The Fit for Growth
journey for health
plans
A strategic
framework for
winning a
two-front war
Contacts
Chicago
New York
San Francisco
Mike Connolly
Senior Partner
+1-312-578-4580
mike.connolly
@strategyand.pwc.com
Gil Irwin
Senior Partner
+1-212-551-6548
gil.irwin
@strategyand.pwc.com
Thom Bales
Partner
+1-415-627-3371
thom.bales
@strategyand.pwc.com
Anil Kaul
Partner
+1-312-578-4738
anil.kaul
@strategyand.pwc.com
Frank Ribeiro
Partner
+1-973-410-7667
frank.ribeiro
@strategyand.pwc.com
Pier Noventa
Partner
+1-312-578-4877
pier.noventa
@strategyand.pwc.com
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About the authors
Thom Bales is a partner with Strategy& based in San Francisco. He
specializes in operations, technology, and transformation strategy in the
healthcare industry.
Anil Kaul is a partner with Strategy& based in Chicago. His areas of
expertise are organizational design, performance measurement, process
design, cost analysis, implementation of business process outsourcing/
offshoring, and shared services.
Pier Noventa is a partner with Strategy& based in Chicago. He
specializes in operating model transformation, lean operations, and
technology strategy in the healthcare industry.
Frank Ribeiro is a partner with Strategy& based in New York. He
focuses on overall corporate transformation and associated capabilitybuilding programs to increase an organization’s effectiveness and
efficiency.
This report was originally published by Booz & Company in 2013.
Chase McCann, Preetha Sekharan, and Neeharika Vinod also contributed to this report.
Strategy&
3
Executive summary
U.S. health insurers are facing a structural change in the dynamics of
their industry, which has embroiled many of them in a two-front war:
Payors must formulate strategies and invest in new capabilities to grow
in the new and restructured markets of the post-reform era, and at the
same time, they must contain costs — not only to cope with
unprecedented margin pressure, but also to fund and support growth.
To win in this environment, payors should consider a Fit for Growth*
regime that fuels strategic growth, nurtures essential capabilities, and
ensures cost competitiveness.
No matter how payors choose to differentiate themselves from their
competitors in the coming years, they can prepare for growth by
fostering strategic clarity, identifying the organizational capabilities
that will be required to execute the strategy, aligning resources in order
to transform the cost structure and generate investment capital, and
building the supportive organization required to create sustainable
change, align management, and mobilize staff. Strategy& analysis
shows that payors that adopt and utilize such an approach can win a
two-front war in the marketplace.
* Fit for Growth is a registered service mark of PwC Strategy& Inc. in the United States.
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A two-front war
Changing conditions have precipitated a structural break in healthcare
that has rendered many payors’ business models obsolete. Top-line
growth is being constrained by a number of factors, including a
softening in the secular inflation in medical costs, anemic investment
yields, and rising numbers of coverage buy-downs and self-insurers.
Further, payors’ near-term and long-term outlooks are being disrupted
by a host of forces, including an aging member base, rising levels of
chronic disease, emerging consumerism, and the mandates of reform.
In response to these conditions, payors are rightly searching out new
growth opportunities, which boil down to two main options: expansion
into new markets, such as insurance exchanges, and the delivery of
differentiated value in existing markets (via accountable care
organizations, for example). Often, these opportunities require that
payors revamp their value propositions — that is, their way to play —
to differentiate themselves in the marketplace. They will need to build
new capabilities systems — the three to six interlocking capabilities
required to execute a strategy. And they will need to create new
operating models — redesigning their front office, middle office, back
office, and corporate operations to properly align with their strategies
and position payors to successfully compete in the market.
Pursuing new value propositions, and putting into place the new
capabilities and operating models that will be required to execute them,
calls for levels of investment that can be sustained in the long term only
by transforming the cost structure. Many payors are already pursuing
cost efficiencies, but in a time when the need for capital investment in
the industry is reaching historical peaks, they will have to maximize the
returns generated by their cost initiatives and ensure that they can
sustain lean operations going forward.
In short, payors will need to fight a two-front war: successfully
positioning themselves to grow in their chosen markets through
substantial capability development efforts and simultaneously pursuing
step changes in the cost base and capital generation.
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The Fit for Growth* journey
The major challenge for payors in this two-front war is aligning their
strategic goals and their cost structures. They will need to channel
investment to the handful of capabilities that truly differentiate the
company in the marketplace and support its strategy, perform tablestakes functions as efficiently as possible, and reduce or eliminate all
other expenses. In short, a payor’s resources must flow to “good” costs
— those that differentiate the company — and away from “bad” costs.
