marketplace where they wanted to be. How serious andcommitted they are to the marketplace will be clear in the next enrollment season hopefully.

11.6. CO-OP Companies

ACA has created a new type of private nonprofit health insurer - Consumer Operated and Oriented PlanCO-OP - with aim to make individual and small business healthcare more affordable, consumer friendlyand high quality. These CO-OP companies will offer health plans through Health Insurance Exchange aswell as outside Health Insurance Exchange.

As per National Business Coalition on Health website (National Business Coalition on Health & , 2014)

"...the Affordable Care Act (ACA) calls for the establishment of the Consumer Operated and OrientedPlan (CO-OP) Program. The CO-OP Program will foster the creation of at least one, qualified nonprofithealth insurance issuer in each of the 50 states and the District of Columbia, to offer competitive healthplans in the individual and small group markets..."

ACA has appropriated $3.8 billion in start-up and solvency loans to fund CO-OP development 1 . Theseloans are available to private, nonprofit companies with high financial viability; rate of interest on loan ismuch lower from open market.

As per Kaiser Family Foundation website (Kaisar Family Foundation, 2014), as of first quarter of 2014,following is the table of loans awarded

United States $2,088,892,884 NAAlabama NA NAAlaska NA NA

Arizona $93,313,233 Compass Cooperative HealthNetwork

Arkansas NA NACalifornia NA NA

Colorado $72,335,129 Colorado Health InsuranceCooperative, Inc.

Connecticut $79,553,768 HealthyCTDelaware NA NA

31 National Business Coalition on Health webpage - http://www.nbch.org/CO-OPs.



District ofColumbia

NA NA

Florida NA NA

Georgia NA NA

Hawaii NA NA

Idaho NA NA

Illinois $160,154,812 Land of Lincoln Health

Indiana NA NAIowa $1,126,121,001 CoOpertunity Health

Kansas NA NA

Kentucky $81,494,772 Kentucky Health Care

Cooperative

Louisiana $65,790,660 Louisiana Health Cooperative,Inc.

Maine $64,686,124 Maine Community HealthOptions (MCHO)

Maryland $65,450,900 Evergreen Health Cooperative,Inc.

Massachusetts $156,442,995 Minuteman Health, Inc.

Michigan $71,534,300 Michigan Consumer's HealthcareCO-OP

Minnesota NA NA

Mississippi NA NA

Missouri NA NA

Montana $85,019,688 Montana Health Cooperative

Nebraska NAl NA

Nevada $65,925,396 Nevada Health CooperativeNew NA NA

Hampshire

New Jersey $109,074,550 Freelancers CO-OP of New Jersey

New Mexico $77,371,782 New Mexico Health Connections

New York $174,445,000 Freelancers Health ServiceCorporation

North Carolina NA NA

North Dakota NA NA

Ohio $129,225,604 Coordinated Health Mutual

Oklahoma NA NA

Oregon2 $117,305,405 Oregon's Health CO-OP;Freelancers CO-OP of Oregon

Pennsylvania NA NA

Rhode Island NA NA



South Carolina $87,578,208Consumers' Choice Health

Insurance Company (CCHIC)South Dakota NA NA

Tennessee $73,306,700 Community Health AllianceMutual Insurance Company

Texas NA NA

Uta h $89,650,303 Arches Mutual InsuranceCompany

Vermont NA NAVirginia NA NAWashington NA NAWest Virginia NA NA

Wisconsin $56,621,455 Common Ground HealthcareCooperative

Wyoming NA NATable 13: State wise table ofACA loan to establish CO-OP Company

Only 22 (out of 51 states) have used this fund until March 2014.

Total loan awarded to these state is $2,088,892,884.

Only one state - Oregon - has two awardees.

All other states have only one awardee.

One awardee - CoOpertunity Health - serves in both Iowa and Nebraska.

All other awardees serve one state only.

$ 2.08 billion has already been utilize until January 1st, 2014.

$ 1.8 billion is still available for qualified loans.

