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Healthcare Systems and Services Practice
Payor Holiday Reading Selected Highlights
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Introduction As we head into the holiday season, I’d like to share with you some of the highlights from materials we published in 2015. The articles in the first section of this e-book, and the videos and infographics in the second section, relate directly to the challenges the healthcare industry currently faces. The articles in the third section present more general management advice from the pages of the McKinsey Quarterly; we believe that their cross-industry insights are valuable for the discussions in our industry at the moment. We designed this e-book with your convenience in mind. Almost everything in it can be read online or offline. (The only exception are the videos, which are too large to download.) We hope these materials stimulate your thinking as you contemplate the year ahead. We’d be happy to discuss any of them with you. In the interim, we wish you a joyous holiday season—and a happy and successful 2016.
Shubham Singhal Senior Partner Head, Health Systems and Services Practice in the Americas
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Table of Contents Highlights from McKinsey healthcare articles Debunking common myths about healthcare consumerism Jenny Cordina, Rohit Kumar, and Christa Moss |
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Assessing the 2016 Medicare Advantage Star ratings Rebecca Hurley, Alok Ladsariya, Monisha Machado-Pereira, and Denis Vaskov |
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Provider-led health plans: The next frontier—or the 1990s all over again? Gunjan Khanna, PhD; Ebben Smith, MD; and Saum Sutaria, MD |
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Measuring the patient experience: Lessons from other industries Brandon Carrus, Jenny Cordina, Whitney Gretz, and Kevin Neher |
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Insights into Hispanics’ enrollment on the health insurance exchanges Erica Coe, Jenny Cordina, Elizabeth P. Jones, and Suzanne Rivera |
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Designing and implementing an integrated oncology care management program Chiara Leprai; Edward Levine, MD; Alex Sozdatelev; and Denis Vaskov |
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Capturing returns in healthcare Feby Abraham, Myoung Cha, and Garikai Nyaruwata |
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Applying lean IT to healthcare Michael Huskins, Steve Van Kuiken, and Sri Velamoor |
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Table of Contents (continued) Highlights from the McKinsey on Healthcare website VIDEOS Note: Viewing these videos can only be done online.
The disruptive forces that will reshape the healthcare industry Shubham Singhal |
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Insights from our proprietary consumer research Jenny Cordina |
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The digital/mobile convergence and the empowerment of the healthcare consumer Paul Mango |
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2015-2016—eye of the storm? Saum Sutaria, MD |
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INFOGRAPHICS
2016 exchange market remains in flux: Evolution of carriers and offerings McKinsey Center for U.S. Health System Reform |
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2016 exchange market remains in flux: Pricing trends McKinsey Center for U.S. Health System Reform |
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Exchange-eligible consumers heading into OEP McKinsey Center for U.S. Health System Reform |
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Health insurance enrollment and revenue shifts 2013-2014: An emerging story McKinsey Center for U.S. Health System Reform |
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Table of Contents (continued) Highlights from the McKinsey Quarterly Decoding leadership: What really matters Claudio Feser, Fernanda Mayol, and Ramesh Srinivasan |
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The eight essentials of innovation Marc de Jong, Nathan Marston, and Erik Roth |
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The dawn of marketing’s new golden age Jonathan Gordon and Jesko Perrey |
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Gender equality: Taking stock of where we are Dominic Barton, Sandrine Devillard, and Judith Hazlewood |
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Repelling the cyberattackers Tucker Bailey, James M. Kaplan, and Chris Rezek |
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TABLE OF CONTENTS
Highlights from‌ McKinsey healthcare articles
Healthcare Systems and Services Practice
Assessing the 2016 MA Stars ratings
Healthcare Systems and Services Practice
Rebecca Hurley, Alok Ladsariya, Monisha Machado-Pereira, and Denis Vaskov
Provider-led health plans: The next frontier—or the 1990s all over again?
Healthcare Systems and Services Practice
Gunjan Khanna, PhD; Ebben Smith, MD; and Saum Sutaria, MD
Debunking common myths about healthcare consumerism Jenny Cordina, Rohit Kumar, and Christa Moss
1
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Debunking common myths about healthcare consumerism As consumers take an increasingly active role in healthcare decision making, payors and providers need an accurate understanding of how healthcare consumerism is playing out. Using data from surveys of thousands of people across the U.S., we debunk eight of the most common myths circulating in the industry.
Until recently, consumerism in the U.S.
Myth #1
healthcare industry has moved slowly.
Healthcare is different from other industries. Consumers don’t bring the same expectations about customer experience to healthcare that they bring to retail or technology companies.
However, several converging forces are likely to change the situation soon and result in a more dynamic market. Higher deductibles and co-payments, greater transparency into provider performance and costs, and the rise of network nar-
Our findings indicate that consumers want
rowing and provider-led health plans
the same qualities in healthcare companies
are prodding patients to become more
that they value in non-healthcare settings.
involved in healthcare decision making
In this year’s Consumer Health Insights
than ever before.
(CHI) survey, we asked participants to identify the non-healthcare companies with
As yet, most payors and providers have
the strongest consumer focus. Apple and
comparatively little data to assess how
Amazon led the list. We then asked the
consumerism is likely to affect them. As
participants to tell us what qualities gave
a consequence, they can neither confirm
such companies a strong customer focus,
nor refute a number of assumptions about
as well as what they valued in a consumer-
healthcare consumerism that are often
focused healthcare company.
stated as fact. The answers to the two questions were Over the past eight years, we have con-
surprisingly similar (Exhibit 1). For example,
ducted extensive research into healthcare
more than half the participants cited great
consumerism. This year alone, we surveyed
customer service as important for non-
more than 11,000 people across the country
healthcare and healthcare companies alike.
about how they perceive their healthcare
Other qualities that the participants identified
needs and wants, how they select provid-
as important for both sets of companies
ers, and how they make other healthcare
were delivering on expectations, making
decisions. Our results suggest that many
life easier, and offering great value.
of the assumptions currently being made about healthcare consumerism are no
Whether healthcare companies need to
more than myths.
perform as well as Apple and Amazon on
Jenny Cordina, Rohit Kumar, and Christa Moss
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Consumerism Myths — 2015
Qualities consumers value in companies1 Exhibit 1 of 8
EXHIBIT 1 Qualities consumers value in companies1 % of respondents (N=2,255)
Non-healthcare companies
Healthcare companies
100
80
60
53
53 42
43 37
40
37
39
36
20
0
1Participants
Providing great customer service
Delivering on expectations
Making life easier
Offering great value
were offered 10 qualities and asked to select the 3 they thought mattered most.
Source: McKinsey 2015 Consumer Health Insights survey
customer experience remains to be seen.
what consumers believe matters most and
However, the evidence suggests that just
what influences their opinions most strongly.
performing better than other current
Given the intangible nature of health insur-
healthcare competitors will not be sufficient.
ance and healthcare provision, it appears
Customer expectations are being set by
that some factors play a much greater role
non-healthcare industries, and meeting
than most consumers realize. For example,
those expectations is likely to be critical
as part of our 2014 CHI survey, we posed
to ensure satisfaction and loyalty.
two questions about patient satisfaction to
Myth #2 Consumers know what they want from healthcare companies and what drives their decisions.
the participants who reported having been hospitalized within the previous three years. First, we asked them how satisfied they were with their hospital experience. Second, we asked them to rank the importance of various factors that might have influenced
Most consumers have strong opinions
their satisfaction levels.
about what matters to them when they make healthcare decisions or receive healthcare
More than 90% of these participants said
services. The evidence suggests, however,
they had been at least somewhat satisfied
that there is often a disconnect between
with the care they received, and most of
3
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Myth #3
them rated the outcome achieved as the most important influence on their satis-
Most consumers research their healthcare choices before making important decisions and then make fact-based choices based on their research.
faction. However, when we mapped the factors that participants said influenced their satisfaction against their reported levels of satisfaction, we found that the empathy and support provided by health professionals (especially nurses) had
Five different surveys we conducted recent-
a stronger impact than outcomes did
ly suggest that many, if not most, healthcare
(Exhibit 2). Satisfaction levels were also
consumers are not yet making research-
strongly influenced by the information
based decisions. Our findings indicate,
the participants had been given during
for example, that only a few consumers are
and after treatment.
currently researching provider costs or even the number of providers they can choose
In general, our results suggest that people
among. Although some (but far from most)
tend to overstate tangible factors (e.g., Consumerism Myths — 2015 parking, pain management) and under-
consumers are beginning to research their health plan choices, many of them are not
yet aware of key they should con-levels state factors that say are is more emotional What consumers most important does not always correlate withfactors their actual satisfaction sider before selecting coverage. (e.g., empathy) or abstract (e.g., value). Exhibit 2 of 8
EXHIBIT 2 What consumers say is most important does not always
correlate with their actual satisfaction levels Correlation coefficient in relation to overall inpatient satisfaction score (N=1,160) Derived importance
New/updated facility building
0.70 Comfortable waiting areas for family
0.65
Ease of understanding bill and financial support
0.60 0.55
Quality of food
0.45
0.35
Online tools and resources
0.30 0.25
Variety of TV channels
Access to my medical records
Connection with other caregivers
0.20 48
51
54
57
Cleanliness of room
Well-coordinated pain management
Amenities (e.g., Internet access)
0.40
Doctor empathy
Simplicity of Room appearance administration
Value for money
0.50
0.15
Quiet environment
Single point of contact
Outcome of Keeping patient procedure/ informed about care treatment during Nurse and after empathy
60
63
66
Easy parking and access
69
Ease of scheduling appointments and managing details related to visit Conducting scheduled appointments on time
72
75
% of respondents rating as 4 or 5 on 1–5 scale on importance Stated importance Source: McKinsey 2014 Consumer Health Insights survey
78
81
84
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Consumerism Myths — 2015 Some consumers are beginning to research the cost of healthcare services Exhibit 3 of 8
EXHIBIT 3 Some consumers are beginning to research the cost
of healthcare services How research was done, %
% of respondents who researched costs, %1
Talked to someone
52
44
Maternity care
32
32
Joint replacement surgery
22
Diabetes-related doctor visit
Imaging
19
Cardiac-related doctor visit
18
Labs
17
Emergency room
Looked at websites
16
61
42 41
17
25
33
56
20
27
49
14
1The
question about researching costs was asked only of participants who said they had received a given type of care in recent years. Thus, the N value differed depending on the type of treatment. Source: McKinsey 2015 Consumer Health Insights survey
Provider choices. In this year’s CHI survey,
insurance representative) to investigate
only 22% of the participants said that they
costs than to look at websites. Furthermore,
always ask about cost before going to a
even among the subset of consumers who
doctor or other healthcare provider. We
reported doing research on costs before
also asked participants whether they had
undergoing an expensive, invasive proce-
received certain services in the past year
dure (e.g., cardiac or joint surgery), half still
and, if so, whether they had researched
said that their doctor’s recommendation
costs in advance. Exhibit 3 shows the
was the key factor that influenced their
results. The participants who received
decision about where to seek care.
maternity care were most likely to report that they had researched costs prospec-
Cost is not the only factor most consumers
tively. In all cases, the participants were
are not yet actively investigating. In last
much more likely to say that they had
year’s CHI survey, we asked the partici-
“talked to someone” (e.g., a provider or
pants who reported having been hospital-
74
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ized in the previous three years to tell us how many hospitals there were in their local area. More than half said there was only one local hospital when, in fact, there were a median of three hospitals within a 10-mile radius of their home and ten hospitals within a 20-mile radius.
Myth #4 Now that consumers are paying more for their healthcare, premium price is the only truly important factor in purchase decisions. During both the 2014 and 2015 OEPs, premium price was, indeed, an important
Health plan choices. Soon after the close
factor for many consumers. However, a
of the 2015 open enrollment period (OEP),
sizeable percentage of people did not buy
we surveyed consumers who were eligible
the cheapest plan available to them.
to purchase exchange plans to investigate the decisions they made about health insurance during the
OEP.1
Forty-four percent
In our 2015 post-OEP survey, for example, 49% of the participants who had purchased
of those who said they have bought an ex-
exchange plans and remembered the plans’
change plan for the first time indicated that
pricing said that they had selected products
they did not understand the type of provider
with premiums that were average or above-
network included in their plan. Nineteen
average relative to the other plans within
percent of those who had purchased an
the comparable metal tier. The higher-
exchange plan last year also indicated they
premium products these participants bought
were unaware of their plan’s provider net-
(in comparison with the less-expensive plans
work. Only 12% of those who remained
purchased by other respondents) were
uninsured knew the size of the subsidy they
more likely to be based on preferred provider
were eligible for, and only 59% were aware
organizations, to include pharmacy benefit
of the penalty for not obtaining coverage.
add-ons, or to cover alternative types of care (e.g., acupuncture, chiropractic).
Similarly, in our survey this year of Medicare members, we found that only 21% of those
A subsequent report released by the Depart-
who had enrolled in a Medicare Advantage
ment of Health and Human Services confirms
(MA) plan knew their plan’s Star rating.
that price is not the only factor that many
However, almost all of those who knew their
people shopping for individual coverage con-
plan’s rating had purchased a plan that had
sider.2 It found that 66% of the 8.84 million
three or more stars.
people who bought health insurance through the federally facilitated marketplace during
Moreover, in a survey we conducted this
the 2015 OEP could have purchased a health
year of Medicaid-eligible recipients, only
plan with a monthly premium of $50 or less
32% of those who were enrolled in a
(after the advanced premium tax credit was
managed care program and did not have
applied). However, only about half of these
dual Medicare coverage indicated that they
people bought the very-low-cost plans.
had done any research before selecting a carrier, even though they had the option
In our Medicare study, we asked participants
of choosing among multiple carriers.
to design their own plan, giving them trade-
1
Bauman N, et al. Hospital networks: Evolution of the configurations on the 2015 exchanges. McKinsey Center for U.S. Health System Reform Intelligence Brief. April 2015. 2 Health insurance market places 2015 open enrollment period: March enrollment report. ASPE Issue Brief. March 10, 2015.
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Consumerism Myths — 2015 In private exchange simulations, consumers showed a willingness to trade medical for ancillary benefits Exhibit 4 of 8 EXHIBIT 4 In private exchange simulations, consumers showed
a willingness to trade medical for ancillary benefits Medical benefits
Ancillary benefits
In simulation, participants bought down on medical benefits…
… but purchased ancillary products not offered by their employers % of participants given a base level of funding who purchased ancillary products (N = 804)1
Average actuarial value, % (N = 2,406)1 85.3 79.8
Net change from before simulation
Selected coverage during simulation
Dental
–2
Vision
–3
Disability
–12
1 Samples
88
2
79 53
4 15
69
Life
Before simulation
Potential for bundling increase2
3 8
AD&D
63
6
Critical illness
60
12
9 11
After simulation
are weighted to match the profile of employees in the four states studied.
2During
the simulation, participants were not given the option of purchasing products in bundles. However, they were asked whether they would be interested in purchasing certain products in a bundle. The percentages given here reflect the likely increase in products sold based on participants’ responses to that question.
AD&D, accidental death and dismemberment. Source: McKinsey 2015 Private Exchange Simulation
offs between premium prices and various
to buy ancillary products. The feature cited
cost-sharing and benefit options (e.g., pre-
most often by those willing to pay higher
miums went up as deductibles went down).
premiums was having a $0 deductible for
Only 15% of the participants selected a
prescription drugs.
$0 premium plan. In contrast, almost twothirds of them said they would be willing
Similarly, in this year’s CHI survey, one-third
to pay a $50 premium per month if it would
of the participants said they were willing
reduce their medical deductible to $0.
or very willing to pay up to 20% more for
Thirty percent of the participants said that
health insurance if it gave them more
they would be willing to pay more than they
choices about where to seek care. Further-
were currently paying if it would help them
more, in a private exchange simulation we
hold their deductible down or enabled them
conducted recently with individuals covered
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by employer-sponsored insurance, the par-
consult providers other than a regular PCP.
ticipants spent, on average, 40% above the
For example, 71% of all of the participants
employer contribution level to obtain ancil-
agreed with the statement: “There are many
lary benefits, such as vision, life, and critical
good primary care physicians that I would
illness insurance. In fact, many of the private
be satisfied seeing.” Forty-five percent of
exchange simulation participants were willing
the participants said that they had made
to trade down on medical benefits so they
an appointment at least once with any
could trade up on ancillary benefits (Exhibit 4).
available doctor within the same practice
Myth #5 Almost all consumers have a primary care provider (PCP) and are highly reluctant to change doctors.
or facility as their regular PCP. Of those who had not done so, only 18% indicated that they were unwilling to consult any doctor but their PCP. In addition, 16% of the participants said
In this year’s CHI survey, 82% of partici-
that they receive routine care from a multi-
pants said that they had a regular PCP.
doctor primary care clinic rather than an
However, the likelihood of having a PCP
individual PCP. When asked why, nearly
was age-related: 96% of the participants
half of these participants cited accessibility
above age 65 reported having a PCP, com-
(e.g., convenient locations, shorter waiting
pared with only 65% of those ages 18 to 34.
times, easier scheduling). Among the 84%
The likelihood of having a PCP was also
of participants who did not receive care
influenced by income (89% of those with
from a primary care clinic, 55% said they
incomes above $100,000 said that they had
would be willing to do so if it cost no more
a PCP) and health status (90% of those with
than or less than what they currently pay
one or more chronic conditions had a PCP).
(Exhibit 5).
Among all of the participants who did have
Myth #6
a regular PCP, 66% said that they would not
Retail clinics will remain a niche health solution.
change providers unless they or their doctor moved. However, 57% of them also indicated that they would be willing to switch doctors
Awareness and utilization of other alter-
if their health plan no longer covered their
native-care options are also rising. In this
PCP. Among this 57%, willingness to switch
year’s CHI survey, more than 80% of the
was influenced by the length of a participant’s
participants were aware of healthcare
relationship with the PCP: 72% of those who
services being offered through pharmacies
had been using that doctor for only one or
and retail stores. About half of these partici-
two years were willing to make the change,
pants, however, were unsure of the specific
compared with 53% of those who had been
services being offered.
with their doctor for five or more years. About two-thirds of the participants said Other evidence from this year’s CHI sug-
they are willing to use healthcare services
gests that many consumers are willing to
offered by a pharmacy or retail store. Twen-
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Consumerism Myths — 2015 Many consumers are willing to use alternative provider arrangements Exhibit 5 of 8 EXHIBIT 5 Many consumers are willing to use alternative
provider arrangements % of respondents willing to use alternative arrangements (N=1,881) I am willing to do this if it costs me less than what I currently pay
I am not sure
I am willing to do this if it doesn’t cost me more than what I currently pay
I am not willing to do this in the future
See any available physician in the same practice/ facility as my regular PCP
Use a primary care clinic where I would see any of a limited number of physicians who all have access to my medical records
14
42
17
Use a primary care clinic where I would see any of a limited number of physician assistants/nurse practitioners who all have access to my medical records
19
Speak with a physician or other healthcare practitioner by phone and/or Internet and/or email (not video)
18
Speak with a physician or other healthcare practitioner by video (e.g. Skype, Facetime)
15
26
38
25
20
36
25
20
31
21
18
29
32
23
33
Source: McKinsey 2015 Consumer Health Insights survey
ty percent reported having already sought
pharmacy or retail clinic indicated that
care in these settings within the past two
they had done so for immunizations; 26%
years (up from 10% in our 2013 CHI survey).
said they had sought treatment for a minor
The chief reason given for using pharmacies
illness. Of the participants who said they
and retail clinics for care was, once again,
had not yet used one of these alternative-
accessibility (convenient locations, not
care options, more than 60% indicated
needing an appointment, convenient hours).
they were willing to do so for immuniza-
More than three-quarters of the 2015 parti-
tions, minor illnesses, or nutritional/weight
cipants who had used these alternative-
loss support (Exhibit 6).
care options said they plan to do so again. Use of these alternative care options could Just over half (51%) of those who reported
grow substantially in the next few years,
having received healthcare services at a
given their increasing numbers and expand-
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Myth #7
ing offerings. The number of retail clinic locations across the United States rose
Only young people are using technology to manage their health and healthcare needs.
from 1,183 in 2010 to 1,866 in 2015.3 CVS, which operates about half of the retail clinics, has announced that it plans to have 1,500 clinics by 2017. Growth among other
In both this year’s and last year’s CHI surveys,
the major players is likely to accelerate
we also asked participants about using tech-
now that Walmart is putting primary care
nology to manage their health and healthcare
practices within its stores, and Walgreens
needs. Not surprisingly, millennials (those be-
is partnering with Theranos to offer con-
tween the ages of 18 and 34) were more likely
venient, affordable blood testing.
to report using technology for these purposes,
Consumerism Myths — 2015
Many consumers are willing to receive some healthcare services in retail settings Exhibit 6 of 8
EXHIBIT 6 Many consumers are willing to receive some healthcare
services in retail settings % of respondents willing to do these things at a pharmacy or retail clinic (N=1,849) I am very willing to do this
I am somewhat willing to do this
I would not do this
Receive immunizations
37
38
31
Receive care for a minor illness
41
25
Speak with a nutritionist
Receive diabetes counseling
16
Receive chronic condition management support
14
28
40
35
33
51
31
19
Conduct an annual physical
26
55
24
58
Buy a health plan
9
18
73
Receive maternity counseling
9
16
76
Source: McKinsey 2015 Consumer Health Insights survey
3
Tabuchi H. How CVS quit smoking and grew into a health care giant. New York Times. July 11, 2015.
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Consumerism Myths — 2015
but a considerable number of the older partici-
However, millennials were much more likely
pants were doing so as well (Exhibit 7). In all age
than older participants were to say that they
groups, the top two activities were communica-
were using social media to share wellness ideas
ting with doctors and scheduling appointments.
and participate in online wellness groups.
Many consumers are willing to use technology for health-related activities Exhibit 7 of 8
EXHIBIT 7 Many consumers are willing to use technology
for health-related activities % of respondents who have used a technology device for a health-related activity (N=1,665)
18–34
35–55
50
Phone calls with my doctor/health professional
36
28
40
Scheduling an appointment 19
Checking my health status
25
40
16 10
38
A service or app that helps me exercise properly 10
13
Learning about healthy habits or get health-related ideas
33
16 8
A service or app that helps me eat a better diet
35
14 8 27
Checking my health information 12
15
26
Text messages with my doctor/health professional 12
15
24
Email with my doctor/health professional
11 12 27
A service or app that helps me answer questions about my health
12 7
Source: McKinsey 2015 Consumer Health Insights survey
55+
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Consumerism Myths — 2015
Consumers trust PCPs most with their health data Exhibit 8A of 8
EXHIBIT 8 Consumers trust PCPs most with their health data % of respondents willing to store data from a health monitoring device with... (N=871) 18–34
35–49
50–64
65 and older
100 84 80 70
73
65 60
Consumerism Myths — 2015 40 25 with their health data Consumers trust PCPs most 16 17
20
Exhibit 8B of 8 0
13
18
6
PCPs
10 3
Health insurers
8
2
4
1
6
Apple
5
1
0
Employers
Source: McKinsey 2014 Consumer Health Insights survey
% of respondents willing to share their health data with... (N=973) 18–34
35–49
50–64
65 and older
100 83 78
80 62
66
60 44 40
37
36 31
31 18 16
20
21
23 8
0
PCPs
Specialist
Source: McKinsey 2014 Consumer Health Insights survey
Friends and family
9
7
Health insurers
8 3
1
Employers
0
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We also asked participants about whether they had used website or apps for a number of healthrelated activities, and, if so, whether they thought those resources were more or less effective than
Myth #8 Most people are willing to trust insurers to store their health records.
phone or in-person communication. For two of
In our 2014 CHI survey, we asked the partici-
the most common activities—communicating
pants to imagine having some sort of health
with a physician and scheduling appoint-
monitoring device. We then asked them two
ments—the majority of participants age 65
questions: Where would they be comfortable
and older (65% and 78%, respectively) thought
storing information from that device? And with
that websites and apps were more effective.
whom would they be willing to share the data?