The result is a leaner, stronger, more strategically focused organization
with improved financial performance.
A recent analysis by Strategy& of leading national and regional health
insurers revealed a correlation between a payor’s Fit for Growth Index
Score and its total shareholder return (see Exhibit 1, next page).1 What
drives this performance? Payors that have followed a Fit for Growth
journey reap substantial benefits. Applying a capabilities-based perspective
can yield new insights that are not clear through traditional lenses, such as
product, customer, and geographic views. They also have the opportunity
to transform their operating models and use those models to enable and
sustain change. Moreover, they can implement changes that stick by
articulating an explicit link between growth and cost structure (which
creates a positive rationale for cost cutting and reduces organizational
resistance from Day One of the Fit for Growth process).
To ascertain whether they are ready for growth, payors should step back
from the fray and ask themselves three questions:
1. Do we have clear growth priorities that drive investments?
2. Are resources and costs deployed toward those priorities efficiently
and effectively?
3. Are the requisite organizational elements in place to achieve those
priorities?
* Fit for Growth is a registered service mark of PwC Strategy& Inc. in the United States.
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Exhibit 1
Payors with high Fit for Growth Index scores enjoy superior financial performance
100.0
90.0
80.0
R2=.51
70.0
60.0
Normalized total
shareholder return
(TSR) score
50.0
40.0
30.0
20.0
10.0
0.0
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
4.2
4.4
4.6
4.8
5.0
Fit for Growth Index score
Source: Strategy&
These questions correspond to the three building blocks of
organizational fitness: strategic clarity, resource alignment, and a
supportive organization (see Exhibit 2, next page).
Building block 1: Strategic clarity
To properly align costs with the strategic priorities of the business and
optimize results, payors must first attain strategic clarity. Strategic
clarity requires that a payor either tailor its ways to play to different
businesses (if sufficient resources are available) or focus on a single way
to play.
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Exhibit 2
The Fit for Growth framework
Company’s way to play
- Articulates how the business creates differentiated value for customers
Supported by
Strategic clarity
Supported by
Supported by
Resource alignment
Supportive organization
- Creates an explicit link between
growth and costs—reinvesting
in the business is a clear
objective and is tracked, unlike
traditional cost-cutting
programs
- Uses the company’s operating
model to enable and sustain
changes
- Aligns organization structures,
jobs, and incentives to enable
differentiating capabilities
- Identifies misaligned investment
and overinvestment
- Establishes clear decision rights
and governance mechanisms to
enable work across silos
- Adopts a capabilities lens for a
fresh perspective, identifying
new insights that are not clear
through traditional lenses, such
as product, customer, and
geographic views
- Fosters capability alignment
across functional boundaries
and processes
- Identifies transformational
opportunities to change the
operating model (e.g.,
digitization)
- Creates investment discipline
through “capability blueprints”
that outline what’s different and
what’s required for each
differentiating capability
- Fosters and rewards a culture of
ownership and continuous
improvement
- Makes change stick by
harnessing the informal
networks within the organization
- Establishes leadership
alignment with strategic
priorities throughout the
organization
Source: Strategy&
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Strategy&
For example, one national plan recently faced a set of challenges that
will be familiar to many payors: increased pressure to be as lean as
possible, the need to stand up new models of care delivery and
reimbursement, and a significant shift to retail business.
In response, the plan’s senior leaders articulated a strategy that called
for expansion into the fast-growing small-group and individual
segments, international markets, and new businesses, including
integrated care delivery and health IT. To support these strategic
thrusts, they made a deliberate choice to invest in new differentiating
capabilities, such as consumer engagement and population health
management.
Strategic clarity begins at the enterprise level, but must be extended to
segment or business unit levels when they require different strategic
emphases. For example, the leaders of the national plan decided to
pursue a low-cost platform to win in the small-group and individual
market segments. Then they defined a specific capabilities system for
this business that included a tiered broker compensation plan bolstered
by self-service channels and robust CRM capabilities, a streamlined
quote-to-card process, narrow provider networks, and agile, lean
service channels.
There is a greater risk that strategic clarity will become muddled when
a payor attempts to pursue multiple ways to play simultaneously — for
instance, when a large payor enters several unrelated businesses.
Success requires a different capabilities system and business model for
each, yet a payor may try to pursue them all with one capabilities
system and operating model, sacrificing effectiveness for operating
efficiencies. Another issue is that this approach divides the
organization’s focus and resources, which may not be sufficient to
support multiple ways to play. Choosing only one way to play requires
courage and conviction on the part of the senior leaders and typically
entails an opportunity cost. However, companies that adopt
a single, properly differentiated way to play usually outperform their
industries and their less focused peers.