Going through website of all 141 companies, which are offering products through Health Exchange, oneby one and finding out how many of these CO-OP companies have offered coverage from 1St January 2014has revealed that only 13 companies have offered plans in 14 states.

This means out of 22 states and 22 companies, only 13 companies are offering plans in 14 states. Restcompanies could not offer coverage beginning January 1 1t, 2014. In all possibility, these companies will beable to offer products in open enrollment season in 2014. Therefore, 2014 open enrollment season willsee more than 22 CO-OP companies offering products in 22 states.

Let us check the information present about some of these companies on their websites and find out theareas they are focusing on.



Arches Health Plan

Arches Health Plan came into existence in 2013 and is offering healthcare plans in Utah. Arches aimsto be the first consumer driven, CO-OP, Non Profit health Insurance Company in Utah and the themeof the company is to provide lower rate with a promise of better care. It has started offering planseffective October 1st, 2013 and coverage has started from January 1s, 2014.

Website of Arches Health Plan promises to deliver lower health plan cost with approach that websitecalls 'Medical Home' approach. Following content is from their website (Arches Health Plan, 2014)

'Medical Home

The medical home is best described as a model or philosophy of primary care that is patient-centered,comprehensive, team-based, coordinated, accessible, and focused on quality and safety. It is a placewhere patients are treated with respect, dignity, and compassion, and enable strong and trustingrelationships with providers and staff Above all, the medical home is not a final destination instead, it isa model for achieving primary care excellence so that care is received in the right place, at the right time,and in the manner that best suits a patient's needs."

Though the website does not offer how 'Medical Home' approach will bring the cost down, however,the CO-OP and nonprofit nature with focus on cost reduction may be able to deliver the results soonerthan later. Success registered by this company will prompt other states to promote companies on thesimilar lines and replicate the success.

Common Ground Healthcare Cooperative - CGHC

CGHC is very similar to the 'Arches Health Plan' above - a nonprofit, CO-OP company - and isoperating in Eastern Wisconsin area. CGHC is a creation of ACA, as its website states (Common GroundHealthcare Cooperative, 2014)

"In February 2012, Common Ground Healthcare Cooperative (CGHC) was awarded a loan from theU.S. Department of Health and Human Services to launch the new nonprofit health insurancecooperative and bring affordable health insurance to the region beginning January 1, 2014."

This is one of those positive effects of ACA that will drive the industry towards disruption. As in caseof 'Arches Health Plan', CGHC has also started enrollment from 1s October, 2013 and coverage hasstarted from 1st January, 2014.

Apart from these two companies on the similar model with ACA or State funding origin are

Table 14: CO-OP companies offering healthcare effective from January 1, 2014.

No COO Nam Stt 0omn

1 Arches Health Plan UT2 Common Ground Healthcare Cooperative WI Eastern Wisconsin3 Community Health Alliance TN4 Community Health Choice TX Southern Texas



5 Consumers' Choice Health Plan CA Operates in Southern California.6 Consumers Mutual Insurance of Michigan MI

IA, Operates in two states - IA and7,8 CoOportunity Health NE NE

9 Health Republic Insurance of New Jersey NJ10 Louisiana Health Cooperative LA11 Maine Community Health Options ME12 Meritus Health Partners AZ13 Montana Health CO-OP MO14 Sendero Health Plans TX

There is an interesting observation for 'Consumers' Choice Health Plan - CA' and 'Community HealthAlliance - TN': content, look and feel, and even the logo on the websites of these two companies aresame (just company name is different). This could be a sheer coincidence instead of strategy.

However, this indicates towards a very effective measure to control the cost. If the development of ITresources is shared by two or more CO-OP companies, it will bring down the IT cost substantially.Community CO-OP companies can do this the best as their marketing is based on Health Exchangeand word of mouth instead of ostentatious websites, offices, and costly advertisement campaigns.

These CO-OP companies can disrupt existing Healthcare System, these companies are nonprofit, andconsumer operated so they will be able to make decisions that are best suited for customers.

There is no expectation of a good return on investment, which could make these companies morecompetitive in the market. In addition, as provide a level playing field, these companies need notworry about costly advertisement campaign and other commercial gimmicks. Being locally operatedwill give them further opportunity to reduce cost by streamlining its operations.