Appendix: Details about our research The articles in this compendium leverage
In addition, it assesses a range of variables,
proprietary research and analyses that
including: A) respondents’ shopping be-
McKinsey’s Healthcare Systems and
haviors; B) their attitudes regarding health,
Services Practice, McKinsey Advanced
healthcare, and the purchase and use of
Healthcare Analytics, and other groups
healthcare services; C) their awareness
within the firm have conducted over the
of health reform; D) their opinions about
past several years. This appendix describes
shopping for health insurance and using
the major tools and data sources used in
an insurance exchange; E) their preferences
these articles.
for specific plan designs (including tradeoffs among coverage features, such as
Consumer Health Insights (CHI) Survey
benefits, network, ancillaries, service
This unique annual survey, which has been
options, cost sharing, brand, and price);
conducted since 2007, provides information
F) their perceptions of the employer’s role
on the opinions, preferences, and behaviors
in healthcare coverage; G) their attitudes
of healthcare consumers, as well as the
about a broad range of related supple-
environmental factors that influence their
mental insurance products; H) their
healthcare choices. The survey also
opinions, use, and loyalty levels regarding
enables insights into the current market
healthcare providers; and I) their attitudes
environment and can be used to make
and behaviors regarding pharmaceuticals
predictions about the choices and trade-
and pharmacies.
offs consumers are likely to make in the post-reform environment.
The CHI survey included a total of 2,255 participants in 2015, 4,019 in 2014, and
The CHI survey collects descriptive information on all participants and their households.
6,934 in 2013.
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Apropos storage, the participants overwhelmingly chose PCPs (Exhibit 8). Only a
...
minority of them said they were comfortable
We believe that healthcare consumerism
having health insurers, Google, or Apple
will soon enter the steep slope of the
store their health data, and even fewer
innovation S curve and become a much
people chose employers. Participants also
more significant force. Payors and providers
named PCPs as the group with whom they
need to begin making plans now if they
were most comfortable sharing the data
want to be ready to respond to, and per-
(Exhibit 8). In both cases, age had only
haps shape the evolution of, healthcare
a small impact on the answers received.
consumerism.
Medicaid Consumer Survey
Post-open enrollment period survey
Quantitative consumer insights about the
McKinsey’s post-open enrollment period
current Medicaid population and potential
survey is a national survey of 3,007 uninsured
new entrants to the program have been
and individually insured consumers. It was
difficult to come by. To help address this
conducted February 21–24, 2015, shortly
gap, McKinsey surveyed more than 1,419
after the 2015 individual market open enroll-
consumers across the United States in 2015,
ment period (OEP) ended. This survey is part
focusing on current Medicaid members
of the ongoing longitudinal research we began
(both dual eligibles and non-dual enrollees)
with four 2014 OEP surveys (which together
and people who are currently eligible for
had about 14,000 respondents), which were
Medicaid but not enrolled. The results,
conducted between November 2013 and
weighted to reflect the age, gender, ethnicity,
February 2014, enabling trend analysis.
education, and income of each of the groups, revealed important insights about the current
Private exchange simulation
and future Medicaid population.
McKinsey’s private exchange simulation investigates what might happen if individuals
Medicare Consumer Survey
currently covered under employer-sponsored
Our Medicare consumer survey was a
insurance were given the option of selecting
national survey of 2,208 seniors who are
their own coverage (and other benefits) on
covered by Medicare Advantage, Medicare
a private online exchange. It assesses par-
fee-for-service, or Medicare supplement
ticipants’ interest in private exchanges and
plans. The survey sought to understand
tests their buying behavior given a range
what matters to these consumers and
of plan options and ancillary benefits. In the
their decision-making process for both
past year, more than 2,400 consumers have
coverage- and care-related decisions.
participated in these online simulations.
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The data and insights we have amassed
that (rather than just on what consumers
can help them do that. Our findings sug-
say). This understanding must be based
gest, for example, that payors should think
on very granular data to ensure its rele-
about what value proposition they want to
vance to local healthcare players.
offer to consumers. That value proposition can be, but doesn’t have to be, price re-
In addition, both payors and providers
lated—consumers are open to other entice-
should think about the evolving role of new
ments. And payors should not assume they
healthcare technologies in shaping con-
are the natural owners of consumers’ health
sumer behaviors so they can take advan-
records; they will have to find a way to earn
tage—and not become victims—of them.
greater consumer trust if they want to do
Perhaps most important, both payors and
that. Providers should not take patient
providers should realize that consumers’
loyalty for granted or underestimate the
expectations are no different in healthcare
role that experience-related factors such
than in any other industry. In fact, other
as convenience and empathy play in
industries will continue to shape these
consumer satisfaction and loyalty.
expectations—healthcare companies need to catch up, or they risk being disrupted.
The results described in this article are only a fraction of the information we have amassed. Our findings also reveal important attitudinal differences based on age, gender, ethnicity, income, health status, and geography—differences that have important implications for both payors and providers. These findings have convinced us that both payors and providers need to better understand what really drives consumer decision making and focus on
Jenny Cordina (jenny_cordina@mckinsey. com) is an expert principal in McKinsey’s Detroit office. Rohit Kumar (rohit_kumar@mckinsey .com) is an associate principal in its Chicago office. Christa Moss (christa_moss@mckinsey .com) is a consultant in its Cleveland office. Acknowledgments The authors would like to thank Erica Coe, Elizabeth Jones, Katherine Linzer, Elina Onitskansky, Kyle Weber, and Emir Roach for their contributions to this article.
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Intelligence Brief
Assessing the 2016 MA Star ratings On October 8, 2015, the Centers for Medicare and Medicaid Services (CMS) released the Medicare Advantage (MA) Star ratings for 2016. We analyzed CMS’s data covering 642 MA plans and prescription drug plans across the 50 states to develop a perspective on the payor industry’s Stars performance. Four key observations emerged from our analysis: ■ Since last year, the total number of consumers in MA plans with 4 or more Stars grew by 11 percentage points. The industry’s enrollment-weighted average Star rating rose from 3.92 to 4.03.1 – The primary cause of the increased rating was improvements in plan performance, and not CMS changes to cut-points, measures, or methodology. – Changes to certain individual Star measures did influence—positively or negatively—the ratings of some plans. For the industry overall, however, the scoring changes largely cancelled each other out. ■ Although plans based on health maintenance organizations (HMOs) outperformed the market in previous years, local preferred provider organization (PPO) plans performed best this year, with an enrollment-weighted average Star rating of 4.16. ■ This year, like last year, plans built around integrated delivery networks (IDNs)2 received a higher weighted average rating (4.45) than plans offered by commercial carriers3 (3.96) or Blues carriers (3.86). However, commercial and Blues carriers continue to close the gap. ■ The 2016 enrollment-weighted average Star ratings are lower for carriers with fewer than 20,000 MA members (3.45) than for carriers with MA enrollment between 20,000 and 100,000 (4.12) or above 100,000 (4.03).
1 Methodology used to calculate enrollment-weighted average is described in the appendix. 2 Includes both provider-led IDNs and payor-led IDNs. Kaiser Permanente is included as an integrated carrier. 3 Commercial carriers are defined as those operated by for-profit entities that are not part of the Blue Cross Blue Shield Association and not considered part of an integrated delivery network (IDN).
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Star ratings have increased since last year Since last year, the MA market has grown by 7% (from 15.7 million to 16.8 million members). The total number of consumers in MA plans with 4 or more Stars increased from 60% to 71%. Overall, close to 50% of this year’s MA plans achieved a Star rating of 4 or higher, compared with 40% last year. Across all MA plans, the enrollment-weighted average Star rating rose from 3.93 to 4.03. We estimate that 2016 plans with fewer than 4 Stars may forego $2.03 billion in potential bonus payments;4 comparable 2015 plans gave up $3.47 billion. To understand the cause of the higher Star ratings, we analyzed the scores the MA plans would have achieved had CMS not changed the cut-points for certain measures, added (or subtracted) measures, or altered the methods used to calculate Star ratings. The initial results strongly suggested that the key driver of this year’s higher Star ratings was improvements in the performance of many plans; indeed, improved performance accounted for nearly all of the enrollment-weighted average Star rating increase (Exhibit 1).
1 Across contracts common to 2015 and 2016 rating years. 2 Contract-weighted average difference between the 2015 average Star score by measure and the 2016 average Star score if 2015 cut points were used (only measures with methodology that was substantially unchanged between 2015 and 2016 were used in the calculation). 3 Contract-weighted average difference between the 2016 average Star score (using 2016 cut points) and the 2016 average Star score if 2015 cut points were used. 4 Includes contract-weighted impact of adding new measures, removing measures, measures that changed methodology, changes in performance on improvement measures, and changes in the ifactor bonus.
4 This estimate is based on the average bonus payment and the number of MA consumers enrolled in plans with a rating of less than 4 Stars. The estimate is conservative because it does not take into account MA enrollment growth.
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When we dug deeper, we learned that a few of the changes in cut-points did influence the Star ratings for MA plans. For example, cut-point changes increased the enrollmentweighted average rating per individual metric for appeals auto-forward (+1.19), medication adherence for hypertension (+0.94), and improving or maintaining mental health (+0.93). In contrast, cut-point changes caused decreases in the weighted average rating per individual metric for improving or maintaining physical health (–1.35), Medicare Plan Finder price accuracy (–0.91), and colorectal cancer screening (–0.90). However, these increases and decreases largely cancelled each other out. As a result, improvements in plan performance remain the largest cause of this year’s higher Star ratings for MA plans.
Average Star ratings vary by product type Among all MA plans, local PPO plans received the highest enrollment-weighted average Star rating (4.16) this year, a significant improvement from last year’s 3.87. HMO MA plans received an enrollment-weighted average Star rating of 4.07 this year, compared with 3.96 last year. Regional PPO MA plans received an enrollment-weighted average rating of 3.33, a significant drop from their enrollment-weighted average of 3.51 last year (Exhibit 2).
HMO, health maintenance organization; PFFS, private fee for service; POS, point of service; PPO, preferred provider organization.
Since last year, enrollment in local PPO MA plans with 4 or more Stars grew by 1.4 million. Conversely, enrollment in regional MA plans with a lower than 4-Star rating increased by approximately 0.5 million.
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Plans built around IDNs (Kaiser, in particular) received higher ratings In 2016, MA plans built around IDNs continued to outperform both commercial and Blues plans. Their enrollment-weighted average Star rating was 4.45, quite similar to last year’s 4.43. These plans have maintained the lead position since 2012, when their enrollmentweighted average was 4.40 (Exhibit 3). Note, however, that the 5-Star rating achieved by Kaiser Permanente elevates the average for these plans (Exhibit 4). Absent Kaiser, the 2016 enrollment-weighted average for IDN plans drops to 4.03.
BCBS, Blue Cross Blue Shield; UPMC, University of Pittsburg Medical Center.
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Commercial and Blues plan performance is improving Collectively, commercial MA plans earned an enrollment-weighted average Star rating of 3.96 for 2016. The performance of regional commercial plans and national commercial plans5 was comparable, with weighted averages of 3.95 and 3.93, respectively (Exhibit 5). Blues plans achieved a 3.86 weighted average Star rating.
Plan scale and maturity are associated with higher Star ratings The 2016 enrollment-weighted average Star ratings for MA plans from small carriers (those with fewer than 20,000 members) was 3.45. MA plans from medium-sized carriers (those with between 20,000 and 100,000 members) and large carriers (those with more than 100,000 members) had comparable ratings—4.12 and 4.03, respectively (Exhibit 6).
5 National commercial carriers are defined as those offering health insurance products in 25 states or more, and regional commercial plans are defined as those offering products in 24 states or less.
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1 For the purpose of this slide, carriers are defined as parent organizations.
Performance is also related to plan maturity. The plans with more experience in the MA program tend to have higher Star ratings (Exhibit 7).
□
□
□
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McKinsey Center for U.S. Health System Reform Assessing the 2016 MA Star ratings
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The findings in this Intelligence Brief provide a perspective on how CMS is rating the performance of MA plans offered for 2016. The information is based on publicly reported data released on October 8, 2015.
— Rebecca Hurley, Alok Ladsariya, Monisha Machado-Pereira, and Denis Vaskov The authors would like to thank Matt Carey and Brock Mark for their invaluable assistance with the analyses used in this article.
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Appendix Methodology Enrollment-weighted average: On October 8, 2015, CMS released data on Medicare Advantage contracts and plans offered for 2016 in advance of the annual enrollment period. McKinsey calculated enrollment-weighted averages by taking the total number of enrollees in contracts and plans for 2015, assigning higher weights to plans with higher enrollment. These were used to calculate the enrollment-weighted average for 2016 Star ratings. The enrollment-weighted average demonstrates Stars performance among carriers and products with the highest level of participation and thus allows us to understand overall trends. Enrollment: The October 2015 summary Star rating data from CMS was used as a filter for the April 2015 CMS Medicare Advantage enrollment by state, county, and contract. Therefore, enrollment in contracts that did not exist in the October 2015 ratings file are not included in the enrollment data in this brief.
Glossary Integrated delivery network (IDN). A health plan model, either provider-led or payor-led, with close alignment between the payor and provider functions Health maintenance organization (HMO). A plan model centered on a primary care physician who acts as gatekeeper to other services and referrals; it provides no coverage for out-of-network services except in emergency or urgent-care situations Preferred provider organization (PPO). A health plan model that allows members to see physicians and get services that are not part of a network, but the out-of-network services require a higher copayment
Past McKinsey intelligence briefs on Medicare Advantage ■ “2016 Medicare Advantage rates: Perspectives for payors” (Apr 2015) ■ “Individual market: Insights into consumer behavior at the end of open enrollment” (September 2015) ■ “Assessing the 2015 MA Star ratings” (Nov 2014) ■ “Individual market enrollment: Updated view” (March 2014) ■ “Exchange product benefit design: Consumer responsibility and value consciousness” (February 2014) ■ “Individual market enrollment: Early assessments and observations” (January 2014) ■ “Hospital networks: Configurations on the exchanges and their impact on premiums” (December 2013)
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■ “Exchanges go live: Early trends in exchange dynamics” (October 2013) ■ “Emerging exchange dynamics: Temporary turbulence or sustainable market disruption?” (September 2013)
October 2015 Copyright © 2015 McKinsey & Company Any use of this material without specific permission of McKinsey & Company is strictly prohibited.
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Provider-led health plans: The next frontier—or the 1990s all over again? By offering its own health plan, a hospital system may be able to gain a variety of strategic and economic advantages. The move is not without risk, however—and often the risk is greater than the potential benefits. Three sets of questions can help hospital systems determine if offering a health plan is right for them.
Over the past few years, forces have been
Furthermore, some of the challenges to
aligning to make offering a health plan look
success have become even more acute
increasingly attractive to health systems.
since then. Thus, it’s hard not to wonder:
Many providers we speak with believe they
Is this current phenomenon a repeat of
deliver efficient, outstanding care and
what we saw during that decade? There
superior customer service, and thus they
are at least four core reasons to believe
assume that if they were to offer a health
that might not be the case:
plan, they would succeed. Our experience suggests, however, that many of these
• Explicit linkages between care quality/
providers will fail to meet their expectations.
outcomes and reimbursement. Increasingly
Without a deep understanding of the strate
today, reimbursement is being tied to qual
gic, operational, and organizational factors
ity and outcomes, causing more providers
needed for success, health systems may
to be “at risk” for the care that they are
end up repeating mistakes of the past.
delivering. Payors at all levels (e.g., federal, state, private) are recognizing the limitations
History has shown that it is quite difficult to
of trying to manage care from a distance
reach the level of payorprovider integration
and are increasingly willing to fund provider
needed to succeed as a providerled health
efforts to take on longitudinal management
plan. In fact, the health systems that have
of care beyond their office walls.
successfully sponsored health plans (e.g., Intermountain, Geisinger, University of Pitts
• Improved access to data, driven by technol-
burgh Medical Center) have special circum
ogy. The healthcare delivery infrastructure
stances or unique market structures that
is much more connected now, and signi
are not easily replicated. If new entrants are
ficant improvements have been made in
not deeply familiar with the challenges they
how to use data to design better clinical
are likely to face and the factors required to
care programs.
win—and if they do not know how to position the owned health plan in their specific market—success will likely be elusive.
• Increasing consumer acceptance of restricted-access networks. Consumers today, unlike those in the 1990s, are increasingly
Many of us witnessed this phenomenon in
willing to accept restrictions on access
the 1990s, when there was a similar wave
to providers. Although consumers rebelled
of entrants to the providerled plan space.
against the strict gatekeeper model used
Gunjan Khanna, PhD; Ebben Smith, MD; and Saum Sutaria, MD
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Providers Compendium — Provider-led Plans — January 2015 Provider systems are offering a range of health plans Exhibit 1 of 7
EXHIBIT 1 Provider systems are offering a range of health plans % of providers 100% = 107 providers Medicaid/MA 11
Medicaid only 11
17 Medicaid/MA/Commercial
MA only
28
15 13 MA/Commercial
Commercial only
7 Medicaid/Commercial
MA, Medicaid Advantage. The percentages shown do not sum to 100 because of rounding. Source: 2013 AIS database; 2014 InterStudy database; CMS MA enrollment data; McKinsey analysis
in earlier health maintenance organizations
derive from having a health plan. Although
(HMOs), they now appear to be much
this move can deliver several potential
more open to narrow networks (in part
advantages, it also entails considerable risk,
because of their concerns about rising
the degree of which varies from one health
healthcare spending).
system to another. This paper presents a comparison of the pros and cons—including
• New markets in which to offer products.
financial, option value, channel conflict,
Providers today have more options for
and operational implications—of establishing
marketing themselves to consumers
a providerled health plan. It also outlines
(e.g., through public and private exchanges).
a series of questions health systems con
This flexibility disrupts the status quo in
sidering this step should ask themselves
a way that offers providers an entry point
before moving forward.
into rapidly growing consumer segments. Note: A large number of health systems are These factors increase the likelihood that
considering various accountable care organi
providers will consider offering health plans
zation (ACO) relationships, including Medicare
and that the health plans will succeed. It
Shared Savings Programs and Pioneer
is not clear, however, that offering a health
ACOs. In this paper, however, we focus not
plan can ensure a viable economic future
on ACOs but on health systems that are
for every health system, or that providers
already offering insurance products or may
can maximize the value they could potentially
be considering offering them in the future.
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The current landscape
that market. Another 1.6 million people
Today, 13 percent of all US health systems
in providerled MA plans.
(9.7 percent of the market) are enrolled
offer health plans in one or more markets— Providerled plans are currently present
commercial, Medicare Advantage (MA), or managed Medicaid (Exhibit
1).1
Together,
in 39 states (Exhibit 2). However, consider
these 107 systems operate health plans
able variation exists in both the number
covering about 18 million members, about
of plans in each state and the size of each
8 percent of all insured lives. Ten more
plan. The 10 largest plans2 cover about
providerled plans will be offered on the
43 percent of the 17.9 million lives in the
public exchanges in 2015. Approximately
providerled market. The next 10 largest
half of all those covered by providerled
plans cover another 20 percent of lives.
in Medicaid products and represent 23.5
plans include only 1 percent of covered lives.
The 7 million people covered by providerled
It is not yet clear how many more health
commercial plans constitute 4.3 percent of
systems will decide to offer health plans—
Providers Compendium — Provider-led Plans — January 2015 In contrast, the 10 smallest providerled plans—8.9 million people—are enrolled Provider-led health plans are operating in most states percent of all insured lives in that market. Exhibit 2 of 7
EXHIBIT 2 Provider-led health plans are operating in most states Distribution of provider-led health plans in each state, number of plans offered 0
1
Washington (4) Montana Oregon (3)
Idaho Wyoming
Utah (2)
California (5)
Arizona (4)
Colorado (2)
New Mexico (3)
Kansas
Oklahoma
Texas (15) Hawaii
Minnesota (4)
Nebraska (3)
Nevada
Alaska
4–6
7+
Maine
North Dakota
South Dakota (2)
2–3
Wisconsin (9) Michigan (7)
New York (8)
Pennsylvania (5) Ohio Illinois Indiana (6) West (6) (6) Virginia Virginia (3) Missouri Kentucky North Carolina (2) Tennessee South Arkansas Carolina (2) (2) Missis- Ala- Georgia (1) sippi bama
Iowa (2)
Vermont New Hampshire Massachusetts (6) Rhode Island Connecticut New Jersey Maryland (3) Delaware District of Columbia (1)
Louisiana Florida (4)
Total exceeds 107 because some provider-led health plans offer coverage in multiple states and/or in more than one line of business. Source: Plan websites
1
The statistics in this section were provided by McKinsey’s Center for U.S. Healthcare Reform and its Objective Health group. 2 AmeriHealth Caritas, Fidelis Care, HealthPartners, University of Pittsburgh Medical Center, HealthFirst, Intermountain Healthcare, Spectrum Health, Henry Ford Health System, Geisinger Health System, and MetroPlus Health. Enrollment in these plans ranges from about 465,000 to more than 1.3 million people. Many of these plans have a particularly strong presence in the Medicaid market.
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or how many of the current providerled
tomize care management resources and
plans will succeed. As we discuss below,
infrastructure, and to share best practices
success with this approach requires a
in care delivery. In some cases, vertical inte
range of capabilities that not all systems
gration can help reduce the administrative
have or can acquire.
friction between payors and providers, but
Advantages of provider-led plans
the size of that reduction often depends on the health system’s relationships with third party payors. As a result, having a health plan can help health systems prepare for
Acquiring or launching a health plan potenti
population health management (PHM) and
ally offers health systems five benefits. First,
mitigate some of the risks it entails.
it can enable them to preserve or increase volume in settings where payors are attempt
Third, offering a health plan can enable the
ing to steer lives. Providerled plans with low
systems to create strategic option value for
premiums or a compelling value proposition
the future. For example, it can enable a health
can attract members and increase the flow
system to redesign utilization management
of patients to a system’s hospitals—a
efforts (e.g., prior authorization, medical
particularly important advantage in areas
necessity reviews, and retrospective audits)
where narrownetwork products have be
to better suit the needs of the system and
come common. (When consumers buy such
its potential new network(s). It can also help
products, they essentially choose providers
them design internal incentive strategies to
at the point of purchase, not when care is
better align the performance of executives
needed.) If health systems design their prod
and employed clinicians with the system
ucts and networks well, they should also be
strategy—a skill that will become increas
able to increase patient inflow by improving
ingly important if the healthcare industry
their alignment with community physicians;
continues to move away from feeforservice
better alignment should also help them better
reimbursement. These actions create new
manage the total cost of care. The approach
strategic options for the future, such as
es used to increase alignment can be similar
the ability to offer services directly to local
to those providers have been using with
employers and/or consumers.
clinical integrated organizations that include independent and/or employed physicians.
