The Great Exchange
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January 2015
The Great Exchange: 
Health Insurance Approaches a Tipping Point
Scot McConkey, Executive Vice President, Healthcare 

The health insurance industry is approaching a "tipping point" which will cause a major shift - one that promises to change how insurance coverage is marketed, sold, and consumed. Here's our perspective on how the Exchanges will transform the industry - and what health insurers can do to compete.


To capture some much-needed data on the initial rollout of the Public Healthcare Exchanges - and to understand what health insurers experienced during the process - The Nolan Company recently interviewed health plan leaders representing more than 40 marketplaces. Our findings revealed that despite facing significant operational challenges during deployment, insurers remain committed to the Healthcare Marketplace (i.e. Public Exchanges).


Although it's too early to know how profitable the Public Exchanges will be, insurance executives believe early results are promising - and most plan to expand their market presence. In fact, in a recent earnings call, UnitedHealth Group announced their intent to expand from five marketplaces to "as many as two dozen."  In addition, two recent studies done by the Kaiser Family Foundation reported that the average premium for employer-sponsored health insurance rose 3% in 2014 ,  while the average premium for the benchmark silver plan in 16 markets will decrease by .8% in 2015 - this isn't yet proof that Exchanges will be successful in managing costs, but it is a promising start.


While there is still some debate over the actual number of members in the Healthcare Marketplace, there's no question that several million have enrolled.  The CBO believes membership for the 2015 plan year will approach 13 million, and expects membership to plateau at around 24 million over the next few years . Given the industry's commitment to the marketplace and the number of members enrolled, we believe the Public Exchanges are here to stay.


At the same time, it appears Private Exchanges are also gaining popularity. A recent report from the Kaiser Family Foundation counted more than 20 Private Exchange platforms in the market, and set the number of members enrolled in 2014 through Private Exchanges at approximately 2.5 million . The report echoes other industry research that projects enrollment in Private Exchanges could reach more than 40 million - surpassing that of the Public Exchanges. Still more studies, including one by Array Health, indicate that employers expect the market to continue its current shift from "defined benefit" to "defined contribution." In addition, the Institute for Healthcare Consumerism (IHC) found that 42% of insurers plan to participate in a Private Exchange by the end of 2015, and 75% will participate by the end of 2016 .


As long as the industry continues its early acceptance of the Public Exchanges - as we believe it will - the Private Exchanges will be fast followers. At the projected rate of adoption, combined membership in the online marketplaces could soon exceed 50 million - a population approximately one-third the size of today's commercial membership, and approximately the same size as the Medicaid and Medicare markets. If this happens, the health insurance industry will certainly reach a tipping point.


The Marketplace of the (Near) Future

Exchanges don't necessarily mean the demise of employer-sponsored health insurance - it is just a means for employers to move to a defined contribution model while providing choice for members.


For the most part, the new Exchange marketplace will exist online. That means legacy health insurers will have to adapt to support a new, web-based model. There is also evidence that members participating in Exchanges are increasing using member support tools to navigate.


Perhaps more importantly, the future marketplace will essentially look, feel, and act as a true business-to-consumer (B2C) environment. While our interviews and other industry research indicate that consumers in the marketplaces made their plan selections primarily based on price, we're also seeing price transparency driving cost compression - and we expect prices to normalize over the next few years. So, while price will still be important, we don't believe it will be a differentiator. In short, health insurers must learn how to attract, service, and retain members in an online, B2C world.



This shift also gives new entrants a potential advantage, since they won't be weighed down by legacy operations, and can create capabilities specifically for an online, B2C marketplace. But the industry is complicated, and most outsiders underestimate the necessary investments. New players will be hard-pressed to set up customer-facing, real-time back-office operations. More importantly, they'll need to build the networks and wellness programs that provide long-term value. Ultimately, it may be easier for new entrants to develop intuitive portals and tell compelling stories than to implement meaningful health insurance capabilities.


Prior to the dot-com collapse, many in the industry believed that new entrants would invade the marketplace and "disintermediate" health insurers - and they reacted by spending billions in a rush to launch online capabilities. Ultimately, the dot-com bubble burst, and disintermediation never happened. But the initial growth in the Exchanges suggests that things could indeed be different this time. That means one of the biggest threats for health plan leaders may be inaction.



Established health insurers do have some advantages over new players, provided they move now. To adapt quickly and smoothly, health plans will need four essential attributes:


  1. A Recognizable Brand: Until now, most plans have been focused on employer groups or government programs, and there's been little emphasis on the individual commercial "customer." It's time for insurers to start building and maintaining positive reputations with individual members. A strong, established brand can help make entry costs higher for new players.
  2. A "B2C" Operating Environment: Most health insurers have not had the end-to-end administrative capabilities to support direct, real-time interactions with members. But today's consumers expect clear, simple, accurate, and seamless transactions. Plans need to develop intuitive, consistent, accurate, and cost effective processing capabilities.
  3. Value-based Relationship with Members: Insurers need to develop a member engagement strategy that wraps products, services, communications, and support mechanism into a cohesive experience where the member perceives value.  As members become educated consumers and make purchasing decisions on factors beyond price and network insurers that have a clear value proposition for consumers can stand out in what will be a competitive marketplace.
  4. Provider Partnerships: In the new marketplace, provider relationships will be more important than ever. First, providers are moving toward value based contracting, and they will need help launching and supporting new models. Second, provider satisfaction will have an even greater influence on a member's experience. Traditionally, a member's satisfaction with a health plan has been tied closely to their experience with the network. And when a provider is unhappy with a member's carrier, they often let the patient know about it. Solid provider relationships, contracts, and services will not only help control medical costs, but also improve member experience.


The Healthcare Marketplace segment continues to grow and will become increasingly competitive. In the battle for market share, plans that can build customer-friendly operations, develop appropriate products and services, and learning how to truly engage members - develop a value-based relationship with their members - should do well, from a membership growth and retention perspective, in the evolving marketplace.


If you have any questions or comments about the article, or you are interested in seeing the results of our survey, please don't hesitate to contact Scot McConkey, Executive Vice President, at


2014 The Nolan Company