11.7. Other Companies on Exchange

There are other companies operating in the exchange, however, most of them are operating in one ortwo states only. These are mostly existing insurance companies that are also offering insurance atexchanges. At this point, there are no radical, path breaking innovation expected from these companiesand any effects from these companies will be local only.

11.8. Disruptor System

Elements of the disruptor system are taking shape; however, there is no evidence of disruptor systemitself taking shape. Moreover, it is early to get that as coverage has just started from January 1, 2014 andopen enrollment is still going on.

Disruptor System Element Early Trend



Payer - New Disruptor Company Ambetter and CO-OP companies

New innovative processes to use existing technologies betterNew Disrupter Technology to reduce cost

New Regulation ACA

Non Participant Potential Consumer 6 million have opted for Healthcare thru Health Exchange

Provider MinuteClinic CVS and Walgreen Clinic

New Low Cost Product Plans offered in Health Exchange

New Supplier-Distributer Health Exchange

11.9. Conclusion

Early trends unambiguously indicate towards disruptor system formation. They also indicate that Health

Exchanges are a hit and there is no threat to their sustainability. Health Exchanges have added more than

8 million Americans under health insurance. Of this 8 million, an impressive 28 percent is young adult -

age 19 to 34.

As expected, an independent entity formed by existing insurance company is frontrunner to be new

disruptor company. However, CO-OP companies formed under ACA are not far behind. If they put their

act together, and with all ACA support to them, they could very well be the disruptor new company. In

this vast market, there is space for more than one company to be a disruptor, and Ambetter and CO-OP

companies both can survive and flourish at the same time.


Chapter 12: Challenges for Disruptor

In this chapter, we will analyze what challenges disruptor system will face or is facing. And what challengeselements of this system are facing individually.

12.1. Challenge for Disruptor System

In chapter 11 we have seen that elements of the disruptor system has taken shape however it is still tooearly to witness any system formation, so the first challenge is to form the system. Thought the disruptorsystem has not formed yet; let us see what challenges this system will have once it is formed.

Forming a disruptor system

A clear formation of disruptor system will be the first challenge for the elements of the system.Remember, the system offers more than sum of its parts offer so unless the system is formed, theseelements will not be able to reap all benefits of working together.

Moving up the value chain

Once the system is formed, next challenge would be to go up in the value chain. This might not be aquick and easy thing and it may take few years before Disruptor Company may start looking upwards.

Maintain quality and innovation

Healthcare services are very quality sensitive; these services cannot be tested in advance andproduced at the time of consumption only, which makes maintaining quality of services tricky. Forexample, delivering primary care to customer-this service is being produced by primary care providerand is consumed by the customer at the same time. Well-defined processes and procedures, andstrong adherence to them by the staff are key to quality service. However, this is easier said thandone.

Similarly, innovation should be an ongoing phenomenon. System needs to constantly innovate tomake healthcare more reliable, accessible, and cost effective.

12.2. Challenge for Disruptor System Elements

There are major challenges for the elements of the disruptor system even before the system can form.These challenges are for their very own success and survival. Their success lies in bringing efficiency, costeffectiveness, and accessibility to the reliable health care series. If the elements of the disruptor systemlive up to the expectation and meet these challenges then they will make disruption successful.



CO-OP Companies

The idea of CO-OP companies is based on nonprofit, which means no pursuit of profit. This will hinderits desire to disrupt the existing setup to some extent.

The main reason CO-OP companies are promoted by administration is to contain the profit thatprivate companies are making and bring down the cost by doing so. However, as the profit is not agoal, whether these companies are as willing to make processes and services more efficient to bringthe cost down will remain a question. The real benefits and objectives of ACA will remain unfulfilledunless efficiency comes into the processes and services in healthcare industry and moves the costdown.

Another factor that will not work so much in favor of these companies is economy of scale. As thesecompanies are regional - sometimes not serving a complete state even - with no intention ofbecoming pan American company, if we see a big picture it is obvious that multiple independentcompanies will be operating in country to provide services in one state and United States.