Fourth, having a health plan can lower barriers to entry in many areas. A health
Second, having a health plan can permit the
system with a providerled health plan can
systems to leverage local or geographical
offer narrow network options effectively on
economies of scale and skill. Among other
the public and private exchanges. Such a
things, it can give them access to the full
system could also deal directly with regional
set of resources needed to manage care—
or national companies willing to carve out
and the total cost of care—effectively
local network arrangements for employees.
(e.g., clinical and claims data, including information from other providers). In addition,
Fifth, in some cases having a health plan
it can enable them to consolidate and cus
may give health systems economic advan
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Risks and challenges with provider-led plans
tages. Not only can it allow them to capture all of the premiums paid by employers and individuals, but it can also help them preserve market competition. In areas
Perhaps the biggest risk health systems
dominated by a few payors (or where payor
offering health plans face results from the
consolidation is expected), providers’
inherent tension between payor and provider
pricing power typically erodes. By gaining
value creation. Payors have traditionally
a foothold in the payor space, health systems
created value by negotiating reduced reimburse
can bring the market to better equilibrium.
ment rates with providers, lowering utilization rates, or both. Providers have created value
As Exhibit 3 shows, perpatient economics
through pricing and by increasing asset
could improve when a health system
utilization; some have also sought to improve
offers its own health plan, especially if it
their economic mix of patients or have
is able to increase physician alignment—
focused on highermargin procedures. Health
the additional operating profit from the
systems that want to benefit from having a
payor arm is not the only incremental
health plan must be proactive in reconciling
differences contributorCompendium to the improved eco Plans —these Providers —system Provider-led January 2015 in value creation. nomics. It cannot be assumed, however, key challenge is ensuring that the provider that offering ahealth healthplans plan auto Provider-led canmatically improve a providerAsystem’s economics creates economic benefits—the risks could
led plan offers a differentiated value propo
result in a negative return on investment.
sition and strong branding, especially if it
Exhibit 3 of 7
EXHIBIT 3 Provider-led health plans can improve a provider
system’s economics Patients utilizing the provider-led system
Scenario
Health plan premium revenue
Patients insured by third-party payor
—
Patients insured by provider-led health plan
$$$$$$$$
Health plan operating profit
System utilization
—
Net provider revenue
$$$$$
Patients utilizing other systems
Provider contribution margin
$$$$$
$$$$
$
Total system impact
$$$$ $
$$$$$
$$$$$
$$$$
$$$$$$$$
$$$$$
$
$$$
$$$$
$$$
The dollar signs shown here illustrate in general terms how a provider’s economics can change by launching a health plan. They do not represent actual sums of money. Source: McKinsey Healthcare Systems and Services Practice
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includes a narrow network. As a growing
increasing economic benefits from offering
number of consumers contemplate the trade
a health plan as volume grows—but growth
off between network breadth and premium
will materialize only when consumers recog
size, the importance of strong branding,
nize and understand the value offered by the
superior customer experience, and compe
plan. Only if there is real synergy between the
titive pricing should not be underestimated.
payor and provider arms will an integrated
To state the obvious, providers will derive
value proposition beat its competitors.
Questions a health system should ask itself if it is considering offering a health plan 1. Strategy
• How should we address channel
What strategy are we trying to pursue,
conflicts between our health plan
and where will the incremental value
and thirdparty plans?
created by the health plan come from? • Which consumer segments and which markets offer incremental value creation if we create an integrated delivery network? • What type of health plan will we offer? • How can we best capture value from integration? • How do the benefits we can gain from offer ing our own health plan compare with those that could be obtained through a closer partnership with one or two local payors? • What risks are we most likely to face if we offer a health plan? 2. Structure How should the health plan be structured to manage the tension between the different businesses? • How will we manage value creation conflicts between the payor and provider businesses?
• What is the optimal way to organize the combined entity (e.g., by geography, customer segment, or something else)? • Which part of the organization should own specific business processes? 3. Operational, financial, and regulatory readiness How should the health system get ready, and what investment is required? • In what key areas do we need additional skills or capabilities (e.g., member acquisition, regulatory and compliance, utilization management)? • How do we manage the heightened balance sheet risk of a combined payorprovider entity? • How much capital will we need not only to build infrastructure but also to maintain the appropriate riskbased capital levels?
Provider-led health plans: The next frontier—or the 1990s all over again?
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Having a health plan also exposes the systems
other health systems in its market, but also by
to balance sheet risks. At present, medical
national, regional, and local payors. Further
cost inflation is relatively low, which makes the
more, negotiations with these payors will be
payor business look less risky than it has been
complicated by the fact that the health system
at other times. Interest rates are also low and
now competes against them. These negotia
liquidity is high, and thus funding the capital
tions could be especially tricky given the
needed is easier. As a result, the joint econo
current trend toward narrow networks.
mics of a providerled health plan can look quite attractive. However, if both medical cost
Questions to consider
inflation and interest rates rise significantly, health systems that own health plans (and,
Health systems considering offering health
to a lesser extent, those that have joint ventures
plans should ask themselves questions in three
with payors) could face strong financial pres
key areas: strategy, structure, and operational/
sures. In our experience, only a few systems
financial/regulatory readiness. These questions
fully grasp these balance sheet risks today.
are outlined in the sidebar on p. 6.
Scale also presents risk. Unless a health
Strategy
system acquires a health plan with a sub
Market segmentation: The overall value of the
stantial membership, it will have to invest
payor’s members to the health system is largely
considerable capital in such things as claims
determined by the percentage of medical
management and service operations infra
spending that stays within the providerled plan.
structure. Smaller systems could find it diffi
If the percentage is low, more costefficient care
cult to fund these investments while waiting
delivery will not enable the system to retain a
for membership to grow to the point that
greater share of revenue as profit or to reduce
economies of scale kick in.
the plan’s premiums enough to stimulate enroll ment growth.
Regulatory compliance is another concern. Maintaining compliance with federal and state
Value differs by market, though (Exhibit 4).
insurance regulations, and the regulations
For a typical providerled plan, the potential
governing certain programs (e.g., MA and
perpatient profit is likely to be lower on indi
Medicaid) is both complex and expensive.
vidual products than commercial products—
Health systems should not underestimate
but the individual market is growing much more
what it takes to establish and maintain a
rapidly. The MA market is also growing rapidly,
robust regulatory function—even national
a result not only of population aging but also
payors with longstanding expertise in regu
of increased consumer interest. For health
latory compliance have sometimes been
systems, the economics of an integrated MA
penalized (both financially and through market
plan can be especially appealing given the high
restrictions) for not meeting requirements.
profit potential on the payor side (particularly for systems that can use care management
Having a health plan also increases a health
effectively to lower utilization). The value health
system’s list of competitors. The system must
systems can derive from Medicaid plans de
consider the strategic moves made not only by
pends primarily on the state and the Medicaid
7
8
McKinsey & Company Healthcare Systems and Services Practice
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Providers Compendium — Provider-led Plans — January 2015 Net profit per incremental new member for a hypothetical regional provider-led health plan Exhibit 4 of 7 EXHIBIT 4 Net profit per incremental new member for a hypothetical
regional provider-led health plan $ PMPY Provider
Medicare Advantage1
Commercial2
700 – 800
Exchanges3
Medicaid4
400 – 800
150 – 300
350 – 400
–100 – – 200
–300 – +50
Payor
550 – 1,100
150 – 300
850 – 1,100
50 – 400 – 550 150
–500 – +50
PMPY, per member per year. average net profit margin of ~2–4% for providers and ~4–8% for payors. average net profit margin of ~25% for providers and 4–8% for payors. 3Assumes average net profit margin of ~25% for providers and 2–4% for payors. 4Assumes average net profit margin of about minus 5–10% for providers and between 2% and minus 10% for payors. 1Assumes
2Assumes
Source: McKinsey Healthcare Systems and Services Practice
rate it is paid. If the Medicaid rate is sufficient
or wholly open (the system can accept
to help cover the variable costs for PHM, then
patients covered by other health plans,
having an integrated system can improve the
the payor business can reimburse for
provider’s economics. Otherwise, the integrat
care delivered elsewhere, or both). Value
ed system will likely have negative margins.
creation in the two plan types differs.
Segmenting health plan members can
Value capture: Health systems must also
also help health systems in other ways. For
determine whether building or buying a
example, when a system is negotiating with
health plan would better enable them to
employers that have private exchanges or
capture value. Our experience in both health
administrativeservicesonly accounts, it
care and other industries shows that seven
may make sense to lower the health plan’s
factors can help guide this decision (see the
premium—and profit margin—to attract
sidebar on p. 9). For many systems, the most
more members.
critical factors are the cost of building the payor component (especially given that the
Plan type: Providerled plans can be com
payor will likely have few members initially)
pletely closed (the health system and health
and their ability to access the market (e.g.,
plan work only with each other) or partially
their regulatory and marketing expertise).
Provider-led health plans: The next frontier—or the 1990s all over again?
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Seven questions that help guide build vs. buy decisions 1. Focus Which approach will enable us to deploy
so that we can control part of the market and maintain inpatient volume.
limited resources (e.g., capital, people) more effectively? Example: A buy decision is favored if we plan to expand our range of insurance products.
5. Innovation Which approach will provide access to better product and process innovations? Example: A buy decision is favored if the payor environment
2. Uncertainty
is competitive and we plan to serve
How do we want to manage input cost
multiple market segments that require
variability and use pooling to respond
frequent product innovations.
to unpredictable demand? Example: A buy decision is favored if we anticipate significant nearterm variability in patient volumes, since it would enable us to stabilize inpatient demand sooner. 3. Cost
6. Market access Which approach will best enable us to comply with external restrictions (e.g., government regulations, taxes) and give us access to markets, customers, and suppliers? Example: A buy decision is
Which approach will best enable us
favored if significant barriers to entry
to achieve lower costs from economies
exist and we need to gain regulatory
of scale (fixedcost absorption) and
expertise rapidly.
more efficient processes? Example: A build decision is favored if we are confident we can increase the productivity of our existing clinical staff to meet the needs of the payor function. 4. Speed
7. Control Which approach will best enable us to maintain control of intellectual property, critical pipeline information, and quality standards? Example: A build decision is favored
Which approach will deliver faster
if it is important that we control the payor
time to market?
assets in a way that an acquisition would
Example: A buy decision is favored if we need to become a payor quickly
make challenging (perhaps because of cultural differences).
9
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Providers Compendium — Provider-led Plans — January 2015 Value can be captured through different transaction types (the right type is not always obvious) Exhibit 5 of 7 EXHIBIT 5 Value can be captured through different transaction types
(the right type is not always obvious) Typical forms of intercompany transactions Acquisition/merger
Joint venture
Alliance
Acquisition/merger
Full business joint venture
Partial business joint venture
Strategic alliance with dedicated resources
• Full (or majority) acquisition of target company or merger of equals
• Partner contributions put into new JV entity
• Certain resources put into new JV entity
• All degrees of operational integration possible
• Operational lead by separate management team
• Vital other resources remain in parent companies
• Partners dedicate resources, creating a virtual entity
Examples:
Example:
Example:
• Baylor Health Care System
• Innovation Health (formed by Aetna and Inova Health System)
• ElevateHealth (formed by Harvard Pilgrim, Elliott, and Dartmouth Hitchcock)
• Scott & White Healthcare Integration
Separate new company
Contractual alliance
• Resources are made available to the partner but remain inside the parent
Existing companies
JV, joint venture. Source: McKinsey JV and Alliance Service Line
3
Pooja Kumar, MD; Anna Sherwood; and Saumya Sutaria, MD. Engaging physicians to transform operational and clinical excellence. The Post-Reform Health System: Meeting the Challenges Ahead. McKinsey & Company. May 2013.
Ownership versus partnership: A related
Structure
question is whether an alliance or joint venture
Value creation conflicts: If health systems offer
could provide the benefits of an acquisition
ing health plans are to achieve the alignment
without the risks. Factors that favor these
required to overcome value creation conflicts,
arrangements over M&A include the abilities
they must be able to manage internal incentives
to share risk and leverage complementary
for both physicians and operating unit leaders.
capabilities. In contrast, M&A is likely to be
A recent McKinsey survey showed that com
more beneficial for health systems if there
pensation remains a very important incentive
is considerable overlap in assets between
for physicians—but not sufficient on its own
the potential partners. Exhibit 5 outlines the
to drive behavioral change.3 Training, leader
full range of partnership choices available.
ship capability building, and a robust commu
11
Provider-led health plans: The next frontier—or the 1990s all over again?
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nication plan are also required. Operating unit
likely to surface. Being aware of these potential
leaders should be offered incentives tied to the
problems, and ensuring internal alignment on
integrated system’s value drivers (e.g., lowering
how they should be addressed (e.g., through a
care costs, improving quality metrics).
decision framework that spells out who makes decisions, who is consulted on decisions, etc.),
Channel conflicts: Unless a health system
is an important part of organizing for success.
obtains 100 percent of its patients through its
Providers Provider-led Plans —Organizational January 2015optimization: Health systems health plan,Compendium problems may— arise when it nego also need to think through where the health
tiates with thirdparty payors, especially those
Integrated system’s structure becon driven byplan’s the sources value can be maximized. sources of value with considerable market power.should Systems sidering offering health plans should carefully
If value creation is primarily derived from
evaluate6when Exhibit of 7 and where such challenges are
specific consumer segments, for example,
EXHIBIT 6 Integrated system’s structure should be driven
by the sources of value Business line prioritized
CEO
Hospitals
Health plan
Customer segment prioritized
Geography prioritized
CEO
Physicians
• Ideal if you believe growth/ margin opportunities will vary by business • Optimizes for: – Managing portfolio: investment, M&A, and growth decisions can be made separately
Region 1
Region 2
CEO
Region 3
• Ideal if you believe primary growth/margin opportunities are from market penetration/ integration • Optimizes for: – Capturing integration value – Speeding decisions in markets
– Responsiveness of businesses to individual opportunities
– Community responsiveness
Commercial
Government
Retail (MA, exchange)
• Ideal if you want to maximize competitiveness as payor, and integration is less important • Optimizes for: – Segment competitiveness (especially on national and regional level) – Membership growth – Plan acquisition – Product innovation
– Minimizing disruption Key question:
Key question:
Key question:
Are health plan assets going to be important going forward?
Do you believe that regional networks are required for success?
Are the different consumer segments unique enough to require special attention?
MA, Medicare Advantage. Source: McKinsey JV and Alliance Service Line
12
McKinsey & Company Healthcare Systems and Services Practice
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the plan’s organizational structure should
care outside of clinic or hospital walls. For
focus on those segments. In contrast, the
example, few health systems today have
organizational structure should be based on
experience in managing the continuum of
geography if regional differences require
care that extends through postacute care,
unique strategies (Exhibit 6).
but the ability to do so is likely to be crucial to the success of integrated plans. In our
Business process ownership: As they develop
experience, the capabilities health systems
their new organizational structures, health
need to develop can be grouped into four
systems should also think through which
main areas: financial risk management,
parts of the new organization should have
care management, clinical integration,
ownership of various business processes.
and patient engagement (Exhibit 7).
Four questions can help them make these decisions. First, what type of expertise is
Heightened balance sheet risk: Senior leaders
needed? (Payors and providers have histori
should consider taking steps to dampen the
cally had distinct areas of expertise.) Second,
impact of a more volatile risk environment.
how is financial risk allocated? (Resource
For example, a countercyclical reimburse
allocation should align with the extent of risk
ment mechanism that redistributes funds
each business is allocated. This holds true
between payor and provider when utilization
regardless of whether a health system owns
is very high or low can stabilize operations
a health plan or has a JV/alliance with a
while meeting the regulatory requirement
payor.) Third, what is the degree of benefit
to maintain adequate capital reserve levels.
from scale? (For example, the provider arm
This functions similarly to risk corridors to
of the organization should own the business
soften the impact on balance sheets when
processes related to PHM if larger scale
system utilization is volatile.
would enable it to justify investments in such things as having nurses embedded
Capital requirements: Insurance regulations
in physician offices.) Fourth, how will critical
put in place and monitored by the National
decisions, including those related to capital
Association of Insurance Commissioners
and growth, be reached? (In other words,
(NAIC) require payors to hold capital to guard
how will the health plan be governed?)
against insolvency. The amount of riskbased capital (RBC) needed is determined by a
Operational, financial, and regulatory readiness
formula that calculates the minimum amount
Additional skills/capabilities: Offering a health
support its overall business operations, given
plan often requires health systems to develop
its size and risk profile. The NAIC RBC sys
new skills and capabilities, particularly those
tem operates as a tripwire—regulators have
needed for PHM. Although most systems
legal authority to intervene in the business
have put at least some effort into building
affairs of an insurer if capital levels fall to one
PHM capabilities, those considering offering
of the action levels specified in the RBC law.
health plans must get serious about it. Many
Awareness and active monitoring of RBC
systems face a capability gap with PHM be
levels is yet another function that requires
cause of their lack of experience in managing
specific expertise and dedicated resources.
of money an insurer should have on hand to
Provider-led health plans: The next frontier—or the 1990s all over again?
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Providers Compendium — Provider-led Plans — January 2015 Readiness for population health management requires capabilities in four key areas Exhibit 7 of 7
EXHIBIT 7 Readiness for population health management requires
capabilities in four key areas Financial risk management
Care management
• Cost and utilization analytics • Financial risk accounting/reporting
• Care coordination, including post-acute and supportive care
• Contract management
• Case management
• Documentation and accurate coding
• Utilization management • Chronic disease management • Wellness and prevention • Clinical analytics for risk segmentation and provider reporting
Clinical integration
Patient engagement
• Governance, strategy, and alignment across the network
• Patient navigation tools, including transparency
• Clinical-quality best-practice dissemination, clinical pathways
• Superior patient experience and customer service
• Tools to manage own health/engagement
• Clinical-operations improvement to optimize quality and cost • Practice transformation • IT tools that enable integration (e.g., EHR operability)
EHR, electronic health records; IT, information technology.
...
avoid this move, because they are unlikely to
For most health systems, offering a health
achieve a positive return—much as occurred
plan is not easy. The providers most likely
when many providers established health
to succeed with this move are those that
maintenance organizations in the 1990s.
Source: McKinsey Healthcare Systems and Services Practice in the Americas
have an aligned strategy across their system, a strong balance sheet, welldeveloped PHM capabilities, solid brand recognition, and sufficient scale. By answering the questions we posed in this article, senior provider executives can determine how ready their organization is, and how well aligned they are, before they venture into health insurance. Some health systems (especially those with strong balance sheets) are in reasonably good shape to take the first steps. Other systems, however, should
Gunjan Khanna, PhD (gunjan_khanna@ mckinsey.com), is a partner in McKinsey’s Pittsburgh office. Ebben Smith, MD (ebben_smith@ mckinsey.com), is a consultant in its New York office. Saum Sutaria, MD (saum_sutaria@ mckinsey.com), a director in its Silicon Valley office, leads all provider work in McKinsey’s Healthcare Systems and Services Practice in the Americas.
Acknowledgments The authors would like to thank Erica Coe, Rohit Kumar, Patrick Morton, Brendan Murphy, and Suzanne Rivera for their contributions to this article.
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Measuring the patient experience: Lessons from other industries August 2015 | by Brandon Carrus, Jenny Cordina, Whitney Gretz, and Kevin Neher
A comprehensive approach health systems can use to better understand the patient experience and thereby improve patient satisfaction. For hospitals and health systems, patient satisfaction is likely to become an increasingly important source of competitive advantage. Yet many providers cannot measure the patient experience comprehensively, an important first step in improving it. Most health systems currently use a survey developed by the Centers for Medicare and Medicaid Services (CMS)—the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS)—to gauge how inpatients perceive their hospital stay as their basis for understanding patient satisfaction. While HCAHPS does provide important insights into the patient experience, it does not assess all of the important aspects of that experience. Furthermore, it was not designed to provide the level of detail needed for hospitals to link patient satisfaction with business performance. Health systems that want to use patient satisfaction as a way to improve business performance need additional feedback and data to identify the factors that matter most to the patients they serve. Armed with the combined information, the health systems can then determine which investments in improving the patient experience can best help them meet their business objectives. In this article, we describe a comprehensive approach health systems can use to better understand the patient experience and thereby improve patient satisfaction. This approach is based on the experience of companies in other industries that were able to markedly improve customer satisfaction levels.
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Lessons from other industries In other industries, high customer satisfaction levels have been linked with stronger loyalty, sales, and profits. McKinsey research in multiple industries has shown that companies that routinely achieve high customer satisfaction scores rely on best-practice measurement systems that: Link improvements in the customer experience with desired business outcomes (e.g., repeat sales) Enable the companies to identify the most important drivers of customer satisfaction and measure ongoing performance in those areas Uncover operational insights that enable the frontline staff to make continuous improvements in the customer experience Applying these lessons in health systems To date, few health systems have achieved significant business results through patientexperience initiatives. Yet, growing consumerism in the healthcare industry—a result of higher deductibles and copayments, network narrowing, and greater transparency into provider performance and costs—is likely to make patient-experience initiatives more of an imperative for the industry. The proliferation of provider-led health plans is also making it increasingly important for health systems to market themselves, and patient satisfaction could be a key differentiator in their marketing efforts. The steps outlined below can enable providers to adapt best practices from other industries to the healthcare environment. Link patient satisfaction to business outcomes The first step for health systems is to determine the business outcomes they most want to focus on (e.g., total patient volume, patient retention, percentage of commercial patients). They should then conduct research to investigate the types of questions that will best enable them to gauge patient satisfaction in a way that ties into those objectives. For example, a major US health insurer discovered that customer agreement with the phrase “[company name] is the insurer for me” predicted loyalty in one of its most important member segments better than agreement with any other phrase did. Because member retention in that segment was one of its business objectives, the insurer then focused its efforts on how to increase the percentage of people in that segment who agreed with the phrase. Next, health systems should conduct additional research to identify the factors that most strongly influence how patients respond to the chosen questions and the specific metrics
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that would enable them to assess performance in those areas. Over time, the combined data should permit the health systems to develop robust measurement systems that can uncover operational insights and enable continuous frontline improvements. To ensure that the measurement systems remain robust, health systems should repeat this fundamental research every few years so that their understanding of the patient experience is always current. Identify the strongest influences on patient satisfaction To determine which factors most strongly influence patient satisfaction, health systems must accurately understand the end-to-end inpatient journey, from pre-admission scheduling and testing through to follow-up care, as well as the role that price, service offerings, physician referrals, and brand play in determining where patients seek care (Exhibit 1). Web 2015 HCAHPS Exhibit 1 of 2
Exhibit 1
Patient experience spans the entire clinical journey Patient experience spans the entire clinical journey
Day of Surgery
3.
1.
Scheduling 4.
Follow Up
Pre-Op Testing
2.
There are many “mini-journeys” throughout a patient’s care journey A patient’s care journey provides a consumer-centric view of an individual’s experience. It includes all clinical and nonclinical touch points as a person chooses and receives care, and is followed up afterward.