Companies
that adopt a
single, properly
differentiated
way to play
usually
outperform
their industries.
In either case, a company must adopt a rigorous approach to identifying
and weaving together the organizational capabilities required to
successfully execute its way (or ways) to play. Objective appraisal is
critical to a payor’s success at identifying the capabilities needed to
create a distinctive advantage and ascertaining the organization’s
ability to establish and develop those capabilities. To this end, payors
should categorize their existing and required capabilities as follows (in
ascending order of resource priority):
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• Non-required capabilities: unessential to the organization, and often
left over from previous business models
• Lights-on capabilities: required for any company to function,
regardless of industry (HR, real estate, tax reporting, etc.)
• Table-stakes capabilities: required to compete in the industry
• Differentiating capabilities: the three to six capabilities that are
essential for executing the payor’s way to play
Building block 2: Resource alignment
Once a payor has identified its way to play and the capabilities system
needed to support it, its leaders will need a vehicle for making optimal
decisions as to how to prioritize and spend the company’s resources.
Such a vehicle enables leadership teams to confidently undertake a
transformational redesign of the organization’s cost structure in a way
that will not only fund growth, but also eliminate low-productivity
investments. This begins by asking what costs are required to achieve
the organizational strategy before savings targets are identified.
Consider a regional payor seeking to differentiate itself in its markets
through a combination of consumer engagement and high-quality care
delivery. It transformed its cost structure using three levers:
capabilities, operating model, and operational excellence.
In terms of capabilities, the payor adopted a segmented consumer model
better matched to member needs. It also shifted work to providers by
digitizing medical management functions that offered them added
value, such as clinical pathways and evidence-based protocols. Last, it
reduced its focus and cut costs on its lights-on and table-stakes
capabilities, such as claims processing and other back-office functions.
In terms of operating model choices, the payor consolidated duplicative
support functions within its business units and market teams into
common shared services. It consolidated its internal sales force. It also
simplified its offerings, reducing complexity by aligning products,
processes, and platforms end-to-end for priority offerings and shutting
down high-cost, unprofitable products.
Finally, in terms of operational excellence, the payor migrated to lowcost benefit plans that feature less complexity and more digital, selfservice interaction. It also shifted routine, commoditized work to
locations with lower labor costs and adopted work-at-home policies.
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As this example suggests, payors should begin by identifying the root
causes of costs and then determine whether they are related to
differentiating capabilities that support the company’s way to play.
Non-required capabilities and the costs associated with them —
including lights-on and table-stakes capabilities — need to be
challenged and targeted for elimination. At a minimum, payors can
increase their efficiency in these areas, through outsourcing and other
levers. At the same time, companies should invest in differentiating
capabilities in order to establish best-in-class service levels that are
difficult for competitors to match.
Toward this end, payors should do the following:
• Establish clear criteria within the company to determine which
investments enable differentiating capabilities and which
investments are linked to table-stakes capabilities.
• Focus investments on truly differentiating capabilities in pursuit of
best-in-class service levels.
• Calibrate table-stakes and lights-on capabilities to avoid
overinvestment and achieve best-in-class cost levels.
Resource alignment is very different from the cost-cutting initiatives
that are traditionally undertaken in the industry. Conventional cost
cutting usually devolves into austerity programs that carve out costs
with broad, indiscriminate strokes. It cripples growth initiatives in the
quest to capture savings, demoralizes employees and stimulates
resistance, and pursues short-term solutions that cannot be sustained
over the long term. By contrast, resource alignment embraces the
strategic context of the enterprise, invests in growth, and leaves the
organization stronger in its wake.
Resource
alignment
embraces the
strategic context
of the enterprise,
invests in
growth, and
leaves the
organization
stronger.
Building block 3: Supportive organization
The final building block in a Fit for Growth regime is the creation of an
organization that supports the payor’s way to play, its capabilities
system, and a strategically aligned, lean cost structure — that is, a
supportive organization.
A supportive organization facilitates and sustains transformative cost
reduction. It enables and maintains investment in differentiating
capabilities. It encourages and empowers employees to act like owners.
And it is capable of change — able to thrive in a state of continuous
transformation.
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Toward these ends, the organization is designed — that is, its parts are
organized, linked, and staffed — to meet the company’s strategic
objectives. And its culture — the predominant beliefs, behaviors, and
practices that shape how work is done — is expressly established and
nurtured to support the strategy.