Some of functions of all these companies will be duplicate and be an unnecessary cost to consumers.For example - IT infrastructure - one portal for each company, one IT system for each companycosting support, maintenance, and enhancement. In contrast, one company-operating pan Americawill centralize many of its functions and infrastructure and will get benefit of economy of scale.Overhead or support function cost per service will be higher for these companies than a big nationalplayer.

As they will be regional nonprofit players, the incentives will be very minimal to innovate in long run.Same is true for administrative quality - as of today - almost all CO-OP companies offering coverageeffective January 1st, 2014 do not have a customer login capability. This capability is very importantand is a quality measure especially for young adult population.

Though, it is understandable that these are early days and new CO-OP companies may have teethingtrouble, however, it will be interesting to see how effectively and efficiently these troubles arehandled.

New Company from Existing Company

We have seen in chapter 11 that Ambetter is a new company formed by and existing health insurancecompany with the sole purpose of offering insurance plans in Health Exchange Marketplace.Challenges are plenty for any such companies as well.

The first challenge is to live with the contradiction - parent company is based on employer sponsoredinsurance provider company whereas the child company is an individual insurance provider company.These are two very diverse stream of health insurance. The child company needs to scale thesecontradictions even being dependent on parent company in many ways.

Another challenge for any such company to think beyond the existing system. Child Company with itsparent in the existing system will not work well to serve the kind of market it is striving to serve. Itwould need to find new partners and spearhead the evolution of new system to be successful.



Retroactive interference in learning - past learning interfering with new learning - will be another

challenge for this company. Parent company has had certain ways of doing things to cater to its market

and the child company will learn to perform same function in a new way to be more effective in its

market; here retroactive interference will pose a challenge for Child Company.

Provider - Minute Clinic

CVS MinuteClinic and Walgreens Healthcare Clinic have capacity to innovate from provider side and

offer primary and preventive care at low cost. Biggest challenge for them would be to become the

part of the system as a reliable healthcare provider partner. Once they are the part of the system,

they will be able to get customers in bulk and provide agreed upon reduced pricing to the 'in system'

customers. This will not only be beneficial to them but also to the system as well.

Other challenge for them would be to bring the cost of the medicine and medical supplies down.

Shifting focus to generic medicine for 'in system' customers would be one way, however, they would

need to do so with minimum damage to their pharmacy profit margin. Some goes for medical supplies

as well.

Regulator

Main challenge for regulator is to get ACA implemented in its true spirit. Open enrollment that started

on October 1, 2013 had a very bumpy ride initially - the website breakdown, confusion, and delay in

fixes - that send jittery signals to administration and common people. Though it was not the direct

fault of regulators, nonetheless, it was their responsibility to make it success. After this initial hiccup,

things went pretty smoothly and more than 6 million individuals have opted for coverage using health

exchange marketplace.

There are certain pieces, which still need to be resolved, such as - how IRS will collect the ACA penalty

if someone does not have insurance? And legal and technical questions surrounding IRA collecting

this penalty.

Another challenge for regulators is the participation of young people. This participation is close to one

third, but not in the numbers, experts had expected. Attracting young adults is an important factor in

ACA's success. Young adults are generally healthier and less expensive, thus they can offset the

healthcare cost on older Americans. Most importantly, today's young population is tomorrow's old

population, if they come in healthcare today and get preventing and primary screening, tomorrow's

old population will be a lot more healthier. One main objective of ACA - changing behavior of

Americans for better health - will not be fulfilled unless all young adults come into healthcare net.

The challenges for regulators are not only legal, compliance, and enforcement but they are political

too. Keeping everyone happy and get buy in from everyone is a tough challenging job.

Lastly, they need to learn quickly and improve the law to make it more pragmatic and effective. They

should keep their focus on "Quality affordable Healthcare for all Americans".



Health Exchange

Finally, we come to health exchange - health exchange is the engine, which is powering the disruptionin Healthcare as it is providing a level playing field to all companies and is transparent to consumer.