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HCAHPS: Overview Since 2006, CMS has supported US hospitals in administering the 27-question HCAHPS survey, which asks patients to rate their experience on several dimensions (e.g., communication with doctors, cleanliness of the hospital environment). CMS then publishes the results online. Beginning in fiscal year 2013, CMS has also used each hospital’s aggregate HCAHPS score to reward top performers and penalize underperformers, putting almost $1 billion of reimbursement at stake.1
1 Centers for Medicare and
Medicaid Services. National provider call: Hospital value-based purchasing – FY 2013 actual percentage payment summary report. October 4, 2012. 2 Isaac T et al. The
relationship between patients’ perception of care and measures of hospital quality and safety. Health Services Research. 2010; 45(4): 1024–40. 3 Rodak S. Improving
HCAHPS scores alone is not the answer: Hospitals need a patient-centric foundation. Becker’s Infection Control & Clinical Quality. January 7, 2013.
At most providers, HCAHPS has increased the management teams’ focus on the patient experience and helped them begin to understand patients’ perspectives. HCAHPS has also allowed both the management teams and patients to compare how well different hospitals perform on patient experience. The McKinsey Consumer Health Insights Survey has shown that most consumers now say that rating sites are at least “somewhat important” when choosing a provider, but how often the scores actually influence a patient’s choice of provider remains unclear. However, HCAHPS was not designed to link the patient experience with a hospital’s financial performance, and our analyses show that HCAHPS scores do not correlate strongly with financial metrics. For example, there
is little correlation between HCAHPS scores and net revenue, inpatient gross revenue, or the percentage of patients with commercial insurance. Furthermore, researchers have found that the evidence linking HCAHPS scores with clinical outcomes is inconclusive.2,3 The low correlation between HCAHPS scores and financial and clinical outcomes most likely reflects the fact that the survey does not investigate a number of factors that, our research suggests, may be strong determinants of patient satisfaction. Some of these affect the inpatient experience (e.g., keeping patients informed about the results of treatment); others occur before or after the inpatient stay (e.g., pre-admission testing and outpatient follow-up). Thus, improving HCAHPS scores may help health systems increase their CMS reimbursement (and avoid penalties), but it may not enable them to achieve all of their other goals for patient satisfaction initiatives, such as increased volume. Therefore, they should undertake additional measures that complement their HCAHPS efforts so they can improve their performance in areas that could lead to increased loyalty, referrals, and profitable patient volume.
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The inpatient journey should then be broken down into discrete elements to identify the factors that can influence patient satisfaction at each step of the journey. Both clinical and nonclinical factors should be included. In-depth qualitative research (e.g., focus groups) and quantitative research (e.g., patient surveys) should then be conducted to pinpoint which factors most strongly influence satisfaction levels in ways that correlate with desired business objectives. When conducting this research, two points are worth remembering. First, the factors with the strongest influence often vary by market and patient segment (e.g., expectant mothers, cardiovascular patients, emergency room patients). Thus, the journeys along different care pathways should be mapped separately to determine which factors influence each one. For example, a hospital in a competitive community that views its maternity services as a way to attract and retain patients would need to understand which elements of care during pregnancy, childbirth, and follow-up have the strongest impact on new mothers’ satisfaction levels. Second, what patients say is important to them may not correlate with how satisfied they actually were with their inpatient stay. In our 2014 Consumer Health Insights Survey, for example, we asked the participants who reported having been hospitalized within the past three years to tell us which factors were most important in influencing their satisfaction with their hospital experience. We then compared those responses with the participants’ reported satisfaction levels to determine the relative (or derived) importance of each factor (Exhibit 2). The match-up was inexact. For example, most participants said that the outcome achieved was the strongest determinant of their satisfaction with care. However, empathy from nurses turned out to have a greater impact on actual satisfaction levels. Health systems need to understand the derived importance of various factors if they want to ensure that their improvement efforts yield significant results. This type of careful qualitative and quantitative research can help health systems avoid costly errors. In our experience, many health systems make large investments to improve the patient experience but fail to achieve their desired objectives because they did not understand what really matters most to their patients. Leading customer-focused companies rarely make this mistake. For example, a major rental car company conducted interviews and surveys to improve the experience of business travelers, its most profitable customer segment. The research established that the most important source of satisfaction for these travelers was not the variety of vehicles (as the company had hypothesized), but the experience from landing at an airport to leaving the rental facility. The research also showed that the key elements influencing that experience were the speed of getting the rental car and communication about the status of the reservations before arrival. As a result, the company invested to streamline the arrival process and used technology to give customers frequent updates. The result: higher retention of business travelers.
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Exhibit 2 Many factors matter to patients
Uncover operational insights As the car rental company example illustrated, it is not sufficient to identify the factors that matter most. Those factors must be broken down into their constituent parts—ideally, ones that can be monitored regularly. For example, if nurse empathy has a strong impact on patient satisfaction, health systems should track such things as total nursing time spent with each patient and timely response to call buttons. Similarly, if the most important factor influencing satisfaction with ER care is how quickly patients see a provider, health systems should routinely measure the average “door to doc� time. Metrics such as these become key performance indicators (KPIs) that can be used to change behaviors in ways that improve the patient experience. The KPIs should, ideally, be assessed daily and results reported to the individual hospital units. The findings help the frontline staff determine where changes are needed and then test the changes to understand the impact 6
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they are achieving. The KPIs are thus an important complement to the monthly patient feedback survey scores. Although those surveys are the most important gauge of patient satisfaction, it may take weeks before the responses are processed and reported to the frontline. In contrast, the KPIs allow the staff to make meaningful, real-time adjustments to their activities and weave continuous improvement into daily operations. As a consequence, patient satisfaction is no longer just a marketing initiative but a component of the organization’s culture. Leading customer-service companies have long used this approach. For example, a large consumer bank discovered that one of the primary factors influencing its customers’ satisfaction was how quickly it could respond to service disruptions; the speed with which its call center agents completed calls about disrupted service was an important subcomponent. The bank therefore began to track the average time call center agents spent handling these calls daily as a first step in improving its ability to address service disruptions.
Improving the patient experience can help health systems achieve their business objectives as well as increase their Medicare revenue. In some cases, it could also have spill-over effects, such as better clinical care delivery. The steps outlined above can help health systems deepen their understanding of the patient experience and identify the most effective ways to increase patient satisfaction. Brandon Carrus is a principal in McKinsey’s Cleveland office. Jenny Cordina is an expert principal in its Detroit office. Whitney Gretz is a consultant in its Chicago office. Kevin Neher is a principal in its Denver office.
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For more information, contact McKinsey_on_Healthcare@mckinsey.com Copyright Š 2015 McKinsey & Company CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited. www.mckinsey.com/client_service/healthcare_systems_and_services
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Insights into Hispanics’ enrollment on the health insurance exchanges New McKinsey research sheds light on why Hispanic enrollment rates continue to be low—and how these numbers could be improved.
In the U.S., Hispanics are more likely to lack
lowing question: “Are you of Hispanic, Latino,
health insurance than any other racial or
or Spanish origin?” Respondents to the
ethnic group, and enrollment on the individual
Spanish-language version of the survey were
health insurance exchanges is disproportion-
drawn from an online U.S. Hispanic panel.
Erica Coe, Jenny Cordina, Elizabeth P. Jones, and Suzanne Rivera
ately low among Hispanics—issues that have been well documented. As payers are pre-
Of the 554 Hispanic survey respondents, more
paring for the 2016 open enrollment period
than half (53%) reported being without health
(OEP), we wanted to share new McKinsey
insurance in both 2014 and 2015. (Among
research that sheds light on why Hispanic
all respondents to our survey, 36% reported
enrollment rates continue to be low, and to
being uninsured in both years.) When we
offer suggestions on how to address some
compared the Hispanic respondents and non-
of the challenges involved in increasing
Hispanic respondents who reported being
Hispanic enrollment.
uninsured in those years, we found several similarities: both groups, for example, con-
Between February and April 2015, we survey-
sisted predominantly of low-income men
ed 554 adults of Hispanic descent who were
between the ages of 30 and 49. However,
eligible for qualified health plans to better
health status was better among the Hispanics.1
understand the factors influencing enrollment rates. All of these respondents reported that
We also uncovered three factors that appear
they were U.S. citizens or legally entitled to
to be contributing to the lower enrollment
live in this country, and that they were not
rates among Hispanics: 1
eligible for Medicare or Medicaid. Penalty awareness. A slightly higher percentThe survey, which was conducted in both
age of Hispanics than non-Hispanics report-
English and Spanish, is part of a much
ed that they were unaware of the financial
broader research effort we have been con-
penalty for lacking health insurance (46%
ducting into decision-making among health-
vs. 41%, respectively). Once we informed all
care consumers, particularly those shopping
respondents in both surveys about that pen-
for health insurance on the public exchanges.
alty, however, the Hispanics were significantly
(Since November 2013, when we conducted
more likely to say that they would purchase
our first OEP study, we have surveyed more
coverage (41% vs. 27%, respectively).
than 14,000 consumers.) Respondents to this year’s English-language survey were defined
Subsidy awareness. In our surveys, price sen-
as Hispanic if they answered “yes” to the fol-
sitivity and affordability concerns were high
A wide range of researchers have found that health status is generally better among Hispanic than non-Hispanic Americans, for reasons not entirely understood. Average age is much lower among Hispanics than among other Americans, but other factors also appear to be involved. For more information about differences in health status between Hispanics and non-Hispanics, see the CDC report, Summary Health Sta tistics for the U.S. Population: National Health Interview Survey, 2012, and Population Research Bureau’s post, “Exploring the Paradox of U.S. Hispanics’ Longer Life Expectancy.”
2
McKinsey & Company Healthcare Systems and Services Practice
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Web 2015 <article slug> Exhibit 1 of 1
Shopping behavior on the public exchanges
Shopping behavior among consumers eligible EXHIBIT Shopping behavior among consumers eligible for qualified health plans Shopped1
69%
Enrolled in a plan1
Enrolled in ACA plan1
39%
20%
78%
Did not shop1
31%
58%
Did not enroll1
22%
30%
33%
Enrolled in non-ACA individual plan1
20%
Hispanics were 9
43% of Hispanics
percentage points
who shopped did
less likely to shop
not enroll, compared
10%
18%
Enrolled in non-individual plan
with 26% of the general population
% of Hispanic population
1
9%
7%
% of general population
Statistically significant difference between Hispanics (n = 554) and general population (n = 3,006) at 95% confidence level.
Source: McKinseyâ&#x20AC;&#x2122;s Center for U.S. Health System Reform Hispanic and National 2015 OEP surveys
among all survey respondents, independent
Decision not to complete a purchase. Lack
of ethnicity. The majority of the respondents,
of knowledge about penalties and subsidies
including the Hispanics, thought health
helps explain why the Hispanic respondents
insurance premiums should be less than
to our surveys were almost 30% less likely
$100 per month. However, awareness of
than other respondents to shop for insurance
subsidy eligibility was lower among Hispanics
(see Exhibit). However, the Hispanic respon-
than among other respondents. For example,
dents were also less likely to complete the
among those who remained uninsured in
purchase once they had started shopping.
both 2014 and 2015, only 5% of the Hispanic
Part of the explanation for this may be that
respondents were aware of the size of the
the Hispanic respondents were almost twice
subsidy they were eligible for, compared
as likely as the non-Hispanic respondents to
with 12% of the non-Hispanic respondents.
report having encountered technical prob-
[ADD 1 LINE HERE TO ALIGN?]
lems on the public exchanges. For example,
Insights into Hispanicsâ&#x20AC;&#x2122; enrollment on the health insurance exchanges
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16% of the Hispanic respondents, compared
The campaigns should focus on increasing
with 9% of the non-Hispanic respondents,
awareness of the penalty for not having in-
said they were unable to open a user account.
surance, the subsidy levels individuals may be eligible for, and the carriers offering health
Language barriers may have contributed to
insurance in a given region.
the technical problems in a few cases, but it is unlikely they were a major factor in most cases.
Price transparency should be a central
Just 4% of the Hispanic respondents in our
element of the campaigns. The Hispanic
surveys said they spoke only Spanish at home,
respondents in our survey, like their counter-
and 6% said they read newspapers and maga-
parts in the general population, were very
zines only in Spanish. In contrast, 83% of the
price sensitive. Messages focusing on the
Hispanic respondents reported they spoke
economic benefits of having coverage may
English at home (part or all of the time), and
be compelling to Hispanics because our
77% reported they preferred to read in English.
research has shown that once individuals
Furthermore, those who preferred Spanish were
obtained health coverage on the exchanges,
more likely to have enrolled in an insurance
Hispanics were more likely than those in
plan than were those who preferred English.
the general population to try to access healthcare services.
Similarly, lack of computer proficiency does not appear to underlie the technical problems
The Hispanic population will continue to
many of the Hispanic respondents reported.
be important to payers, providers, and
More than 90% of both Hispanic and non-
government agencies as they work to enroll
Hispanic respondents said they used comput-
the residually uninsured and to understand
ers at home, and use of smartphones and
how individuals shop for coverage on the
tablets was higher among Hispanics than
exchanges and use healthcare services.
non-Hispanics.
Increasing enrollment among Hispanics to equal that in the general population will
In addition to technical difficulties, another
require targeted efforts from all of these
factor that may have contributed to the low
organizations.
purchase rates among Hispanics was unfamiliarity with health insurance companies. For example, 69% of the Hispanic respondents, compared with 83% of the other respondents, had heard of their local Blues plans. Awareness of national health insurers was also lower among Hispanics (54% vs. 63%, respectively).
Moving forward It appears, therefore, that awarenessbuilding campaigns are likely to be crucial for boosting enrollment rates among Hispanics.
Erica Coe (erica_coe@mckinsey.com) is a senior expert in the McKinsey Center for US Healthcare Reform. Jenny Cordina (jenny_ cordina@mckinsey.com) is an expert principal in the firmâ&#x20AC;&#x2122;s Detroit office. Elizabeth P. Jones (elizabeth_jones@mckinsey.com) is a consumer knowledge expert in that office. Suzanne Rivera (suzanne_rivera@mckinsey.com) is a consultant in the firmâ&#x20AC;&#x2122;s Denver office. This article was originally published on the Health Affairs Blog (http://healthaffairs.org/blog/ 2015/08/26/insights-into-hispanics-enrollmenton-the-health-insurance-exchanges/).
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1
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Designing and implementing an integrated oncology care management program The newer approaches to managing oncology care have been somewhat effective in controlling near-term costs, but have often made care delivery more cumbersome and created friction between payors, providers, and patients. A more comprehensive and integrated oncology care management program, however, can deliver long-term benefits to both payors and providers.
In the past few decades, oncology care has
In the past decade, a number of new
achieved significant progress in the United
approaches designed to improve the
States. Between 1975 and 2010, five-year
quality and safety of oncology care while
survival rates increased almost 40%, a
controlling costs have been developed.
result of earlier diagnosis, improved drug
These initiatives, which require closer
therapies, better radiation treatment, and
collaboration between payors and
other innovations (Exhibit 1). As of January
providers, have been somewhat effective
2014, nearly 14.5 million Americans had a
in controlling near-term costs. However,
history of cancer, including those living with
most of them were based on traditional
cancer and those previously diagnosed but
managed care models and relied on prior
with no current cancer evidence.
authorization, step therapy, and formulary
1
2
Chiara Leprai; Edward Levine, MD; Alex Sozdatelev; and Denis Vaskov
design to reduce the unnecessary utilization Progress has come at a price, however:
of high-cost oncology drugs, diagnostic
oncology care has become one of the key
testing, and procedures. As a result, they
factors underlying the rise in the countryâ&#x20AC;&#x2122;s
have made care delivery more cumbersome
healthcare spending. The American Society
for all parties involved and have created
of Clinical Oncology has predicted that
friction between payors, providers, and
annual US oncology spending, which was
patients. Furthermore, each of these
$104 billion in 2006, will reach $174 billion
initiatives has limitations that could impair
by 2020.3
its ability to achieve sustainable results.
The escalating cost of oncology care has
In this article, we describe a more
attracted the attention of providers, public
comprehensive and integrated oncology
and private payors, and the general public.
care management program that can be
Until fairly recently, oncology care was
implemented in the US healthcare system.
managed almost solely by providers, given
Our experience suggests that this program
that payors and other stakeholders had
can deliver long-term benefits to both
limited expertise. However, the rapid rise in
payors and providers. Even greater impact
costs has made collaboration, joint decision
can be achieved if other stakeholders in the
making, and transfer of knowledge between
oncology value chain, especially patients
payors and providers essential.
and drug suppliers, are involved.
1
National Cancer Institute. SEER Cancer Statistics Review 1975-2011. 2 American Cancer Society. Cancer Treatment & Survivorship Facts & Figures 2014-2015. 3 The State of Cancer Care in America, 2014: A Report by the American Society of Clinical Oncology.
McKinsey & Company Healthcare Systems and Services Practice
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Why the rising costs?
oncology care. Other important factors include:
The advances in medical treatment that have improved outcomes and prolonged patients’
Increasing cancer incidence. According to
lives have also extended the duration of
the National Cancer Institute, the cancer
treatment and raised costs. The average
incidence rate in the United States grew by
monthly price of oncology drugs has been
more than 16% between 1975 and 2010,8
rising for decades; between 2009 and 2014
largely because of population aging and
alone, the average inflation-adjusted monthly
earlier diagnosis.
price of new oncology drugs increased by 48% (Exhibit 2).4 Those drugs and drug
Significant variations in treatment patterns.
administration now account for about 34%
Treatment approaches vary considerably
of total oncology expenditures.5 This increase
for patients with the same type and stage
primarily reflects the high price and growing
of cancer—not only across the United
use of biologic drugs.6 However, the cost
States but also among practices and
of radiation therapy and other forms of
physicians in the same localities. Although
treatment have also been growing rapidly.
some of this variation is inevitable given
EHR Value Capture7 — Oncology — 2015 Five-year cancer survival rates in the U.S.
the specific needs of each patient, a large
Treatment costs are not the only factors
portion of it reflects overutilization and
underlying the increase in spending on
waste.9
Exhibit 1 of 3
EXHIBIT 1 Five-year cancer survival rates in the U.S. 4
Matthews AM. Insurers push to rein in spending on cancer care. Wall Street Journal. May 27, 2014. 5 The 2014 Genentech Oncology Trend Report. Genentech; 2014. 6 Ensuring Patient Access to Affordable Cancer Drugs: Workshop Summary. National Academies Press (US); Dec 23, 2014. 7 Smith BD, et al: Adoption of intensity-modulated radiation therapy for breast cancer in the United States. Journal of the National Cancer Institute. 2011;103:798-809. 8 Surveillance, Epidemiology, and End Results (SEER) Program. Cancer Statistics Review. (seer.cancer.gov/csr/ 1975_2011/browse_csr.php? sectionSEL=2&pageSEL= sect_02_table.05.html) 9 Fitch K, Pyenson B. Cancer Patients Receiving Chemotherapy: Opportunities for Better Management. Milliman; 2010.
Five-year cancer survival rates in the U.S., %
1975–1977
2004–2010
99.6
100 90.5 80
74.8 68.3
67.8
66.1
60 49.8
48.9 40
20
0
Relative survival increased by 39% All cancers
17.8 12.2
Breast
Prostate
Source: National Cancer Institute, Survival Epidemiology and End Results (SEER)
Colon and rectum
Lung and bronchus
3
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EHR Value Capture â&#x20AC;&#x201D; Oncology â&#x20AC;&#x201D; 2015
Oncology drug prices continue to rise dramatically Exhibit 2 of 3
EXHIBIT 2 Oncology drug prices continue to rise dramatically Cost of treatment and launch dates (by calendar year) for oncology drugs, U.S., $ thousands1
25
20
10
5
0 1965 1In
1970
1975
1980
1985
1990
1995
2000
2005
2010
2013 dollars
Source: McKinsey analysis
Shift of treatment to higher-cost care settings. In the past few years, health systems have been acquiring independent oncology
Newer approaches: Pros and cons
practices at an increasing rate because
In recent years, payors and providers
of the high growth in the need for oncology
have started working together to develop
care, cost pressures from payors, and a
more collaborative solutions for controlling
more favorable cost structure for select
costs without denying patients access
facilities (e.g., the federal 340B program
to potentially life-saving drugs. Three
provides hospitals with access to drugs
approaches are being used most often:
at significant discounts to treat indigent Introduction of clinically based pathways
patients). However, care provided by
to drive standardization of care. Pathways
hospitals is now often more expensive than care provided by physician practices,
define the sequence and timing of cancer
and studies suggest that the cost differ-
treatment, based on cancer type, stage,
ence cannot be attributed to observable
and other patient-specific factors. Although
differences in patient characteristics or
providers can deviate from pathways when
10
treatment types. As a result, the shift of
they deem it appropriate, the presence of a
cancer care to hospitals has contributed
standard of care has been proved effective
to the growth in overall oncology spending.
in decreasing treatment variability and
11
10
According to the analysis, the average annual cost of chemotherapy covered by Medicare between 2006 and 2009 was $47,500 for privately owned practices; similar services performed in the outpatient hospital setting incurred an average cost of $54,000 (Finch K, Pyenson B. Site of Service Cost Differences for Medicare Patients Receiving Chemotherapy. Milliman; 2011). 11 Fitch K, Iwasake K, Pyenson B. Comparing Episode of Cancer Care Costs in Different Settings: An Actuarial Analysis of Patients Receiving Chemotherapy. Milliman; 2013.
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reducing the use of drugs likely to cause
retrospectively). The providers may also
severe side effects. When pathways are
receive additional rewards based on clinical
used, payors typically reward providers
outcomes, and the achievement of care
based on their compliance with the
quality goals may be a prerequisite for
pathways and performance on other
participation in savings. Several recent
process and outcome quality metrics.
pilots show that well designed and
12
implemented episode-based oncology The majority of existing pathways have
payment programs can significantly
limitations, though. They often focus on
decrease the total cost of care without
specific areas of oncology care (usually,
harming clinical quality, financially
on chemotherapy; less so on imaging
benefiting both providers and payors.14,15
and radiation therapy) without looking at
Whether these pilots can be scaled up
patients holistically. Moreover, the large
remains to be seen, however.
number and variety of pathways currently
12
LeClerc O, et al. Strategies in oncology: Spotlight on clinical pathways. Oncology Knowledge Bulletin. McKinsey & Company; 2012. 13 On January 26, 2015, CMS announced new initiatives to promote: a) better care (by encouraging integrated care, population health, and patient engagement); b) smarter spending (by encouraging the use of bundled payment arrangements); and c) healthier people (by advancing electronic health records, interoperability, and transparency). (See www.cms.gov/Newsroom/ MediaReleaseDatabase/ Fact-sheets/2015-Fact-sheetsitems/2015-01-26.html.) 14 Newcomer LN, et al. Changing physician incentives for affordable, quality cancer care: Results of an episode payment model. Journal of Oncology Practice. 2014; 10(5):322-6. 15 Sobczak M. Alternate payment methodologies: Building and costing care bundles. Presentation at the 2014 Cancer Center Business Summit. November 7, 2014.
available creates operational complexities
The effectiveness of episode-based
for both payors and providers by making
payment depends on the specificity of
it more difficult to consistently identify the
the information given to providers to help
optimal treatment path for a given patient.
them understand the sources of cost
Furthermore, most current pathways are
and outcome variations. Simply establish-
developed at the national level. Local
ing a flat sum for payment without giving
physicians may not believe the pathways
providers more detailed information on
are appropriate for their patients, especially
sources of variation may leave them
given that they had no input into their
without the tools to improve performance.
development.