For example, a large payor created a supportive organization to bolster
its transition from a highly centralized and hierarchical management
model to a more customer-focused regional model. To achieve this, the
payor pushed decision making further down into the organization. It
also underwent a significant culture evolution initiative that built on the
strengths of its organization and modified behaviors and practices that
were counterproductive.
This initiative identified and clearly specified the behaviors expected at
each level of the organization, and it began at the C-suite level, where
the company devoted significant time to aligning and driving action
among senior leaders via a clear case for change. This investment in
time and executive resources resulted in a viral network of leaders, who
became responsible for understanding future-state expectations and
who became instrumental in creating action plans and driving change
across the organization.
Supportive organizations have two main components:
Design: In supportive organizations, the “greater good” of the
organization’s strategy and the hierarchy of capabilities — from nonrequired to differentiating — always guide the decision-making process.
Because these priorities trump the political desires of individual
executives and the demands of functional silos, decisions are
transparent.
Operating mechanisms are deliberately structured in ways that support
analysis, effective solutions, and sound decision making. They prompt
the “right fights” instead of biased advocacy, along with the ability to
access pertinent information in a timely manner and the early
identification of both needs and concerns.
The supportive organization also requires properly and clearly aligned
structures, roles, and incentives. The formal definition of what gets
done and how it is rewarded must be aligned to capabilities, to ensure
that efforts are focused in the right areas. Additionally, understanding
which roles enable differentiating capabilities provides the opportunity
to place the best talent in positions that will have the greatest impact on
performance and outcomes.
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Culture: The supportive organization features a tailored culture that
flows from a payor’s strategy and is designed expressly to support it.
This is accomplished by understanding and managing the formal and
informal networks of people, norms, commitments, and mind-sets that
shape how work is done in the company.
• Networks include the relationships and levels of collaboration within
the company. Payors with strong networks can bridge organizational
boundaries and enable staff to come together and move quickly.
• Norms are the values and standards of the organization. They should
embrace innovation, thoughtful risk taking, and speed, while
adhering to the dictates of compliance.
• Commitments include shared visions, objectives, and accountability.
They should endow employees with the drive to win and pride in
their organization and work.
• Mind-sets are the identity, shared language, and beliefs of the
organization. They should enable people to see how their work is
connected to the vision and strategy of the company.
Culture change efforts often fail, but we find that these failures almost
always stem from one or more of four causes: lack of leadership and
leadership alignment; lack of preparation and support; lack of
organizational alignment with change goals; and lack of change-related
metrics and rewards. These pitfalls can be avoided and the outcomes of
cultural change initiatives can be significantly improved by activating
seven essential components of change (see Exhibit 3, next page).
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Exhibit 3
The essential components of sustainable change
Energizing approach
Create energy about the vision behind the changes, using top-down and viral methods
Leadership alignment
Align leaders around owning the vision, and mobilize them to model behavioral changes
Behavior focus
Focus on changing a few critical behaviors first, then mind-sets
Case for change
Drive commitment by pulling both rational and emotional levers
Driving change internally
Organizational culture
Talent requirements
Monitor and manage the transformation by putting in place ongoing reinforcing mechanisms
Leverage existing culture as well as the formal and informal to change behavior
Integrate people requirements and help close capability gaps
Source: Strategy&
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Strategy&
Unleash growth
Although a Fit for Growth regime requires all three building blocks,
payors can choose to pursue them in several different ways. The most
ambitious approach begins with an enterprise-level strategic
assessment, in which the focus is on overall financial performance
improvement and operating model transformation. This option seeks to
create a “big ticket” capability blueprint and drive the development of a
capabilities system. A second alternative, which can be used when a
payor already has a clear sense of its way to play and differentiating
capabilities, begins with a targeted strategic assessment by line of
business or functional domain. A third option, often chosen when a
company needs to quickly capture cost savings, is an abbreviated
strategic assessment that moves immediately to capture cost savings
without harming a payor’s differentiating capabilities and most
promising growth initiatives.
No matter which Fit for Growth approach is used, when a health plan
puts the three building blocks into place successfully, it unleashes its
growth potential and improves financial performance. The plan’s
strategic intent becomes clear; it aligns resources to strategy and
eliminates waste; and its organizational structure and culture fully
support its capabilities system. This is the only proven means of
winning the two-front war currently facing the payor industry.
Endnote
A payor’s Fit for Growth Index Score is based on its rankings in 10 dimensions across the
three Fit for Growth building blocks. The building blocks are weighted as follows: strategic
clarity (50 percent), resource alignment (30 percent), and supportive organization (20 percent).
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This report was originally published by Booz & Company in 2013.
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