Setting up health exchange is done by states and federal government. As setting up exchange is onetime cost so, state and federal government can take it up (though many states have refused to bearthe cost). However, Sustainability of Health Exchange will be major challenge for them.

Primarily, Governments may not be willing to pump taxpayer dollars in Health Exchanges endlessly.Secondly, if Health Exchanges are not sustainable, some government can pull the plug in future as itis essentially taxpayer's money that is going into it.

With our study in chapter 8 and the number of enrollment available, it appears that all exchanges willbe sustainable fairly quickly. However, it will remain a challenge for them to become self-sustainable.

The push to sign people up for Health Insurance at Marketplace will not end on March 31. It will beginall over again on November 15 when open enrollment starts for 2015. In addition, the bar will bemuch higher in coming years. Keeping the bumpy start this year in mind, Health Exchanges needs todo a better job in the coming open enrollment season.

12.3. Conclusion

The biggest challenge for a disruptor company is to form a disruptor system. Disruptor System formationwill be the biggest step towards the successful disruption of Group Health Insurance based HealthcareSystem today.

Individual elements of the system have and will have challenges of their own. Elements of DisruptorSystem will have to use their strength and innovate, wherever required, to meet these challenges.Formation of disruptor system will also help them in meeting these challenges.


Chapter 13: Conclusion

This is the first enrollment season of open enrollment season and it is just the start of a start. As of today,March 30, 2014, health insurance coverage has already started for more than 2 million, and, healthinsurance coverage will start for more than 4 million people coming April 1, 2014. Thus, more than 6million people will have health insurance coverage purchased thru Health Exchanges.

Therefore, it is just the start of a start.

With the analysis here, we can see Individual elements of disruption are making presence felt. Moreentities will join these elements of the system in coming time. This clearly shows that

V Healthcare industry is ready for disruption

V Initial signs for start of disruption are visible

However,

V There is no clarity whether disruptive system formation has started, probably it is too early to lookfor these signs

There is no sign that conscious efforts are underway to disrupt Healthcare System

System formation will start as coverage has started from January 1, 2014. System formation will take sometime and it would be a bit trial and error process as well. It may take 3 to 4 open enrollment season to seecredible disruptor system formation.

Currently entrants are entering the individual market sensing business opportunity. There is no indicationthat entrants are entering market sensing disruption opportunity and there is no conscious disruptioneffort visible.


Chapter 13: Conclusion


Notes:


Appendix

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ReferencesAmbetter. (2014). Ambetter. http://www.ambetterhealth.com/. Retrieved March 14, 2014, from

http://www.ambetterhealth.com/Arches Health Plan. (2014). Arches Health Plan Website. Utah: Arches Health Plan. Retrieved

03 14, 2014, from http://www.archeshealth.org/about-arches-health-plan/BridgeSpan. (2014). BridgeSpan. https://www.bridgespanhealth.com. Retrieved 3 15, 2014, from

https://www.bridgespanhealth.comChristensen, C. M. (2000). The Innovator's Dilemma. Boston: HarperCollins Publishers Inc.Christensen, C. M. (2009). Innovator's Prescription. New York: McGraw-Hill.Clifford T. Morgan, R. A. (2000). Introduction to Psychology. MCGRAW-HILL BOOK

COMPANY.Common Ground Healthcare Cooperative . (2014). CGHC. Eastern Wisconsin:

http://www.commongroundhealthcare.org. Retrieved 03 15, 2014, fromhttp://www.commongroundhealthcare.org/about-cghc-3/

Deolitte. (2013). Power to the People. Retrieved from www.deolitte.com:http://www.deloitte.com/view/enUS/us/Industries/health-plans/07f626 1 e 1 8c063 1 OVgnVCM3 000001 c56f00aRCRD.htm

Department of Health and Human Services. (2014, May 1).http://aspe. hhs.gov/health/reports/2014/MarketPlaceEnrollment/Apr2Ol4/ib_2014Apr-enrollment.pdf Retrieved from http://aspe.hhs.gov/:http://aspe.hhs.gov/health/reports/2014/MarketPlaceEnrollment/Apr2O14/ib_2014Apr-enrollment.pdf