Comparative, detailed information on cost drivers and outcomes is likely to achieve
Empowerment of providers through episode-
greater impact that can be scaled across
based payment arrangements. More and
different provider types (e.g., large
more payors are experimenting with episode-
academic medical centers vs. community
of-care payment arrangements. CMS has
hospitals vs. independent oncologists).
also announced that it will expand its episodebased chemotherapy payment program.13
Support of provider-to-provider collaboration to increase care coordination. Accountable
In episode-based arrangements, payors
care organizations (ACOs), medical homes,
either: (a) give providers a flat sum to cover
and similar arrangements are designed to
pre-defined services delivered during a
increase care coordination and potentially
specified duration of treatment for a given
shift risk from payors to providers. The
type of cancer; (b) reward providers for
providers optimize care decisions for their
achieving an average cost per episode
patients by more closely coordinating care
(paid out on a fee-for-service basis) that is
and are rewarded for their performance
lower than a benchmark level; or (c) reward
based on the total cost of care and quality
providers for controlling the rate of growth
metrics. The payors encourage and support
in the cost per episode (measured
interactions among the providers by giving
5
Designing and implementing an integrated oncology care management program
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risk, reimbursement models may offer limited
An integrated approach to improving quality and controlling costs
upside only or substantial gain sharing and
After helping multiple payors and provi-
downside risk.
ders across the United States develop
them IT tools and facilitating peer-to-peer discussions on performance. Depending on the providers’ readiness and appetite for
approaches for dealing with rising oncology costs, we have come to believe that long-
At present, there are about 10 oncology-
term impact can best be achieved through
focused medical homes accredited by the National Committee for Quality Assurance
an integrated program that begins with
and only a handful of oncology-focused
close collaboration between payors and
ACOs. These arrangements have been
providers, and combines elements from all
shown to control the cost curve without
three of the approaches described above
harming outcomes, but they are not easily
(Exhibit 3). The program then radiates
scalable. Collecting and transferring the data
outward to involve others in the value chain,
needed to accurately track performance and
especially patients and drug suppliers.
calculate reimbursement is often a— manual, EHR Value Capture — Oncology 2015
(See the sidebar on p. 6 for more details
16
time-consuming process. Moreover, not all
about how to involve these other
physicians are approach comfortable takingmanagement on stakeholders.) Our experience suggests An integrated to with oncology risk, and some payors are unwilling to help
that this combination delivers larger—and
risk-averse identify and capture Exhibit 3 ofpractices 3
more sustained—results than do any of
value-creation opportunities.
the program elements on their own.
EXHIBIT 3 An integrated approach to oncology management • Include the whole spectrum of disciplines involved in cancer treatment, as well as supportive care and Comprehensive appropriate transition care protocols to palliative care • Have consensus of local oncologists • Are consistently updated over time to reflect the most recent clinical evidence
Transparency
Better quality at lower cost
• Outcomes and cost performance are assessed across the continuum of care, on a time frame consistent with duration of the treatment • Assessment leverages data that providers trust and a methodology perceived as fair • Data on performance is easily accessible to providers and discussed regularly in physician forums
Alignment of incentives 16
• Reward compliance with care protocols and improvement in clinical outcomes • Are based on a set of performance metrics consistent with what is tracked and shared as part of the transparency initiatives
Robeznieks A. At home with the specialist: Oncologists and other specialists launching patient-centered medical homes. Modern Healthcare. October 18, 2014.
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Extending alignment beyond payors and providers Close collaboration between payors and providers
administered in hospitals (assuming there is no
can be very effective in reining in the cost and
difference in quality among the sites).
improving the quality of oncology care. However, maximum impact can be achieved only if other
In addition, payors can use appropriate benefit
stakeholders in the value chain are included in the
designs (e.g., wellness bonuses) to encourage
collaboration. Payors, for example, can use product
wellness behaviors and use of preventive mea-
design to encourage patients to select the most
sures that have the potential to decrease cancer
cost-efficient providers. Both payors and providers
incidence and ultimately reduce costs. The most
can take steps to encourage patients to adopt
obvious example of this is smoking cessation.
wellness behaviors and use preventive measures
Studies have shown that direct expenditures
to reduce cancer incidence. Both sides can also
on medical care attributable to smoking and
work with suppliers to reduce the overall cost base.
smoking-related illnesses amount to more than $2,500 per smoker; cancer care accounts for a
Aligning incentives for patients
significant portion of this spending.1 These costs
Payors can help cancer patients choose cost-
can be minimized through appropriate smoking
efficient, high-quality providers through oncology-
cessation programs. Providers can help make
specific product designs and benefits. For example,
sure that smoking cessation programs and other
they can use network narrowing or other levers to
methods of promoting wellness and preventive
manage their network of oncology care providers
health are easily available to patients.
more actively (e.g., based on the providersâ&#x20AC;&#x2122; level of compliance with care protocols and clinical
Finally, both payors and providers can take steps
outcomes). This approach not only gives patients
to raise patientsâ&#x20AC;&#x2122; awareness of cancer symptoms
preferential access to cost-efficient, high-quality
and how to seek care to increase their chances
providers, but also gives providers an additional
for early diagnosis.
incentive to take part in the oncology management 1
Rumberger JS, Hollenbeak CS, Kline D. Potential Costs and Benefits of Smoking Cessation: An Overview of the Approach to State Specific Analysis. April 30, 2010. 2 HCPCS is the acronym for the Healthcare Common Procedure Coding System. 3 More information on the Medicaid Drug Rebate Program can be found at www.medicaid.gov/MedicaidCHIP-Program-Information/ By-Topics/Benefits/PrescriptionDrugs/Medicaid-Drug-RebateProgram.html.
program, adopt care protocols, and participate
Aligning incentives with suppliers
in episode-based reimbursement models.
Both payors and providers can partner with other stakeholders in the oncology value chain to
Payors can also design their co-payment and
reduce the overall cost base while maintaining or
co-insurance requirements to give patients
improving care quality. This collaboration could
incentives to use lower-cost sites of care
happen in at least three ways:
whenever doing so is clinically appropriate and safe. For example, co-payment and co-insurance
Increase the penetration of existing services.
rates could be lower for chemotherapy drugs
For example, payors could implement more
infusions conducted in physician offices and
prescriptive medical management initiatives,
ambulatory infusion centers than for infusions
leveraging their scale to shift oncology drug
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distribution to specialty pharmacies. This would
NDC information to implement preferred drugs
result in almost real-time drug delivery, creating
strategies in exchange for appropriate rebates
value for providers by reducing the up-front
from pharmaceutical companies. Again, a portion
capital investments required to ensure the
of this value could then be shared with providers.3
presence of an adequate stock of medications
Some payors are already leveraging NDC data
and appropriate cold storage. Moreover, the shift
as a source of value creation; for example, CMS
from “buy and bill” to specialty pharmacy (on a
and state Medicaid agencies are using it to get
drug-by-drug basis to ensure that the timeliness
rebates from the drug manufacturers and help
of the supply and patient safety are not affected)
offset Federal and state costs for most outpatient
would separate provider margin from the cost
prescription drugs.
of the drugs, thus removing potential perverse incentives and creating a pool of value that could
Create value by developing new collaborations.
be redistributed to providers to reward them for
Finally, payors and providers could collaborate
adherence to care protocols.
with pharmaceutical companies to develop and implement cutting-edge oncology care solutions.
Negotiate better conditions with pharma
Next-generation sequencing, molecular imaging,
ceutical companies, leveraging larger scale
and genetic screening have already saved the
and additional information. Both payors and
lives of many patients by enabling more effective
providers could negotiate with pharmaceutical
cancer screenings, better treatment regimens,
companies to obtain more competitive prices
and more accurate care monitoring. Payors
for oncology drugs by linking rates to real-world
could complement the efforts of pharmaceutical
evidence of the drugs’ effectiveness. This
companies in this field by providing appropriate
option is especially feasible once standard
(and blinded) patient data and detailed analytics
care protocols are implemented and a credible
on drug utilization, and by facilitating interactions
mechanism for assessing performance and
between the companies and providers. Providers
outcomes has been established.
could ensure that next-generation sequencing is deployed when appropriate and corresponding
Similarly, payors could negotiate rebates with
treatment decisions are being made. Providers
pharmaceutical companies by collecting and
could also consistently codify and share their
leveraging National Drug Code (NDC)-level data
experiences with personalized medicine.
on specialty drug utilization. Most private payors
Collaboration among all stakeholders in
reimburse for infusions of cancer drugs based on
developing and implementing new oncology
HCPCS2 codes, and many HCPCS codes include
solutions could help ensure that patients get
multiple different but clinically equivalent drugs
the best possible cancer treatment and could
(each with an individual NDC) that providers can
be another major element in driving down the
choose from. Payors could use the availability of
cost of oncology care in the United States.
7
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The collaboration between payors and
cols should therefore cover such topics
providers should focus on coordination of
as how to minimize the risk of side effects
care across disciplines (e.g., chemotherapy,
(e.g., hydration of a patient during chemo
oncology surgery, pathology, radiation
infusions), how to provide rehabilitative care,
therapy) because effective coordination
when and how to transition from curative
is critical for improving outcomes and
treatment to supportive and palliative care,
reducing variability among providers.
and how supportive/palliative care should
Effective coordination across disciplines,
be provided to patients with cancer. The
in turn, requires local consensus on the
care protocols should also allow for the use
best standards of care to ensure that
of personalized medicine (also sometimes
those standards are consistently applied,
referred to as precision medicine) when
as well as a robust framework for assessing,
appropriate. (For more details about person-
comparing, and incentivizing performance.
alized medicine, see the sidebar on p. 9.)
The main components of this offering are therefore comprehensive care protocols to
The more common types of solid tumors
reduce variability in care delivery, increased
(e.g., breast, lung, colon, and prostate
transparency to drive optimal results, and
cancers) account for almost half of all new
alignment of incentives between payors
cancer cases19 and overall cancer spend20;
and providers.
they are thus a reasonable starting point for standardization of care with care protocols.
17
Newcomer LN, et al. Changing physician incentives for affordable, quality cancer care: Results of an episode payment model. Journal of Oncology Practice. 2014;10(5):322-6. 18 Kolodziej M, et al. Benchmarks for value in cancer care: An analysis of a large commercial population. Journal of Oncology Practice. 2011; 7(5):301-6. 19 American Cancer Society. Cancer Facts & Figures 2015. 20 Mariotto AB, et al. Projections of the cost of cancer care in the United States: 2010â&#x20AC;&#x201C;2020. Journal of the National Cancer Institute. 2011;103(2)117-28. 21 Saraiya S. The use and implementation of standardized treatment pathways. American Journal of Managed Care: Evidence-based Oncology. 2015;21(3): SP85.
Comprehensive care protocols
Once care protocols for these types of
Care protocols define standardized
cancers are adopted, care standardization
approaches for managing different types
can be expanded to other cancer types
and stages of cancer, thereby reducing
(e.g., blood-borne malignancies). Then,
variability in treatment not justified by
efforts can be undertaken to ensure
patient-specific needs. They are similar to,
coordination among practices across
but more comprehensive than, the care
various types and stages of cancer.
pathways described above. Although care protocols are available for all the common
Provider ownership. Consensus among
cancer types, successful use of them
local oncologists is crucial for successful
depends on three factors:
use of care protocols. Straight application of national pathways often delivers mixed
Scope. Care protocols should include the
results, largely because the pathways do
whole spectrum of disciplines involved in
not take local factors into consideration
cancer treatment. Recent studies suggest
and buy-in from local providers has not
that the largest opportunity for reducing
been obtained. Allowing local physicians
cancer-related costs lies in minimizing the
to tweak and enhance these pathways
number of avoidable inpatient stays due to
can significantly improve clinical outcomes
side effects of cancer therapy, as well as
and lower costs.21
avoidable use of intensive care units.
17,18
Costs also tend to be concentrated in the
Evolution over time. Care protocols should
last months of the patientâ&#x20AC;&#x2122;s life. Care proto-
be flexibleâ&#x20AC;&#x201D;they must allow for updates
9
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to accommodate the most recent cancer
access to appropriately blinded data about
treatment developments and safety
all aspects of treatmentâ&#x20AC;&#x201D;data that most
concerns. Thus, implementation of care
providers would otherwise not see.
protocols, and the oncology management program in general, must have a physician-
Increased transparency
led governing body that meets regularly to
Performance transparency is critical for verify-
ensure that the protocols remain valid and
ing that providers follow the agreed-on care
relevant, or are changed when appropriate.
protocols whenever appropriate and identify opportunities for ongoing performance
Payors, especially those with significant
improvement. Episodes of care, when paired
local market share and/or strong align-
with care protocols, can present a suitable
ment with providers, can help facilitate
way to establish the needed transparency
the development and regular updating
because they include a framework for evalu-
of comprehensive care protocols by
ating and comparing physician performance,
encouraging conversations among local
as well as mechanisms for understanding the
providers. Payors can also influence the
sources of variation. It is important to note,
protocolsâ&#x20AC;&#x2122; development by giving providers
however, that the concept of episodes does
Incorporating personalized medicine in care protocols 1
Care protocols must be updated regularly
inpatient admissions).2 Furthermore, the cost
to account for advances in oncology
of genetic profiling has decreased significantly
care, especially the growing use of
in the past decade.3,4
personalized medicine to test cancer patients for known genetic mutations.
The use of predictive biomarkers is already
Tumor genome profiling and other molecular
considered standard of care for several tumor
tests can screen for a growing list of such
types (e.g., lung cancer, colorectal cancer,
mutations (called predictive biomarkers);
and melanoma),5 and it is highly likely to
when one is found, the patient can be
become standard of care for other cancers
given more targeted therapies. Often, this
as the list of genetic mutations associated
approach helps patients avoid less effective
with malignancies expands.6 However, not
(or even ineffective) treatment courses,
all cancer types have been linked yet to
resulting in improved survival rates and
genetic mutations, and treatments targeted
better quality of life. Cost savings are
to some of the identified mutations are not
also often achieved through reductions in
yet available. Thus, the care protocols
treatment time and the rate of side effects
should define which cancer patients should
and complications (especially those that
undergo genetic profiling, and under what
necessitate emergency room visits or
conditions, at various stages of treatment.
1
Shaw AT, et al. Impact of crizotinib on survival in patients with advanced, ALKpositive nsclc compared with historical controls. Journal of Clinical Oncology. 2011;29 (suppl abstract 7507). 2 Dendukuri N, et al. Testing for her2-positive breast cancer: A systematic review and costeffectiveness analysis. CMAJ. 2007;176:1429-34. 3 Illumina Sequencer Enables $1,000 Genome. Genetic Engineering and Biotechnology News. 2014;34(4):18. 4 DNA sequencing costs: Data from the NHGRI Genome Sequencing Program. (www.genome.gov/ sequencingcosts/) 5 AndrĂŠ F, et al. Personalized medicine in oncology: Where have we come from and where are we going? Pharmacogenomics. 2013;14(8):931-9. 6 Mooney, SD. Progress towards the integration of pharmacogenomics in practice. Human Genetics. 2015;134(5):459-65.
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not necessarily require bundled payments.
cancer, and some form of risk adjustment
Episodes can be applied for comparison
to take into account patientsâ&#x20AC;&#x2122; comorbidities
purposes even if reimbursement remains
and other health factors that could lead to
fee-for-service as long as some pay-for-
variations in care. It should also allow for
performance/gain sharing elements are
a reasonable amount of variability among
included.
providers, but it should permit both payors and providers to identify the root causes
Successful implementation of episodes
of variability in outcomes so that more
of care depends on several factors:
targeted performance improvement initiatives can be designed.
Scope. Provider performance and costs should be assessed across the continuum
Accessibility. Data on performance should
of care, from cancer diagnosis and
be easily accessible to providers without
treatment (chemotherapy, radiation, or
disruptions to their workflow. Results
surgery) to supportive and follow-up care
should be discussed regularly in physician
(taking into account that some treatments
forums to ensure that insights are captured
might be more expensive but deliver better
and, when appropriate, the care protocols
clinical outcomes). As a result, the duration
are updated.
of a cancer episode is important. To be comprehensive, the episode should last
Payors are well positioned to support pro-
at least one year, ideally beginning about
viders in this area since they are indepen-
30 days before the first treatment. In addi-
dent third parties. Furthermore, payors
tion, the episode must establish mech-
typically have more advanced analytical
anisms allowing adjustment of cancer
skills and access to more data across the
treatments to reduce side effects and
continuum of care than providers do.
unnecessary utilization.
Better alignment of incentives Methodology. If oncologists are to be
Although transparency is fundamental
compared based on compliance with
for changing behaviors, it is usually more
care protocols, total cost of care, and
effective when supported by economic
quality of care (as reflected in such factors
incentives. At present, many payors are
as the number of ER visits, survival rates,
switching from fee-for-service arrange-
disease progression, and patientsâ&#x20AC;&#x2122;
ments, which can lead to overutilization,
psychological well-being), the method-
to incentives that reward preferred sets
ology used for data analysis must have
of behaviors. If this trend continues, it
a high degree of technical accuracy.
is likely that most payors will ultimately
Unless providers can understand and
move to incentives that reward desired
trust the results, and perceive them as
clinical outcomes.
fair, the methodology will not be effective in promoting the desired behavioral
In the target state, episode-based
changes. The methodology should, for
reimbursement based on performance
example, include the type and stage of
on clinical outcome metrics would ensure
Designing and implementing an integrated oncology care management program
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the alignment of incentives between payors
tools required to track performance
and providers, with the aim of improving
and achieve the best clinical outcomes.
care quality while controlling costs. The reimbursement for each episode would be
• Establish partnerships with select other
adjusted up or down depending on disease
payors to ensure that providers are given
progression, three-year survival rate, and/or
consistent incentives to change their
cancer recurrence rate. The duration of
behavior and adopt the most advanced
the episode would take into account the
care protocols. Such partnerships are
characteristics of different types of cancer
especially relevant in areas where no
(e.g., a longer duration for slow-moving
payor represents more than 10% to 15%
cancers, such as prostate cancer).
of a provider’s total patient volume. The partnerships must be formed carefully,
Reaching this target state will require time.
however, to ensure that they do not
A trust-based relationship between provid-
inadvertently raise legal issues and that
ers and payors must be established, the
they enable all participating payors to
accuracy of the data used to calculate
strike an appropriate balance between
performance on quality metrics must be
achieving a differentiated position in the
verified, and a baseline must be agreed on.
marketplace and maximizing the value
To incentivize desired changes in provider
created for the system as a whole.
behavior during the transition, payors could consider reimbursing them based on compliance with a well-defined set of metrics.
...
For example, payors could increase the
Payors and providers have the same
reimbursement rate for select evaluation
primary goals for oncology care: to prolong
and management codes to reward compli-
patients’ survival and improve both their
ance with care protocols, and guarantee
physical and psychological well-being. By
reimbursement for palliative care counseling
collaborating on payment and care delivery
and appropriate care coordination.
innovations through a comprehensive, integrated oncology care management
There are several elements a payor can
program, such as the one described in this
use to help build trust and accelerate the
article, they can improve the likelihood of
transition to episode-based payments:
achieving these goals while keeping costs under control.
• Give providers transparency into the time line for, and milestones of, the transition to episode-based reimbursement, as well as how data will be validated, so that all parties can align on assumptions and methodology early in the process. • Make upfront investments (mainly, IT-related) to help providers build the
Chiara Leprai (chiara_leprai@mckinsey .com) is a consultant in the New Jersey office. Edward Levine, MD (edward_levine @mckinsey.com) is a senior partner in McKinsey’s Silicon Valley office. Alex Sozdatelev (alex_sozdatelev@mckinsey.com) is an associate partner in the Chicago office. Denis Vaskov (denis_vaskov@mckinsey.com) is a consultant in the Chicago office.
11
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Capturing returns in healthcare
New research finds that the healthcare sector has been very good to private equity, especially payor and pharmaceutical services. And specialist firms seem to have an edge over generalists. Feby Abraham, Myoung Cha, and Garikai Nyaruwata
We recently analyzed 140 private investments in US healthcare companies from 1995 to 2014 and found that returns were 1.5 times higher than the broader public market, and, in five of eight subsectors, outstripped the US private-equity industry. That strong performance was mirrored in the return multiples that sellers achieved, which were 2.3 times for healthcare versus 1.7 times for all US private equity. An aging demographic has propelled the industry. And the scope for innovation and a steady supply of profitable businesses have made it a fertile market for private-equity investors.
need for technological capabilities, to deal directly with individuals as direct purchasers of healthcare or to diversify into new populations.
Healthcare covers a wide range of businesses. Some provide services to hospitals and physicians, insurers, and drug companies; others supply products such as pharmaceuticals, biotechnologies, and medical technologies. Naturally, profit pools, margins, and growth rates vary widely among these subsectors; so do risk and returns (Exhibit 1).
Also surprising is the strong performance of buyouts in pharmaceuticals (including both generics and specialty pharma). As is well known, Big Pharma has been on an acquisition spree. Private owners have sold into this wave, capitalizing on the scarcity of new high-growth pharmaceutical products. TPGâ&#x20AC;&#x2122;s exit from Par Pharmaceutical Companies, which earned it a sevenfold return in three years, is a recent notable example. Others include Stiefel Laboratories (sold by The Blackstone Group to GlaxoSmithKline), Ikaria (New Mountain Capital/Madison Dearborn Partners to Mallinckrodt Pharmaceuticals), Talecris Biotherapeutics (Cerberus Capital Management/Ampersand Capital Partners to Grifols), and JHP Pharmaceuticals (Warburg Pincus to Par Pharmaceutical Companies).
What may surprise some is the identity of the outperforming subsectors. Consider payor services, where investors have been skeptical of growth prospects because of the pressures that payors face. Much of the activity has been driven by payorsâ&#x20AC;&#x2122;
Selecting the right subsector is not enough; we found a wide range of performance within every subsector. In part, this is driven by a handful of deals that achieved outstanding performance. These outliers skew subsector averages much higher than
Capturing returns in healthcare
55
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medians. Leave aside these deals, however, and performance still varies considerably. We see two factors at work.
The variance suggests that investors should think about the time to exit at least as much as they think about multiple expansion. Entering a transaction with a clear exit plan, based on an understanding of the assetâ&#x20AC;&#x2122;s strategic value, is one way to do so.
First, our research suggests that exits to strategic buyers produce higher returns than sales to other private-equity funds (Exhibit 2). Naturally, strategic buyers are often willing to pay over the odds because of the synergies they can reap, but privateMcKinsey equity firms on haveInvesting also begun2015 to bid multiples higher.
Success also seems to be driven in part by superior knowledge (Exhibit 3). Sector specialists have long argued that they have an advantage in industries as complex as healthcare. Although the data set here is small (14 deals done by specialists and 84 by generalists), it indicates that specialists have attained somewhat higher median returns than
Healthcare Exhibit 1 ofalso 3 found that there is significantly The research greater variance in holding periods than in multiples.
Exhibit 1
Payor services and pharma services have generated the greatest median returns.
Target sector
Sector type1
Number of targets
Payor services
Services
14
Pharma services
Services
15
Diagnostics
Services
6
Pharma and biotech
Products
22
Medical technologies
Products
29
Provider services
Services
35
Healthcare IT
Services
5
Radiology
Services
5
Median return rate, %
Average deal size, $ million 476
39
321
39
183
470
605
356 428
164
Multiple of median deal by return, x 3.3
2.2
56
McKinsey on Investing Number 2, Summer 2015
3.6
2.5
27
2.4
3.7
26
2.7
4.0
20
5.4
9.4
16
2.0
12
1.8
5.0
7
1.4
4.7
1 Sectors with n <5 were excluded. Consumer-health and animal-health products and services were excluded as a result.
Source: PitchBook Data; Preqin; press search; S&P Capital IQ
Holding period of median deal by return, years
4.5
MoInvesting 2015 Healthcare Exhibit 2 of 3
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Exhibit 2
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Exits to strategic buyers have provided greater median returns. Median 23% 29
Private equity (PE) to non-PE,1 %, n = 121
17
11 3
15 8
3
–25% –15% –5%
PE to PE, %, n = 24
5%
15%
25%
35%
45%
2
3
35%
45%
4
5
7
5
55%
65%
75%
85%
2
3
9
95% 105% 115% >115%
Median 15%
MoInvesting 2015 Healthcare –25% –15% Exhibit 3 of 3
1 –5%
4 5%
7
6
15%
25%
1 55%
65%
75%
85%
95% 105% 115% >115%
1 Includes trade sales, IPOs.
Source: PitchBook Data; Preqin; press search; S&P Capital IQ
Exhibit 3
Specialists have higher and less-variable returns but fewer ‘blockbuster’ deals. Specialist general partners (GPs),1 %, n = 14, standard deviation = 23%2 Non-specialist GPs, %, n = 85, standard deviation = 138%2
Median 35% Average 40%
–25% –15% –5%
5%
15%
25%
4
3
1
35%
45%
55%
65%
1
1
75%
85%
1 95% 105% 115% >115%
Median 23% 21 12 3
3
–25% –15% –5% 1
2
1
5 5%
15%
25%
Average 63% 9 35%
5 45%
2
3
55%
65%
6 75%
3 85%
1
3
9
95% 105% 115% >115%
>40% of past 10-year deal volume in healthcare-related transactions. Excludes consortium deals.
2Standard deviations are statistically different at the 1% significance level (2-tail F-test p-value = 0.00).
Source: PitchBook Data; Preqin; press search; S&P Capital IQ
generalists. That they have done so with significantly less variability is what sets them apart. Healthcare expertise apparently helps to mitigate risk. Risk aversion also has a downside, of course. Specialists tended to produce fewer “blockbuster” deals (those with an internal rate of return of more than 100 percent) than generalists.
Capturing returns in healthcare
Feby Abraham (Feby_Abraham@McKinsey.com) is a principal in McKinsey’s Houston office, Myoung Cha (Myoung_Cha@McKinsey.com) is a principal in the Silicon Valley office, and Garikai Nyaruwata (Garikai_ Nyaruwata@McKinsey.com) is a consultant in the Stamford office. Copyright © 2015 McKinsey & Company. All rights reserved.
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Pete Ryan
D E C E M B E R 2 0 14
Bu
s i n e s s
Te
c h n o l o g y
o
f f i c e
Applying lean IT to healthcare Lean IT can help providers in their quest to create a digital enterprise.
Michael Huskins, Steve Van Kuiken, and Sri Velamoor
The healthcare sector is going through funda-
the IT department, and this presents tough
mental technology-enabled changes in the
challenges in a sector that has traditionally
way care is delivered, how providers interact
lagged behind others in the adoption of
with their patients, and how payments are
information technology. For example, accord-
made.1 To take advantage of digital technology
ing to Gartner, IT spending as a portion of
and create more effective systems that help
revenue is 6.3 percent in banking and finan-
health professionals deliver better care,
cial services and 4.2 percent in healthcare.2
providers are moving rapidly toward becoming
Despite this history, IT departments are now
digital enterprises. For example, they are
being asked to deliver the core digital plat-
borrowing lessons from e-commerce leaders
forms that will enable far-reaching changes
on how to acquire and retain patients through
for healthcare providers. At the same time,
data analytics and from manufacturing entities
in the spirit of doing more with less, these
on managing patient throughput and optimiz-
IT departments are being asked to improve
ing clinical supply chains. Providers are also
service levels and increase IT efficiency.
leveraging apps on smartphones to engage
1Digitization trends in
healthcare apply broadly around the world, though the level of urgency to address them may vary by country as a result of regulatory considerations and competitive dynamics. 2 IT Key Metrics Data 2014, Gartner, December 2013, gartner.com.
patients remotely in new ways that improve
IT departments will need to take a compre-
outcomes, and they are using digital tech-
hensive view of how to meet the demands
nologies to support clinical decisions and
of all core IT functions rather than under-
streamline hospital operations. In this way,
take discrete initiatives. IT leaders will have
the adoption of more sophisticated analytics
to address topics such as IT-infrastructure
has simplified processes and significantly
architecture and services, cybersecurity,
reduced manual workloads.
advanced analytics and data management, and the rationalization of application port-
The pressure of enabling the digital enter-
folios. IT departments must carefully juggle
prise is landing squarely on the shoulders of
a two-speed IT infrastructureâ&#x20AC;&#x201D;balancing
2
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Takeaways As healthcare providers take advantage of digital technology to improve patient access and quality of care, their IT departments must enable a digital enterprise amid budget pressures. To do so, providers need an efficient, effective IT workforce—which a lean-IT transformation can help provide. In addition, IT leaders and staff have to overcome several sector-specific challenges when applying lean IT to healthcare.
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the acceleration of new digital capabilities
by adopting lean principles and adapting
against the maintenance of legacy systems
them to the IT environment.
(see “A two-speed IT architecture for the digital enterprise,” on mckinsey.com).
In many respects, the IT department of a typical healthcare provider is similar to the
All this will require a more efficient and
lean-IT functions of companies in other
effective IT workforce. That’s why the appli-
sectors. Each IT team deals with the common
cation of lean principles is one important
challenges of keeping servers running, rolling
element for healthcare providers across the
out new applications, and supporting end-user
globe pursuing digitization.
devices, such as PCs, tablets, and smartphones.
The role of lean IT
In general, healthcare providers can benefit from nearly all the tried-and-true lean-IT methodologies. For example, most IT depart-
With roots in the Toyota production system,
ments could stand to improve the processes
lean IT is an integrated approach, based on
for defining new IT projects, such as incor-
empowering the front line, to improving
porating mobile devices in patient care,
operations. Lean IT can therefore help stream-
gathering requirements for application
line day-to-day IT operations and so free up the
development, or streamlining the response
resources necessary for creating the digital
to service disruptions or cyberincidents.
enterprise (see sidebar “What is lean IT?”).
Common lean IT levers applicable to healthcare include the following:
In our experience, it’s often possible to increase IT productivity by 20 to 40 per-
• standardizing routine processes
cent through the application of lean and to reduce the delivery time of new applica-
• segmenting work by complexity and urgency
tions and functionality by 10 to 30 percent through more rapid iterations. As a result, lean not only reduces IT costs directly
• pooling resources to break down technology silos
but also enhances revenues by accelerating the deployment of digital technologies (see sidebar “How a healthcare provider
• cross-training teams on multiple systems or platforms to build a more flexible workforce
benefited”). • eliminating activities that don’t add value Since the inception of lean in automotive manufacturing, its principles have traveled successfully to back-office processing and more recently to IT. Although the typical
Lean’s challenges for healthcare providers
IT department bears little resemblance to a manufacturing line, many IT departments
The IT departments of healthcare providers
across multiple industries have improved
face several sector-specific challenges in how
their efficiency and effectiveness substantially
lean levers are applied.
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High stakes
consider the ramifications for patient care when prioritizing incidents, service requests,
In many industries, including healthcare,
and projects, as well as when setting the
the availability and stability of IT systems
corresponding service-level objectives. Lean-IT
are critical to business success, with down-
practitioners consequently must understand
time resulting in lost revenue or incremental
how changes will affect patient care. Moreover,
expenses. For healthcare providers, IT can
it is often more difficult to cross-train system
also be critical to patient care. For example,
administrators or developers to handle
hospitals increasingly are relying on wireless
multiple systems in healthcare than it is in
technology to monitor the vital signs of
other industries, because of the specialization
intensive-care patients. As a result, it is
required to administer patient-care systems.
perhaps only a slight overstatement to say that stable healthcare IT can literally be a
Broad-scale ‘white glove’ service
matter of life and death. Most IT departments provide “white glove,” The implications of this reality for lean IT can
expedited service to the company’s chief
be profound. For example, IT must carefully
executives and top revenue generators, such
What is lean IT? The overall objective of lean is to deliver exactly what the customer is willing to pay for exactly when the customer wants it, all while minimizing or eliminating activities that the customer does not value. To achieve these ends, lean practitioners aim to simultaneously reduce waste, variability, and inflexibility in IT operations through a proven lean methodology. Waste Several common examples illustrate waste in IT: • Rework. IT frequently starts projects only to find that the business requirements change midway through their efforts. • Mismatched skills. Experienced subjectmatter experts often spend a significant part of their time on relatively simple tasks that could be better handled by less experienced colleagues.
• Context switching. IT professionals find themselves jumping from task to task as they respond to multiple e-mails, instant messages, and shoulder taps, thereby wasting time as they reengage with what they were originally trying to accomplish. Variability External variability is caused by fluctuations in demand for IT services. To reduce this variability, IT can work with the business to prioritize and sequence projects to avoid an end-of-year rush, for example. Internal variability comes about when a desired outcome, such as debugging an application, varies in quality or time to deliver. To combat internal variability, lean systems often standardize the steps of routine activities, and then everyone is trained to perform those activities with the same level of skill.
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as the trading floor of an investment bank, and these groups usually represent 5 to 10 percent of the workforce. At healthcare providers, IT departments must prioritize requests from physicians, who probably represent a much larger—yet equally demanding— percentage of the workforce. IT departments must therefore be able to identify when and how IT incidents and service requests affect physicians. Any lean changes to operating practices must provide an expedited path to resolution when physicians and other clinical stakeholders in acute settings are involved. Indeed, lean-IT practitioners should work closely with the communications group to craft a change story that explains the rationale
Flexibility Although standardization is often a critical component of lean, standardization does not imply that lean-IT operating models are inflexible. Instead, lean uses standardization to improve the efficiency of performing routine tasks so as to free up the capacity of the workforce to handle special requests, think more strategically, and be more proactive. Lean methodology Lean uses an integrated approach that addresses five components: • Operating practices. Redesign the way in which work is performed, including work intake, processes, and handoffs. • Management systems. Ensure that performance is measured across a balanced
set of metrics (for example, productivity and quality) and that the workforce is focused on continually improving efficiency and effectiveness. • Organization and capabilities. Establish the appropriate organizational structure, with clear roles and responsibilities to enhance performance, and make sure that individuals have the necessary capabilities to do their jobs. • Mind-sets and behavior. Win the hearts and minds of employees to ensure a high level of motivation and maintain momentum for performance improvements. • Business partners. Understand what business partners truly value so that IT can align with business priorities and deliver exactly what is needed, when it is needed.
5
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and the benefits of any IT changes that affect
IT proficiency at healthcare providers and
doctors and patient care in general.
a need for more extensive coaching and change management.
Greater variability in computer proficiency
Highly regulated industry
In industries where knowledge workers
Managing the implications of regulatory-
spend the majority of their time at computers,
compliance guidelinesâ&#x20AC;&#x201D;such as system
lean systems can rely on leveraging self-
access, security, privacy, and auditsâ&#x20AC;&#x201D;is
service and regular end-user training to
often a larger part of IT in the healthcare
increase efficiency and improve service levels.
sector than in other industries. As a result, lean practitioners have to work more closely
Doctors, nurses, and technicians usually
with the legal and compliance departments
spend less of their time at computers. As a
to ensure that any changes in IT comply
result, there may be greater variability in
with multiple levels of regulation.
How a healthcare provider benefited At one healthcare provider, technology spending had been increasing for several years without any appreciable improvement in overall service quality or capacity to fuel a rapidly evolving growth and acquisition agenda. To improve labor productivity, the quality of technology services, and process discipline, the provider launched a comprehensive lean-IT transformation across its applicationdevelopment and IT-infrastructure teams, as well as its call-center and help-desk staff. The goal was also to develop a sustainable approach to continual improvement that could later be deployed across the complete IT organization. Over 500 employees, more than half of the overall IT organization, participated in the transformation effort, which spanned multiple waves of change over an eight- to ten-month period. Six months into the effort, the provider was able to start capturing efficiency savings of
up to 25 percent, measured by the ability to meet a substantial increase in demand while keeping head-count increases to a minimum. Through the use of implementation levers, such as segmenting work by complexity, head count among application developers and systems engineers increased by only 10 percent over the eight- to ten-month effort, while demand for them rose by more than 15 percent. Moreover, service levels in the call center and help desk improved by around 70 percent over the baseline, though staff head count remained constant. In addition, technology staff started spending more time on value-added work and less on rework. These employees were able to devote around 20 percent more hours to strategic projects than they did before, including support of M&A efforts. As the health system continued to grow through acquisition and added 9 percent more technology users, the IT department was able to meet excess demand with no increase in IT resources.
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Growth of clinical devices
added burdens, including increased network traffic and decentralized storage requirements.
Around the world, private and public healthcare providers are increasing investments in digital technologies. The IT departments of healthcare providers often
...
Undertaking a lean-IT transformation is
must manage and maintain an increasing
nearly a prerequisite for keeping pace in this
number of end-user devices, such as
complex healthcare environment. When the
blood-pressure monitors and magnetic-
efficiency and effectiveness of IT are improved,
resonance-imaging machines, which often
freed-up capacity can be directed to develop
store patient data locally. These clinical-
and support new digital technologies. To that
technology devices are above and beyond
end, lean IT needs to be applied in a thought-
the standard IT fare of PCs, smartphones,
ful way that recognizes the unique challenges
and tablets. With additional demand comes
faced by healthcare providers.
•
The authors wish to thank Stefan Biesdorf, David Champeaux, and Gerard Speksnijder for their contributions to this article. Michael Huskins is an alumnus of McKinsey’s Silicon Valley office, Steve Van Kuiken is a director in the New Jersey office, and Sri Velamoor is a principal in the Southern California office. Copyright © 2014 McKinsey & Company. All rights reserved.
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Highlights from the… McKinsey on Healthcare website
McKinsey Center for U.S. Health System Reform
Health insurance enrollment and revenue shifts 2013-2014 An emerging story
By enrollment
By revenue
Share of payors' aggregate enrollment and revenue in Medicaid and the Individual market has grown Percentage share of enrollment 2013 100% = 230 million 7
2014 100% = 247 million
2013 100% = $641 billion 3
7
16
41
Percentage share of revenue from premiums
40
5
20
9
12
27
29
19
7
19
3
28
33
7
22
2014 100% = $743 billion
10
5
24
7
Medicare Part C, D
Managed Medicaid
Individual
Small Group (SG)1
Large Group (LG)1
Administrative Services Only (ASO)2
Absolute enrollment and revenue have also grown, by 17 million lives and $86 billion, respectively Change in enrollment (millions)
Change in revenue ($ billions)
2013 – 2014
2013 – 2014
2 5
4
2
2013 Mcare Mngd Part Mcaid C, D
641 Ind
SG1
LG1
ASO
2014
<1
2
57
247
10
230
4 22
6
733
16
2013 Mcare Mngd Part Mcaid C, D
Ind
Year 1 financials: the Individual market
SG1
LG1
ASO2
2014
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Plenary sessions from the 2015 HSS client conference VIDEOS Note: Viewing these videos can only be done online.
The disruptive forces that will reshape the healthcare industry Shubham Singhal |
Watch video online
|
Insights from our proprietary consumer research Jenny Cordina |
Watch video online
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The digital/mobile convergence and the empowerment of the healthcare consumer Paul Mango |
Watch video online
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2015-2016â&#x20AC;&#x201D;eye of the storm? Saum Sutaria, MD |
Watch video online
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McKinsey Center for U.S. Health System Reform
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2016 exchange market remains in flux: Evolution of carriers and offerings INFOGRAPHIC
The mix of carriers and plans is continuing to change, with nearly half of consumers seeing a new entrant, and plan types becoming more managed.
McKinsey Center for U.S. Health System Reform
2016 exchange market remains in flux: Evolution of carriers and offerings
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Findings across 50 states and DC CARRIER PARTICIPATION1
As of 11.04.2015
MARKET VIEW
Mix of carriers is continuing to change.
Counting carriers unique at state level
TOTAL 2016 EXCHANGE CARRIERS 314
WITHDRAWALS IN 2016 FROM STATES
NEW 2016 ENTRANTS TO STATES
50
275
WITHDRAWALS IN 2016 FROM COUNTIES BY STILL PRESENT ELSEWHERE IN STATE2
631
31 NEW 2106 ENTRANTS TO COUNTIES WITH EXISTING PRESENCE ELSEWHERE IN STATE2
CONSUMER VIEW4
= 10 CARRIERS
16% of consumers are seeing an increase in carriers, and nearly half of consumers are seeing a new entrant.
Counting carriers at a county level
47%
63% ARE SEEING AN EXIT BY A CARRIER IN THEIR COUNTY
41%
ARE SEEING A NEW ENTRANT IN THEIR COUNTY
16%
ARE SEEING A NET DECREASE IN CARRIERS IN THEIR COUNTY3
ARE SEEING A NET INCREASE IN CARRIERS IN THEIR COUNTY3
2016 exchange market remains in flux: Evolution of carriers and offerings I Page 1 of 4
McKinsey Center for U.S. Health System Reform
2016 exchange market remains in flux: Evolution of carriers and offerings continued
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PLAN OFFERINGS5 The plan type mix is becoming more managed.
MARKET VIEW
Counting plans at a county level
BY PLAN NUMBER Thousands (000s)
59
plans terminated
126
2015
46
plans added
2016 113
plans in 2015
plans in 2016
38
of which are bronze and silver
56%
UNMANAGED
of which are bronze and silver
BY PLAN TYPE
2015
44%
MANAGED
33
2016
46%
UNMANAGED
54%
MANAGED
2016 exchange market remains in flux: Evolution of carriers and offerings I Page 2 of 4
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Most consumers are seeing less plan choice, although some are seeing more competitively priced options.
CONSUMER VIEW4
Counting plans at a county level
BY PLAN NUMBER6
31%
BY SILVER PLAN VALUE7
59%
of consumers are seeing more plans in 2016
of consumers are seeing fewer plans in 2016
% SEEING INCREASE IN PLANS BY METAL TIER
% of consumers
28%
36%
see no change
are seeing fewer competitively priced options7
36%
are seeing more competitively priced plan options7
BY PLAN TYPE 27%
catastrophic
33%
36%
bronze
silver
29% gold
13%
-
platinum
% SEEING DECREASE IN PLANS BY METAL TIER
+ 45%
29%
catastrophic
53%
49%
bronze
silver
55% gold
64%
platinum
-
consumers see more managed options in 2016
+ 44%
consumers see fewer managed options
21%
consumers see more unmanaged options
64%
consumers see fewer unmanaged option
BY INCOME LEVEL The lowest-income consumers are seeing the fewest competitively priced plans.7
Consumers <200% FPL have, on average, 1.7 competitively priced silver options available to them
Consumers 200-400% FPL have, on average, 3.8 competitively priced silver options available to them
Consumers >400% FPL have, on average, 5.2 competitively priced silver options available to them
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The above findings are based on publicly available, approved 2016 individual market exchange rates as displayed on exchanges for all states and DC, compiled within the McKinsey Exchange Offering Database.
1 Carrier is defined as an insurance company 2. Counting carriers unique at county level 3. 43% of QHP eligible are seeing no net change in carriers in their county 4. Consumer defined as all individuals eligible to purchase qualified health plans in the states analyzed 5 Plan is defined as a health insurance offering in which an individual can enroll, offered by a carrier 6. Percentages do not equal 100% as some consumers will see no change in number of plans 7. Competitively priced defined as net premium within 10% of the lowest-price silver plan
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2016 exchange market remains in flux: Pricing trends INFOGRAPHIC
Despite higher increases in lowest-price plan gross premiums this year, a greater share of consumers are seeing less expensive lowest-price silver net premiums.
McKinsey Center for U.S. Health System Reform
2016 exchange market remains in flux: Pricing trends
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Findings across 50 states and DC OVERALL
As of 11.04.2015
MARKET VIEW
Median rate increases across re-filed plans are higher than last year. Premiums of lowest-price silver plans have increased as well.
Prices at county level
Median change in gross premium across all re-filed plans1 CATASTROPHIC % SEEING INCREASE BRONZE IN PLANS BY METALSILVER TIER
4%
7%
10%
GOLD
7%
13%
PLATINUM
8% 11%
10% 12%
15%
Median change in gross premium across lowest-price silver plans
KEY:
YEARS: 2014-’15
2014-2015 2015-2016
4.4%
increase
YEARS 2015-’16
13.2%
increase
CONSUMER VIEW2
Prices weighted by QHP-eligible population
Percent of consumers who will see change in net premium of the lowest-price silver plan4
27%
18%
46% 2014-2015
Despite higher increases in lowest-price silver plan gross premiums this year, a greater share of consumers seeing less expensive lowest-price silver net premiums this year than last year.
9%
9% 28%
25%
38% 2015 -2016
KEY:
Over 10% decrease Within 10% decrease Within 10% increase Over 10% increase
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BY GEOGRAPHY In many states, this year's lowest-price silver net premium changes are much different than last yearâ&#x20AC;&#x2122;s.
MARKET & CONSUMER VIEW Prices at county level
QHP-eligible weighted average change in lowest-price silver plans' net premium 20%
18%
16% 15%
12% 5%
AK
8%
6%
4% 4%
AL
AR
4%
2%
AZ
25%
CA
CO
2%
12%
3%
1%
CT
14%
DC
6%
3%
DE
FL
GA
9%
9%
HI
6%
IA
-3% -10%
-11% 18%
16%
11%
10%
7% 8% 2%
ID
5%
5% 0%
IL
0%
IN
KS
KY
18%
16%
LA
6%
3%
1%
MA
2%
MD
5%
2%
0%
ME
9%
MI
MN
0%
MO
-1%
-1% 22%
-7%
4%
MT
4%
NC
-6%
12%
11%
26%
10%
9% 6%
6% 1% 2%
ND
NE
MS
NH
NJ
0% 1%
NM
-2%
NV
1%
NY
9% 3%
12% 9%
1%
OH
OK
OR
PA
-3%
-4% -12%
7%
-14%
22% 13%
11%
9%
4%
RI -5%
SC -1%
SD
TN
7%
TX
10% 4%
0%
UT
4%
10%
8% 7%
4%
2%
VA
6% 0%
VT
WA
-1% -5%
2%
WI
WV
11% 4%
WY
KEY:
2014-2015 2015-2016
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PRICE CHANGES BY CARRIER TYPE MARKET VIEW
There is considerable price fluctuation in rate changes by carrier type.
Prices at county level
Median change in lowest-price silver plansâ&#x20AC;&#x2122; gross premiums by carrier type 11.9%
6.4% 3.4%
BLUE
KEY:
12.6%
11.0%
6.2%
18.5%
6.7%
1.6%
REGIONAL/LOCAL
PROVIDER
NATIONAL
MEDICAID
CO-OP
-0.5%
2014-2015 2015-2016
-8.8% -11.8%
CONSUMER VIEW2
Provider and Medicaid plans are gaining silver price leadership across eligible consumers.