Individual Marketplace Data, M. 2., & https://data.healthcare.gov/. (2014, 03 07). QHPLandscape Individual Market Medical Excel. Baltimore, MD 21244: A federalgovernment website managed by the U.S. Centers for Medicare & Medicaid Services.Retrieved from https://data.healthcare.gov: https://data.healthcare.gov/dataset/QHP-Landscape-Individual-Market-Medical-Excel/ga2z-ezhp

Kaisar Family Foundation. (2014, 03 15). http://kff org/health-reform/state-indicator/co-op-loans/#note-1. Retrieved from http://kff.org/: http://kff.org/health-reform/state-indicator/co-op-loans/#note- 1

National Business Coalition on Health, & . (2014). http://www.nbch.org. Retrieved fromhttp://www.nbch.org/CO-OPs.

Prof. Crawley, E. (2013). System Thinking. Cambridge, MA.USA, D. o. (March 1, 2014). HEALTH INSURANCE MA RKETPLACE: MA RCH

ENROLLMENT REPORT. Department of Health and Human Services - USA. Retrieved03 15, 2014, fromhttp://aspe.hhs.gov/health/reports/2014/MarketPlaceEnrollment/Mar2O14/ib_2014marenrollment.pdf


Table of FiguresFigure 1 - G estalt Psychology Triangle...................................................................................... 19Figure 2: System Breakup - Its entities, and form and function of entities............................... 20Figure 3: Healthcare System from System Perspective ............................................................ 22Figure 4: Affordable Care Act on Timeline............................................................................... 25Figure 5: Objectives of Affordable Care Act............................................................................ 29Figure 6: Healthcare System with its elements as subsystem................................................... 33Figure 7: Existing (Disrupted) System ..................................................................................... 38Figure 8: N ew D isruptor System .............................................................................................. 39Figure 9: Peripheral Disruptor System in action to Disrupt Nucleus System........................... 40Figure 10: Percentage Uninsured by Single Year of Age 0 to 64............................................. 44Figure 11: Change in Uninsured Rates 2008-2012................................................................... 44Figure 12: Uninsured Population in USA 2012 Data .............................................................. 45Figure 13: Health Insurance Penalty from year 2014 to 2016 and beyond .............................. 46Figure 14: Current Group Insurance - Every insured is an ID ................................................. 48Figure 15: Group Insurance Multi Chart ................................................................................... 49Figure 16: Individual Health Insurance - Individual Identities Recognized and Acknowledged 50Figure 17: Health Exchange Marketplace Website Snapshot.................................................... 51Figure 18: Types of Plan available at Marketplace. Information taken fromhttps://w w w .healthcare.gov. ......................................................................................................... 51Figure 19: Shop for Plans at Marketplace. Information taken from https://www.healthcare.gov.52Figure 20: Compare Marketplace Plans. Information taken from https://www.healthcare.gov... 53Figure 21 Cross-Functional Chart - Insurance with Health Exchange...................................... 54Figure 22: Group Insurance Vs Individual Insurance............................................................... 57Figure 23: How marketplace works.......................................................................................... 60Figure 24: Vensim model showing Sustainability calculation part .......................................... 62Figure 25: Percentage of premium towards operating revenue - Vensim model variable ..... 63Figure 26: Number of people enrolled in exchange - Vensim calculation model.................... 64Figure 27: Sustainability Graph by Vensim Model ................................................................... 68Figure 28: Sustainability Values from Vensim Model .............................................................. 69Figure 29: Number of people enrolled in Exchange - Vensim Model...................................... 70Figure 30: Number of people enrolled in Exchange - Vensim Model...................................... 70Figure 31: Disruptor System Elements ..................................................................................... 73Figure 32: Flows in Healthcare system..................................................................................... 79Figure 33: Relationship between 1-year survival rate and total inpatient cost. ......................... 81Figure 34: Cost and Q uality M atrix.......................................................................................... 82Figure 35: Shift from integrated to modular architecture .......................................................... 83Figure 36: No tobacco message from CVS website ................................................................ 90