Price leadership weighted by QHP-eligible population
3
Percentage of consumers seeing given carrier type offering lowest-price silver plan in their county 45% 26% 24%
BLUE KEY:
2014
17%
10% 10%
REGIONAL/LOCAL 2015
10% 13%
17%
PROVIDER
20% 24% 18% NATIONAL
29% 3%
12%
MEDICAID
5%
15%
2%
CO-OP
2016
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PRICE CHANGES BY CARRIER TYPE continued Many consumers will see new price leaders in 2016 and may have to switch plans if they are seeking the lowest-price option. Percentage of QHP-eligible consumers seeing new price leader in 2016
39%
catastrophic
49%
58%
bronze
silver
55% gold
51%
platinum
METHODOLOGY The above findings are based on publicly available, approved 2016 individual market exchange rates as displayed on exchanges for all states and DC, compiled within the McKinsey Exchange Offering Database.
1. Plan is defined as a health insurance offering in which an individual can enroll, offered by a carrier 2. Consumer defined as all individuals eligible to purchase qualified health plans (QHP) 3. Price leader defined as carrier offering the lowest-price plan 4. Net premium takes subsidy into account based on consumers' geography, family size, age and income; we assume that these factors remain constant in 2016, since consumers have not yet supplied current income information during the open enrollment process
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Exchange-eligible consumers heading into OEP INFOGRAPHIC
Now that the 2016 OEP has opened, outreach and retention efforts are ramping up. Understanding the different consumer segments is critical for driving uptake.
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As we near the 2016 OEP, outreach and retention efforts are ramping up. Almost 10M people have bought exchange plans. Another 18.6Mâ&#x20AC;&#x201D;including close to 11M uninsuredâ&#x20AC;&#x201D;are eligible to do so. Understanding the different consumer segments is critical for driving uptake.
Estimated size of exchange-eligible population heading into 2016 OEP1 On-exchange enrollees Enrollees who purchased an ACA plan through the exchange who may stay in an exchange plan
Off-exchange ACA enrollees
9.9M 4.0M
Current off-exchange ACA enrollees who could move into an exchange plan
Non-ACA enrollees Enrollees in a grandfathered or transitional plan or in new limited coverage, who could move into an exchange plan
Uninsured Enrollees who purchased a non-subsidized ACA plan from a non-exchange channel (e.g., directly from a payer or broker) who could move into an exchange plan
3.7M 10.9M
Exchange-eligible consumers heading into OEP I Page 1 of 3
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continued
Uninsured deep-dive: actions to drive enrollment Address affordability challenges
70%
Over 70% of uninsured said that they did not sign up because they could not afford coverage
6X
Insured consumers who faced premium increases of more than 10% were 6X more likely to leave their plan
Increase subsidy and penalty awareness
3.5X
Uninsured subsidy-eligible respondents aware of their subsidy amounts were 3.5X more likely to enroll in 2015 than those who were unaware.
2.4X
Uninsured respondents aware of the penalty were 2.4X more likely to enroll in 2015 than those who were unaware.
Leverage additional influencers
61%
61% of prior uninsured had a family member or friend help them decide to sign up (over 90% of 18-29 year olds cited family or friends as influences)
Close to half (40%) of 50-64 year olds said they were influenced to enroll by a healthcare provider
40%
Strengthen perceived value of coverage
15%
Only 15% of uninsured said they thought having health insurance was financially important, while 71% indicated that covering day-to-day living expenses and paying down debt (39%) were more important
23%
The most common pain point leading consumers to leave their plan was perceived value received for the money paid for insurance (23% cited their experience as “poor” or “very poor”)
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continued
Uninsured deep-dive: actions to drive enrollment Improve convenience of shopping
80%
80% of those who stopped shopping for an exchange plan and remained uninsured were not satisfied with their shopping experience
8X
Those who said they had a poor exchange experience were 8X as likely as those with positive experiences to say that the enrollment process took more than 3 hours
Methodology McKinsey Predictive Agent-based Coverage Tool (MPACT) provides specific county-level demographic details about the exchange-eligible population in 2015. Exchange-eligible is defined as U.S. citizens under 65 years of age with household incomes over 100% FPL or 138% FPL depending on their states' Medicaid expansion status (except in DC, NY, MN which have higher FPL thresholds). These details are attained by merging county- and state-level data from the U.S. Census Bureau, Small Area Health Insurance Estimates (SAHIE), American Community Survey (ACS), Centers for Medicare and Medicaid Services (CMS), and Health and Human Services (HHS). They have been reconciled with publicly reported enrollment information to date, including Supplemental Health Care Exhibits, product rate filings, and exchange enrollment. McKinsey 2015 OEP Consumer Survey was launched in February 2015 to a national sample of 3,007 QHP-eligible uninsured and individually insured consumers. The results provide insight into the intended actions, shopping, and purchasing behavior of consumers who are eligible to purchase individual coverage on the ACA exchanges or elsewhere. 1 Estimated population sizes as of most recent publicly reported exchange enrollment as of June 2015
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Health insurance enrollment and revenue shifts 2013â&#x20AC;&#x201C;2014: An emerging story INFOGRAPHIC
Between 2013 and 2014 absolute enrollment and revenue grew by 17 million lives and $86 billion respectively.
McKinsey Center for U.S. Health System Reform
Health insurance enrollment and revenue shifts 2013-2014 DOWNLOAD FULL PDF TABLE CONTENTS story AnOFemerging By enrollment
By revenue
Share of payors' aggregate enrollment and revenue in Medicaid and the Individual market has grown Percentage share of enrollment
Percentage share of revenue from premiums
2013 100% = 230 million 7
2014 100% = 247 million
40
5
20
9
28
19
19
Managed Medicaid
12
Large Group (LG)1
27
29
33
7
Small Group (SG)1
Medicare Part C, D
3
7
22
2014 100% = $743 billion
3
7
16
41
2013 100% = $641 billion
10
5
24
7
Administrative Services Only (ASO)2
Individual
Absolute enrollment and revenue have also grown, by 17 million lives and $86 billion, respectively Change in enrollment (millions)
Change in revenue ($ billions)
2013 â&#x20AC;&#x201C; 2014
2013 â&#x20AC;&#x201C; 2014
4
2 5
4
6
2
2013 Mcare Part Mngd C, D Mcaid
641 Ind
SG1
LG1
ASO
2014
<1
2
57
247
10
230
22
733
16
2013 Mcare Part Mngd C, D Mcaid
Ind
SG1
LG1
ASO2
2014
Health insurance enrollment and revenue shifts 2013-2014 | Page 1 of 2
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Health insurance enrollment and revenue shifts 2013-2014 DOWNLOAD FULL PDF TABLE OF CONTENTS An emerging story continued Year 1 financials: the Individual market Although Individual market revenues have grown, payors lost $2.5 billion in 2014 there, after reinsurance and risk adjustment
2014 Individual market post-2R operating gain/loss3 Estimated market-wide loss
‑$2.5B
Estimated full year loss per member
‑$163
2014 performance in the Individual market varied among payors — most lost money, but ~35% made money 28
Payors, %
9
2
2
8
15
23 8
1
36
29
Enrollees, % Loss > $50M
4
10
4
2
Loss $40 – 50M
Loss $30 – 40M
Loss $20 – 30M
5
7
Loss $10 – 20M
Loss $0 – 10M
3
5
Gain $0 – 10M
Gain $10 – 20M
0 Gain $20 – 40M
Gain $40M+
Methodology All findings based on publicly available sources. For enrollment and revenue shifts: Estimated enrollment is based on the following sources: CMS enrollment reports (Medicare); NAIC financials, IRS 990 reports, select state websites, DMHC reports (Medicaid); NAIC financials, DMHC reports (Individual, Small Group, Large Group); Kaiser (ASO). Estimated revenues, based on McKinsey Payor Financial Database, which includes NAIC financials of SHCE filings, DMHC filings, IRS 990 forms, DMHC financials, select state websites. For year 1 financials: We analyzed all available 2014 Supplemental Healthcare Exhibits filed by payors for their Individual medical insurance business (comprising 92% of payors). Profitability is based on reported post-tax margin adjusted for the difference between reinsurance and risk adjustment (as booked at the end of 2014) and CMS reported reinsurance and risk adjustment payments as of 06/30/2015, assuming a corporate tax rate of 35%. Risk adjustment bookings were attributed to the Individual line of business based on relative proportion of reported member months. The effect of risk corridors were not included as carrier-specific risk corridor data has not yet been released. 1
Fully insured only
2
Self-insured of all employer sizes; excludes stop loss revenue
3
Includes ACA compliant (on and off exchange) and non-ACA compliant plans
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Highlights from theâ&#x20AC;Ś McKinsey Quarterly
2014 Number 4
2014 2015 Number Number 41
ed ge he
dig ita l
Co mp eti ng on t
Co mp eti ng on t
he
dig ita l
ed ge
2015 Number 2
scale
Thriving at
JA N UA RY 2 015
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Decoding leadership: What really matters Claudio Feser, Fernanda Mayol, and Ramesh Srinivasan
New research suggests that the secret to developing effective leaders is to encourage four types of behavior.
Telling CEOs these days that leadership drives performance is a bit like saying that oxygen is necessary to breathe. Over 90 percent of CEOs are already planning to increase investment in leadership development because they see it as the single most important human-capital issue their organizations face.1 And they’re right to do so: earlier McKinsey research has consistently shown that good leadership is a critical part of organizational health, which is an important driver of shareholder returns.2
A big, unresolved issue is what sort of leadership behavior organizations should encourage. Is leadership so contextual that it defies standard definitions or development approaches?3 Should companies now concentrate their efforts on priorities such as role modeling, making decisions quickly, defining visions, and shaping leaders who are good at adapting? Should they stress the virtues 1 The State of Human Capital 2012—False Summit: Why the Human Capital Function
Still Has Far to Go, a joint report from The Conference Board and McKinsey, October 2012, mckinsey.com.
2 See Aaron De Smet, Bill Schaninger, and Matthew Smith, “The hidden value of
organizational health—and how to capture it,” McKinsey Quarterly, April 2014, on mckinsey.com.
3 See Ralph M. Stogdill, “Personal factors associated with leadership: A survey of the
literature,” Journal of Psychology: Interdisciplinary and Applied, 1948, Volume 25, Issue 1, pp. 35–71. Also, for more on our work with Egon Zehnder, notably the contrast between organizations growing organically and those growing through acquisition, see Katharina Hermann, Asmus Komm, and Sven Smit, “Do you have the right leaders for your growth strategies?,” McKinsey Quarterly, July 2011, on mckinsey.com.
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of enthusiastic communication? In the absence of any academic or practitioner consensus on the answers, leadership-development programs address an extraordinary range of issues, which may help explain why only 43 percent of CEOs are confident that their training investments will bear fruit. Our most recent research, however, suggests that a small subset of leadership skills closely correlates with leadership success, particularly among frontline leaders. Using our own practical experience and searching the relevant academic literature, we came up with a comprehensive list of 20 distinct leadership traits. Next, we surveyed 189,000 people in 81 diverse organizations4 around the world to assess how frequently certain kinds of leadership behavior are applied within their organizations. Finally, we divided the sample into organizations whose leadership performance was strong (the top quartile of leadership effectiveness as measured by McKinsey’s Organizational Health Index) and those that were weak (bottom quartile). What we found was that leaders in organizations with high-quality leadership teams typically displayed 4 of the 20 possible types of behavior; these 4, indeed, explained 89 percent of the variance between strong and weak organizations in terms of leadership effectiveness (exhibit). •
Solving problems effectively. The process that precedes decision making is problem solving, when information is gathered, analyzed, and considered. This is deceptively difficult to get right, yet it is a key input into decision making for major issues (such as M&A) as well as daily ones (such as how to handle a team dispute).
•
Operating with a strong results orientation. Leadership is about not only developing and communicating a vision and setting objectives but also following through to achieve results. Leaders with a strong results orientation tend to emphasize the importance of efficiency and productivity and to prioritize the highest-value work.
4 The 81 organizations are diverse in geography (for instance, Asia, Europe, Latin America,
and North America), industry (agriculture, consulting, energy, government, insurance, mining, and real estate), and size (from about 7,500 employees to 300,000).
3
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Seeking different perspectives. This trait is conspicuous in managers who monitor trends affecting organizations, grasp changes in the environment, encourage employees to contribute ideas that could improve performance, accurately differentiate between important and unimportant issues, and give the appropriate weight to stakeholder concerns. Leaders who do well on this dimension typically base their decisions on sound analysis and avoid the many Q4 2014 biases to which decisions are prone. Leadership Decoded Exhibit 1 of 1 â&#x20AC;˘
Exhibit Four kinds of behavior account for 89 percent of leadership effectiveness. Top kinds of leadership behavior1 1 Be supportive
11 Keep group organized and on task
2 Champion desired change
12 Make quality decisions
3 Clarify objectives, rewards, and consequences
13 Motivate and bring out best in others
4 Communicate prolifically and enthusiastically
14 Offer a critical perspective
5 Develop others
15 Operate with strong results orientation
6 Develop and share a collective mission
16 Recover positively from failures
7 Differentiate among followers
17 Remain composed and confident in uncertainty
8 Facilitate group collaboration
18 Role model organizational values
9 Foster mutual respect
19 Seek different perspectives
10 Give praise
1 Based
20
Solve problems effectively
on a survey of 81 organizations that are diverse in geography (eg, Asia, Europe, Latin America, and North America), industry (eg, agriculture, consulting, energy, government, insurance, mining, and real estate), and size (from ~7,500 to 300,000 employees). Source: McKinseyâ&#x20AC;&#x2122;s Organizational Health Index
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Supporting others. Leaders who are supportive understand and sense how other people feel. By showing authenticity and a sincere interest in those around them, they build trust and inspire and help colleagues to overcome challenges. They intervene in group work to promote organizational efficiency, allaying unwarranted fears about external threats and preventing the energy of employees from dissipating into internal conflict.
We’re not saying that the centuries-old debate about what distinguishes great leaders is over or that context is unimportant. Experience shows that different business situations often require different styles of leadership. We do believe, however, that our research points to a kind of core leadership behavior that will be relevant to most companies today, notably on the front line. For organizations investing in the development of their future leaders, prioritizing these four areas is a good place to start. The authors wish to thank Michael Bazigos, Nate Boaz, Aaron De Smet, Lili Duan, Chris Gagnon, Bill Schaninger, and Ekaterina Titova for their contributions to this article. Claudio Feser is a director in McKinsey’s Zürich office, Fernanda Mayol is an associate principal in the Rio de Janeiro office, and Ramesh Srinivasan is a director in the New York office. Copyright © 2014 McKinsey & Company. All rights reserved.
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The eight essentials of innovation Marc de Jong, Nathan Marston, and Erik Roth
Strategic and organizational factors are what separate successful big-company innovators from the rest of the field.
Itâ&#x20AC;&#x2122;s no secret: innovation is difficult for well-established companies. By and large, they are better executors than innovators, and most succeed less through game-changing creativity than by optimizing their existing businesses.
Yet hard as it is for such organizations to innovate, large ones as diverse as Alcoa, the Discovery Group, and NASAâ&#x20AC;&#x2122;s Ames Research Center are actually doing so. What can other companies learn from their approaches and attributes? That question formed the core of a multiyear study comprising in-depth interviews, workshops, and surveys of more than 2,500 executives in over 300 companies, including both performance leaders and laggards, in a broad set of industries and countries (Exhibit 1). What we found were a set of eight essential attributes that are present, either in part or in full, at every big company thatâ&#x20AC;&#x2122;s a high performer in product, process, or business-model innovation. Since innovation is a complex, company-wide endeavor, it requires a set of crosscutting practices and processes to structure, organize, and encourage it. Taken together, the essentials described in this article constitute just such an operating system, as seen in Exhibit 2. These often overlapping, iterative, and nonsequential practices resist systematic categorization but can nonetheless be thought of in two groups. The first four, which are strategic and creative
2
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in nature, help set and prioritize the terms and conditions under which innovation is more likely to thrive. The next four essentials deal with how to deliver and organize for innovation repeatedly over time and with enough value to contribute meaningfully to overall performance. To be sure, there’s no proven formula for success, particularly when it comes to innovation. While our years of client-service experience provide strong indicators for the existence of a causal relationship between the attributes that survey respondents reported and the innovations of the companies we studied, the statistics described here can only prove correlation. Yet we firmly believe Web 2015 Eight essentials Exhibit11of 2 Exhibit
What innovation leaders say they do right % of respondents by performance quartile1
Top quartile
2nd
3rd
4th
55 44 38
35
31
42
39 29
27
23
20
16
16
14
10 6
Aspire
Choose
15
15
12
10 9 2
Discover
8 2
Evolve
6
9 2
Accelerate
12 7 7
2
Scale
Extend
5
Mobilize
The survey tested for 27 innovation practices spread across eight essentials 1
N = 623. Performance defined as a weighted index of measures for organic growth (% of growth from new products or services developed in-house) and innovation performance (% of sales from new products and self-assessment of innovation performance). Respondents who answered “yes to some degree,” “no,” or “don’t know/not applicable” are not shown. Source: McKinsey survey of 2,500 global executives, Nov 2012
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that if companies assimilate and apply these essentials—in their own way, in accordance with their particular context, capabilities, organizational culture, and appetite for risk—they will improve the likelihood that they, too, can rekindle the lost spark of innovation. In the digital age, the pace of change has gone into hyperspeed, so companies must get these strategic, creative, executional, and organizational factors right to innovate successfully.
Exhibit 2
Testing for innovation Aspire
Choose
Discover
Evolve
Do you really innovate?
Underlying elements
Do you regard innovation-led growth as critical, and do you have cascaded targets that reflect this?
• Innovation vision and model
Do you invest in a coherent, timeand risk-balanced portfolio of initiatives with sufficient resources to win?
• Clarity of innovation themes • Portfolio balancing time and risk • Resources sufficient for initiatives to win • Portfolio governance
Do you have differentiated business, market, and technology insights that translate into winning value propositions?
• Customer orientation
Do you create new business models that provide defensible and scalable profit sources?
• Exploration of new business models
• Required growth contribution from innovation • Cascaded targets and accountabilities
• Multiple-lens insight generation • Differentiated value proposition
• Changing value-chain economics • Diversifying profit streams • Delivery-model changes and new
customer groups
Accelerate
Scale
Extend
Do you beat the competition by developing and launching innovations quickly and effectively?
• Planning and execution rigor
Do you launch innovations at the right scale in the relevant markets and segments?
• Go-to-market planning
Do you win by creating and capitalizing on external networks?
• Strategic external networks
• Cross-functional project culture • Customer- and market-based learning
• Launch management • Operations ramp-up
• Collaboration skills • Partner of choice
Mobilize
Are your people motivated, rewarded, and organized to innovate repeatedly?
• People priorities • Enabling structure • Supportive culture • Learning and adaptive organization
Source: McKinsey analysis
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Aspire President John F. Kennedy’s bold aspiration, in 1962, to “go to the moon in this decade” motivated a nation to unprecedented levels of innovation. A far-reaching vision can be a compelling catalyst, provided it’s realistic enough to stimulate action today. But in a corporate setting, as many CEOs have discovered, even the most inspiring words often are insufficient, no matter how many times they are repeated. It helps to combine high-level aspirations with estimates of the value that innovation should generate to meet financial-growth objectives. Quantifying an “innovation target for growth,” and making it an explicit part of future strategic plans, helps solidify the importance of and accountability for innovation. The target itself must be large enough to force managers to include innovation investments in their business plans. If they can make their numbers using other, less risky tactics, our experience suggests that they (quite rationally) will. Establishing a quantitative innovation aspiration is not enough, however. The target value needs to be apportioned to relevant business “owners” and cascaded down to their organizations in the form of performance targets and timelines. Anything less risks encouraging inaction or the belief that innovation is someone else’s job. For example, Lantmännen, a big Nordic agricultural cooperative, was challenged by flat organic growth and directionless innovation. Top executives created an aspirational vision and strategic plan linked to financial targets: 6 percent growth in the core business and 2 percent growth in new organic ventures. To encourage innovation projects, these quantitative targets were cascaded down to business units and, ultimately, to product groups. During the development of each innovation project, it had to show how it was helping to achieve the growth targets for its category and markets. As a result, Lantmännen went from 4 percent to 13 percent annual growth, underpinned by the successful launch of several new brands. Indeed, it became the market leader in premade food only four years after entry and created a new premium segment in this market.
5
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Such performance parameters can seem painful to managers more accustomed to the traditional approach. In our experience, though, CEOs are likely just going through the motions if they don’t use evaluations and remuneration to assess and recognize the contribution that all top managers make to innovation.
Choose Fresh, creative insights are invaluable, but in our experience many companies run into difficulty less from a scarcity of new ideas than from the struggle to determine which ideas to support and scale. At bigger companies, this can be particularly problematic during market discontinuities, when supporting the next wave of growth may seem too risky, at least until competitive dynamics force painful changes. Innovation is inherently risky, to be sure, and getting the most from a portfolio of innovation initiatives is more about managing risk than eliminating it. Since no one knows exactly where valuable innovations will emerge, and searching everywhere is impractical, executives must create some boundary conditions for the opportunity spaces they want to explore. The process of identifying and bounding these spaces can run the gamut from intuitive visions of the future to carefully scrutinized strategic analyses. Thoughtfully prioritizing these spaces also allows companies to assess whether they have enough investment behind their most valuable opportunities. During this process, companies should set in motion more projects than they will ultimately be able to finance, which makes it easier to kill those that prove less promising. RELX Group, for example, runs 10 to 15 experiments per major customer segment, each funded with a preliminary budget of around $200,000, through its innovation pipeline every year, choosing subsequently to invest more significant funds in one or two of them, and dropping the rest. “One of the hardest things to figure out is when to kill something,” says Kumsal Bayazit, RELX Group’s chief strategy officer. “It’s a heck of a lot easier if you have a portfolio of ideas.” Once the opportunities are defined, companies need transparency into what people are working on and a governance process that
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constantly assesses not only the expected value, timing, and risk of the initiatives in the portfolio but also its overall composition. There’s no single mix that’s universally right. Most established companies err on the side of overloading their innovation pipelines with relatively safe, short-term, and incremental projects that have little chance of realizing their growth targets or staying within their risk parameters. Some spread themselves thinly across too many projects instead of focusing on those with the highest potential for success and resourcing them to win. These tendencies get reinforced by a sluggish resource-reallocation process. Our research shows that a company typically reallocates only a tiny fraction of its resources from year to year, thereby sentencing innovation to a stagnating march of incrementalism.1
Discover Innovation also requires actionable and differentiated insights—the kind that excite customers and bring new categories and markets into being. How do companies develop them? Genius is always an appealing approach, if you have or can get it. Fortunately, innovation yields to other approaches besides exceptional creativity. The rest of us can look for insights by methodically and systematically scrutinizing three areas: a valuable problem to solve, a technology that enables a solution, and a business model that generates money from it. You could argue that nearly every successful innovation occurs at the intersection of these three elements. Companies that effectively collect, synthesize, and “collide” them stand the highest probability of success. “If you get the sweet spot of what the customer is struggling with, and at the same time get a deeper knowledge of the new technologies coming along and find a mechanism for how these two things can come together, then you are going to get good returns,” says Alcoa chairman and chief executive Klaus Kleinfeld. 1 See Stephen Hall, Dan Lovallo, and Reinier Musters, “How to put your money where
your strategy is,” McKinsey Quarterly, March 2012; and Vanessa Chan, Marc de Jong, and Vidyadhar Ranade, “Finding the sweet spot for allocating innovation resources,” McKinsey Quarterly, May 2014, both available on mckinsey.com.