Table of TablesTable 1: Healthcare System Form and Function........................................................................ 23Table 2: Key Features of Affordable Care Act .......................................................................... 30Table 3: ACA objectives and their effect on Healthcare System Elements .............................. 34Table 4: Three sim ulated case param eters ................................................................................ 66Table 5: Sustainability Summary from Vensim model............................................................. 69Table 6: Enrollment in Health Insurance Exchange ................................................................ 74Table 7: Exam ples of Healthcare W aste ................................................................................... 84Table 8: Services Offered in CVS Minute Clinic ..................................................................... 95Table 9: Companies Operating in Heath Exchange and State of Operation Data Key Points...... 98Table 10: Number of companies operating in State Exchanges .............................................. 99Table 11: Number of states covered by some companies........................................................... 100Table 12: Company Name and State of Operation: two views: State View - Pivot on State:Com pany V iew - Pivot on Com pany ......................................................................................... 100Table 13: State wise table of ACA loan to establish CO-OP Company..................................... 113Table 14: CO-OP companies offering healthcare effective from January 1, 2014..................... 114


Table of AbbreviationACA - Affordable Care ActCBO - Congressional Budget OfficeHE - Health Exchange

ACS - American Community SurveyOC - Operating Cost

OR - Operating Revenue

CO-OP - Consumer Operated and Oriented PlanUSPS State Abbreviation - US State Table

AK Alaska KY Kentucky OH OhioAL Alabama LA Louisiana OK OklahomaAR Arkansas MA Massachusetts OR OregonAS American Samoa ME Maine PA PennsylvaniaAZ Arizona MD Maryland PR Puerto RicoCA California MI Michigan RI Rhode Island

CO Colorado MN Minnesota SC South_______Carolina

CT Connecticut MO Missouri SD SouthI___ Dakota

DC District of MS Mississippi TN TennesseeColumbiaDE Delaware MT Montana TX TexasFL Florida NC North Carolina UT Utah

GA Georgia ND North Dakota VI Virgin_______ Islands

GU Guam NE Nebraska VT Vermont

HI Hawaii NH mpshire VA VirginiaIA Iowa NJ New Jersey WA WashingtonID Idaho NM New Mexico WI WisconsinIL Illinois NV Nevada WV West VirginiaIN Indiana NY New York WY Wyoming

KS Kansas


130

130

Index

Affordable Care Act. 1, 3, 11, 25, 26, 29, 30,32, 33, 45, 74, 77, 84, 111, 130Objectives of ACA ............................ 29

Beneficiary ............................. 14, 24, 34, 78CO-OP Companies ........................ 111, 118Cost of Overservice ............................. 80Cost of Quality Healthcare ................... 80Dilemma of Incumbents ....................... 55Disruption in Healthcare....................40Disruptive innovation ....................... 37Disruptive Innovation............. See Disruptive

Innovation - System Perspective6.3. Disruption - System Approach ...... 37

Disruptive Innovation - System Perspective........... ................ See System

Disruptor System Elements..................73Early Trends ........................................ 93Factors leading to Disruption................43Group Insurance .............. 16, 48, 49, 56, 57Health Exchange

Health Exchange - Sustainability ......... 59

Health Exchange Marketplace .......... 95How Model Works............................65Operating Cost ................................. 61Operating Revenue...........................62Overview of Model............................60Simulated Cases ............................. 66

Health Exchange Marketplace..............47Individual Insurance ... 16, 43, 47, 56, 57, 89Provider13, 17, 18, 21, 23, 34, 93, 109, 116,

119Regulator ....................... 14, 21, 24, 34, 119S ystem ................................................. 19

ACA Systems Perspective ................ 33Disruptive Innovation - System

Perspective .................................. 37Elements of System..........................20Form ............................................... . . 2 1Function........................................... 21Health Insurance -As a System.....21System Boundary ............................. 20

Who Could be Possible Disruptor.........87


disruption of the group health insurance in light of the affordable care act-system approach

Documents