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The insight-discovery process, which extends beyond a company’s boundaries to include insight-generating partnerships, is the lifeblood of innovation. We won’t belabor the matter here, though, because it’s already the subject of countless articles and books.2 One thing we can add is that discovery is iterative, and the active use of prototypes can help companies continue to learn as they develop, test, validate, and refine their innovations. Moreover, we firmly believe that without a fully developed innovation system encompassing the other elements described in this article, large organizations probably won’t innovate successfully, no matter how effective their insight-generation process is.
Evolve Business-model innovations—which change the economics of the value chain, diversify profit streams, and/or modify delivery models—have always been a vital part of a strong innovation portfolio. As smartphones and mobile apps threaten to upend oldline industries, business-model innovation has become all the more urgent: established companies must reinvent their businesses before technology-driven upstarts do. Why, then, do most innovation systems so squarely emphasize new products? The reason, of course, is that most big companies are reluctant to risk tampering with their core business model until it’s visibly under threat. At that point, they can only hope it’s not too late. Leading companies combat this troubling tendency in a number of ways. They up their game in market intelligence, the better to separate signal from noise. They establish funding vehicles for new businesses that don’t fit into the current structure. They constantly reevaluate their position in the value chain, carefully considering business models that might deliver value to priority groups of new customers. They sponsor pilot projects and experiments away from the core business to help combat narrow conceptions of what they are and do. And they stress-test newly emerging value propositions and operating models against countermoves by competitors. 2 See, for example, Marla M. Capozzi, Reneé Dye, and Amy Howe, “Sparking creativity in
teams: An executive’s guide,” McKinsey Quarterly, April 2011; and Marla M. Capozzi, John Horn, and Ari Kellen, “Battle-test your innovation strategy,” McKinsey Quarterly, December 2012, both available on mckinsey.com.
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Amazon does a particularly strong job extending itself into new business models by addressing the emerging needs of its customers and suppliers. In fact, it has included many of its suppliers in its customer base by offering them an increasingly wide range of services, from hosted computing to warehouse management. Another strong performer, the Financial Times, was already experimenting with its business model in response to the increasing digitalization of media when, in 2007, it launched an innovative subscription model, upending its relationship with advertisers and readers. “We went against the received wisdom of popular strategies at the time,” says Caspar de Bono, FT board member and managing director of B2B. “We were very deliberate in getting ahead of the emerging structural change, and the decisions turned out to be very successful.” In print’s heyday, 80 percent of the FT’s revenue came from print advertising. Now, more than half of it comes from content, and two-thirds of circulation comes from digital subscriptions.
Accelerate Virulent antibodies undermine innovation at many large companies. Cautious governance processes make it easy for stifling bureaucracies in marketing, legal, IT, and other functions to find reasons to halt or slow approvals. Too often, companies simply get in the way of their own attempts to innovate. A surprising number of impressive innovations from companies were actually the fruit of their mavericks, who succeeded in bypassing their early-approval processes. Clearly, there’s a balance to be maintained: bureaucracy must be held in check, yet the rush to market should not undermine the cross-functional collaboration, continuous learning cycles, and clear decision pathways that help enable innovation. Are managers with the right knowledge, skills, and experience making the crucial decisions in a timely manner, so that innovation continually moves through an organization in a way that creates and maintains competitive advantage, without exposing a company to unnecessary risk? Companies also thrive by testing their promising ideas with customers early in the process, before internal forces impose modifications that blur the original value proposition. To end up with the innovation initially envisioned, it’s necessary to knock
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down the barriers that stand between a great idea and the end user. Companies need a well-connected manager to take charge of a project and be responsible for the budget, time to market, and key specifications—a person who can say yes rather than no. In addition, the project team needs to be cross-functional in reality, not just on paper. This means locating its members in a single place and ensuring that they give the project a significant amount of their time (at least half) to support a culture that puts the innovation project’s success above the success of each function. Cross-functional collaboration can help ensure end-user involvement throughout the development process. At many companies, marketing’s role is to champion the interests of end users as development teams evolve products and to help ensure that the final result is what everyone first envisioned. But this responsibility is honored more often in the breach than in the observance. Other companies, meanwhile, rationalize that consumers don’t necessarily know what they want until it becomes available. This may be true, but customers can certainly say what they don’t like. And the more quickly and frequently a project team gets—and uses—feedback, the more quickly it gets a great end result.
Scale Some ideas, such as luxury goods and many smartphone apps, are destined for niche markets. Others, like social networks, work at global scale. Explicitly considering the appropriate magnitude and reach of a given idea is important to ensuring that the right resources and risks are involved in pursuing it. The seemingly safer option of scaling up over time can be a death sentence. Resources and capabilities must be marshaled to make sure a new product or service can be delivered quickly at the desired volume and quality. Manufacturing facilities, suppliers, distributors, and others must be prepared to execute a rapid and full rollout. For example, when TomTom launched its first touch-screen navigational device, in 2004, the product flew off the shelves. By 2006, TomTom’s line of portable navigation devices reached sales of about 5 million units a year, and by 2008, yearly volume had jumped to more than 12 million. “That’s faster market penetration than mobile phones” had, says Harold Goddijn, TomTom’s CEO and
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cofounder. While TomTom’s initial accomplishment lay in combining a well-defined consumer problem with widely available technology components, rapid scaling was vital to the product’s continuing success. “We doubled down on managing our cash, our operations, maintaining quality, all the parts of the iceberg no one sees,” Goddijn adds. “We were hugely well organized.”
Extend In the space of only a few years, companies in nearly every sector have conceded that innovation requires external collaborators. Flows of talent and knowledge increasingly transcend company and geographic boundaries. Successful innovators achieve significant multiples for every dollar invested in innovation by accessing the skills and talents of others. In this way, they speed up innovation and uncover new ways to create value for their customers and ecosystem partners. Smart collaboration with external partners, though, goes beyond merely sourcing new ideas and insights; it can involve sharing costs and finding faster routes to market. Famously, the components of Apple’s first iPod were developed almost entirely outside the company; by efficiently managing these external partnerships, Apple was able to move from initial concept to marketable product in only nine months. NASA’s Ames Research Center teams up not just with international partners—launching joint satellites with nations as diverse as Lithuania, Saudi Arabia, and Sweden—but also with emerging companies, such as SpaceX. High-performing innovators work hard to develop the ecosystems that help deliver these benefits. Indeed, they strive to become partners of choice, increasing the likelihood that the best ideas and people will come their way. That requires a systematic approach. First, these companies find out which partners they are already working with; surprisingly few companies know this. Then they decide which networks—say, four or five of them—they ideally need to support their innovation strategies. This step helps them to narrow and focus their collaboration efforts and to manage the flow of possibilities from outside the company. Strong innovators also regularly review their networks, extending and pruning them as appropriate and using sophisticated incentives and contractual
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structures to motivate high-performing business partners. Becoming a true partner of choice is, among other things, about clarifying what a partnership can offer the junior member: brand, reach, or access, perhaps. It is also about behavior. Partners of choice are fair and transparent in their dealings. Moreover, companies that make the most of external networks have a good idea of what’s most useful at which stages of the innovation process. In general, they cast a relatively wide net in the early going. But as they come closer to commercializing a new product or service, they become narrower and more specific in their sourcing, since by then the new offering’s design is relatively set.
Mobilize How do leading companies stimulate, encourage, support, and reward innovative behavior and thinking among the right groups of people? The best companies find ways to embed innovation into the fibers of their culture, from the core to the periphery. They start back where we began: with aspirations that forge tight connections among innovation, strategy, and performance. When a company sets financial targets for innovation and defines market spaces, minds become far more focused. As those aspirations come to life through individual projects across the company, innovation leaders clarify responsibilities using the appropriate incentives and rewards. The Discovery Group, for example, is upending the medical and life-insurance industries in its native South Africa and also has operations in the United Kingdom, the United States, and China, among other locations. Innovation is a standard measure in the company’s semiannual divisional scorecards—a process that helps mobilize the organization and affects roughly 1,000 of the company’s business leaders. “They are all required to innovate every year,” Discovery founder and CEO Adrian Gore says of the company’s business leaders. “They have no choice.” Organizational changes may be necessary, not because structural silver bullets exist—we’ve looked hard for them and don’t think they do—but rather to promote collaboration, learning, and experimentation. Companies must help people to share ideas and
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knowledge freely, perhaps by locating teams working on different types of innovation in the same place, reviewing the structure of project teams to make sure they always have new blood, ensuring that lessons learned from success and failure are captured and assimilated, and recognizing innovation efforts even when they fall short of success. Internal collaboration and experimentation can take years to establish, particularly in large, mature companies with strong cultures and ways of working that, in other respects, may have served them well. Some companies set up “innovation garages” where small groups can work on important projects unconstrained by the normal working environment while building new ways of working that can be scaled up and absorbed into the larger organization. NASA, for example, has ten field centers. But the space agency relies on the Ames Research Center, in Silicon Valley, to maintain what its former director, Dr. Pete Worden, calls “the character of rebels” to function as “a laboratory that’s part of a much larger organization.”
Big companies do not easily reinvent themselves as leading innovators. Too many fixed routines and cultural factors can get in the way. For those that do make the attempt, innovation excellence is often built in a multiyear effort that touches most, if not all, parts of the organization. Our experience and research suggest that any company looking to make this journey will maximize its probability of success by closely studying and appropriately assimilating the leading practices of high-performing innovators. Taken together, these form an essential operating system for innovation within a company’s organizational structure and culture.
The authors wish to thank Jill Hellman, an adviser to McKinsey’s Innovation Practice, and McKinsey’s Peet van Biljon for their contributions to this article. Marc de Jong is a principal in McKinsey’s Amsterdam office, Nathan Marston is a principal in the London office, and Erik Roth is a principal in the Shanghai office.
Copyright © 2015 McKinsey & Company. All rights reserved.
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The dawn of marketing’s new golden age Jonathan Gordon and Jesko Perrey
Marketers are boosting their precision, broadening their scope, moving more quickly, and telling better stories.
Science has permeated marketing for decades. Fans of the television drama Mad Men saw a fictionalized encounter when an IBM System/360 mainframe computer physically displaced the creative department of a late-1960s advertising agency. In reality, though, the 1960s through the early 1990s witnessed a happy marriage of advertising and technology as marketers mastered both the medium of television and the science of Nielsen ratings. These years gave birth to iconic advertising messages in categories ranging from sparkling beverages (“I’d like to buy the world a Coke”) to credit cards (“American Express. Don’t leave home without it”) to air travel (“British Airways: the world’s favourite airline”).
Until recently, marketers could be forgiven for looking back wistfully at this golden age as new forces reshaped their world into something completely different. These new trends include a massive proliferation of television and online channels, the transformation of the home PC into a retail channel, the unrelenting rise of mobile social media and gaming, and—with all these trends—a constant battle for the consumer’s attention.
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The resulting expansion of platforms has propelled consistent growth in marketing expenditures, which now total as much as $1 trillion globally. The efficacy of this spending is under deep scrutiny. For example, in a survey of CEOs, close to three out of four agreed with the following statement: marketers “are always asking for more money, but can rarely explain how much incremental business this money will generate.”1 Chief marketing officers (CMOs), it appears, don’t disagree: in another recent survey, just over one-third said they had quantitatively proved the impact of their marketing outlays.2 Paradoxically, though, CEOs are looking to their CMOs more than ever, because they need top-line growth and view marketing as a critical lever to help them achieve it. Can marketers deliver amid ongoing performance pressures? In this article, we’ll explain why we think the answer is yes—and why we are, in fact, on the cusp of a new golden age for marketing. At the core of the new era are five elements that are simultaneously familiar and fast changing. The first two are the science and substance of marketing. Leading marketers are using research and analytics to shed light on who buys what, and why; who influences buyers; and when, in the consumer decision journey, marketing efforts are likely to yield the greatest return. That understanding, in turn, is making it possible for marketers to identify more effectively the functional benefits that customers need, the experiences they want, and the innovations they will value. But this isn’t just another missive on the power of big data. Organizational simplicity is fueling speed, and story is pulling things together while inspiring both the customer and the organization. Happily, the story just seems to get better as creative minds express themselves 1 For results from a survey of 600 CEOs and decision makers conducted by the Fournaise
Marketing Group, see “73% of CEOs think marketers lack business credibility: They can’t prove they generate business growth,” FournaiseTrack, June 15, 2011, fournaisegroup.com.
2 See “Chief marketing officer optimism at four-year high; proving the value of marketing
remains elusive,” blog entry by Christine Moorman, The CMO Survey, August 27, 2013, cmosurvey.org, for results from a survey of 410 CMOs, conducted by Duke University’s Fuqua School of Business with the American Marketing Association and McKinsey & Company. For a further discussion of measuring marketing ROI, see Jean-Hugues Monier, Jonathan Gordon, and Philip Ogren, “How CMOs can get CFOs on their side,” Harvard Business Review, November 25, 2013, hbr.org.
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through digital means, and it then echoes and expands through social media and user-generated content. As you’ll see, the emerging new rules for marketing extend well beyond data and analysis, crucial though those are, and even transcend the marketing organization itself.
Science Advances in data, modeling, and automated analysis are creating ever more refined ways of targeting and measuring the returns on marketing investments, while generating powerful new clues about why consumers behave as they do. Long gone is spending guided mostly by intuition and focus groups. Instead, organizations are seeking greater precision by measuring and managing the consumer decision points where well-timed outlays can make the biggest difference. Big data is a term that’s often used to describe this transition. But it’s not just big data; it’s also big research. A major consumer company investigating the decision journey for its products recently undertook a consumer study, collected through online surveys, on a massive scale and at a speed that would have been unimaginable in the days of mall-intercept interviews. The project, which involved more than 10,000 surveys over the course of a month, uncovered material differences between how the company and consumers were thinking about the category, while also explaining what drives choice at each stage of the journey. These insights are now being used to change brand strategy, product-portfolio design, and marketing campaigns. The potential impact runs into billions of dollars in additional revenue. While much recent marketing science has played out in the measurement and targeting of advertising and promotion expenditures, many consumer companies are increasing their focus on in-store behavior: how promotions, traffic flows, and physical engagement with products affect sales. Capturing and analyzing data on such issues has become more feasible in recent years thanks to low-cost sensors that can be embedded in products, as well as the ability to capture and analyze huge amounts of unstructured data from store videos—and even to track shoppers’ eye movements.
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The impact goes beyond marketing and product teams. Marketing science is boosting the precision of real-time operating decisions. At a major hospitality company, marketing analysts are able to get a read on the performance of a particular property or category over a weekend and then drill down on individual customer segments to assess how to make improvements. If the data show that a profitable segment of weekend travelers are shortening their stays, the company can create special offers (such as late checkouts or room upgrades) to encourage repeat business.3 Or consider how one industrial-products company revamped its highly fragmented portfolio of more than 500 SKUs sold to customers in a diverse set of industries. Prices varied widely even for the same products, without any clear reasons as to why, hindering efforts to manage margins. An analytical tool that could scan 1.3 million transactions helped the company redraw customer segments, identify products with opportunities for pricing flexibility, and recommend new prices. Ultimately, it reset about 100,000 price points. More scientific marketing means that CMOs and other senior leaders need enhanced analytical skills to exploit data possibilities more fully and stay ahead of the whirl of developments. One CEO we know believes it’s time to create a position—marketing technology officer (MTO)—that’s rooted both in technology and domain knowledge. Knowing what can be automated, when judgment is required, and where to seek and place new technical talent are becoming increasingly central to effective marketing leadership. That is intensifying the war for specialized talent as traditional marketing powerhouses bid against high-tech companies for needed skills.
Substance As more advanced marketing science and analytics take hold, they are making it increasingly natural for marketing to go beyond messaging and to shape the substance of the business, particularly the experiences of customers, the delivery of functional benefits, and the drive to develop new products and services. Armed with information about customers and a company’s relationships 3 Peter Dahlstrom, Chris Davis, Fabian Hieronimus, and Marc Singer, “The rebirth of the
CMO,” Harvard Business Review, August 5, 2014, hbr.org.
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Five elements that catalyze great marketing
Sc
Advances in data, modeling, and analysis allow precise measurement and management of customer decisions and more targeted spending.
Marshal big data and analytics for insights into choices along decision journeys.
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Use data from sensors and video that track in-store behavior to improve merchandising.
Marketers can directly shape the business by evolving the customer experience and the development of products and services.
Harness consumer desires and needs to provide functional benefitsâ&#x20AC;&#x201D;from auto safety to shopping convenience.
Make the case for customer care initiatives and for consistency in the customer experience.
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The ways to tell a story are morphing continually, drawing on richer digital interactions and more powerful communications tools.
Learn to relinquish control of stories as customers interpret and modify them on social media.
Sp
Consumer preferences, market dynamics, and product life cycles change with stunning velocity in a digital economy.
Develop the management skills and organizational clout to bring cross-functional teams together swiftly.
Si
Understand how to best access creativity given talent scarcity and evolving relationships with advertising agencies.
Achieve a shared vision with product developers to facilitate a speedy response to market changes.
Complexity is the enemy of speed and leading marketers are seeking greater simplicity.
Reduce or eliminate hierarchies, silos, communications gaps, and redundancies within the organization.
Simplify working relationships with advertising and other media agencies.
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with them, the CMO is well-positioned to help differentiate its products, services, and experiences. That’s good, because digital innovation, transparency, and customercentricity have raised expectations across the board. In automobiles, as sensor technologies proliferate and onboard computing power increases, consumers are now starting to expect that collisionavoidance and digitally-enabled safety systems will become part of manufacturers’ offerings. (Luxury carmakers already are making sophisticated safety options part of their marketing story.) In retail, brands like H&M, Topshop, Uniqlo, and Zara have harnessed the consumer’s desire to have it all by bringing mass-market prices to the colors, fabrics, and designs of high fashion. Simultaneously, Amazon and other digital players are pressuring brick-and-mortar retailers, which are responding both by retooling their supply chains to enable faster restocking and one-day delivery and by creating new advertising messages around the in-store pickup of online orders. Marketers are well placed to help their organizations meet the rising bar by, for example, making the case for customer-care initiatives and for consistency in the customer experience. A better one became the heart of a marketing campaign at European energy supplier Essent, a subsidiary of RWE. To ensure that the company delivered on the promise, the CEO named the chief of marketing to lead the initiative. Among the successes: making customer onboarding less cumbersome by cutting process steps from seven to two. Marketing also took the lead in efforts to create new products that customers wanted. The CMO led a cross-functional team of sales, IT, and product development to produce Essent’s smart, Internetconnected E-thermostat, for instance. Some of its functionality was cocreated with customers. Similarly, marketing has taken a leadership role in designing and setting standards for Daimler’s highly digital customer-experience brand, “Mercedes me.” The digital platform provides customers with automated appointment booking, personalized financing, a chance to cocreate ideas, access to maintenance data from sensor-enabled automobile diagnostics, and even quick access to Daimler’s car-sharing and taxi services—for use on business trips, for example. (See “Marketing the Mercedes way,” forthcoming on mckinsey.com, for more on the role of marketing at the company.)
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These efforts and many more like them are extending marketing into the guts of the business, and most would not have been possible just a few years ago. The power of today’s digital tools and the scientific approaches they make possible are not only enabling a more substantial role for marketing but also giving it opportunities for real-time impact.
Story Even as marketing reaches new heights with technology-enabled measurement, the importance of the story hasn’t diminished. But ways to tell it are morphing continually as the stuff of storytelling encompasses richer digital interactions, and mobile devices become more powerful communications tools. In this world, creativity is in greater demand than ever. Google’s “Dear Sophie” advertisement is an example of the modern art form. It tells the story of a father writing to his daughter as she grows up, with the narrative demonstrating how Google search, Gmail, and YouTube can be new channels of human connectivity.4 (For more on how Google seeks to connect, see “How Google breaks through,” forthcoming on mckinsey.com.) P&G’s “Pick Them Back Up” spot for the Sochi Olympics (part of the ongoing “Thank You, Mom” campaign) is another moving story. It dramatizes the moms who were there for their kids throughout the years of hard training, who picked them up when they fell, and who deserve celebration as the unsung heroines. It’s hard to watch these commercials and not tear up, at least a little. Chanel’s recent launch of the new No. 5 perfume offers a good window on how stories are evolving beyond traditional video. Over a decade after their first collaboration, creative chief Karl Lagerfeld has again partnered with film director Baz Luhrmann to produce a short film on a woman whose lifestyle embodies the brand. Their latest effort—“The one that I want”—stars model Gisele Bündchen and features the perfume, along with clothing and other Chanel products. Beyond the film itself, a series of YouTube videos extend the campaign 4 Google, “Dear Sophie” video advertisement, BBH New York and Google Creative Lab,
2011, youtube.com.
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with shorts on the making of the film, interviews with Luhrmann on both projects, behind-the-scenes footage from Chanel’s studio, and more.5 All of this is designed to amplify the lifestyle message of the fragrance’s launch in a way that traditional TV or print couldn’t accomplish. New media also dictate that marketers relinquish control of the story as digital interactions with customers become more frequent. Customers want to interact with stories and modify them on social media. Following the kinds of story rules that once made board members and CEOs comfortable is no longer feasible. Social-media programs are consuming a larger share of many marketing budgets. A number of major consumer companies are using interaction centers to monitor and participate in social-media conversations as they develop, sometimes including the promotion of discussions on corporate social-media channels. Agency-management issues also are an important piece of the puzzle. Talent scarcity, evolving digital storytelling, and perceived institutional rigidities have opened new debates about the best ways to access creativity. Some companies, like Chanel, are enhancing their control over the story with supplemental digital content. Other global marketing leaders are bringing in-house more of their story muscle, particularly when it involves lighter message content for social media. Agencies are responding. Many are acquiring more digital talent and working to break down silos to overcome perceptions that they are actually geared to bigger productions and may lack the digital and story skills to handle new content in an agile, integrated way. All this is very much in flux, suggesting that leaders who aren’t asking fundamental questions about the roles of (and fit between) agencies and internal marketing teams stand the risk of being left behind.
Speed In a digital economy, marketing is no longer a “batch” process but a continuous one. Consumer preferences change with stunning 5 Chanel, “The one that I want” campaign video advertisements, Bazmark, 2014,
youtube.com/chanel.
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velocity, as do the dynamics of markets and product life cycles. This culture of urgency means that marketers need a new agility, plus the management skills and organizational clout to bring other functions together at a higher clock speed. How speed is achieved, of course, will vary by company and industry. A number of CMOs we know are setting the terms of how functional units should collaborate and spelling out what the entire organization needs to know to get new products to market at a steppedup pace. In these cases, marketing becomes the glue across the organization, providing oversight and coordination. To speed up its digital tempo, Nestlé’s marketing organization launched digital-acceleration teams. These specialists train business units and functions in the skills needed to be effective in digital marketing and social communications. Nestlé’s country units have adopted the approach, as well, allowing them to adapt the digital training to local market conditions, while adhering to core, companywide standards.6 At Google, lead times for new products are continually shrinking. Internal teams are attuned to putting products in front of consumers and then, in real time, to bringing back insights in a cycle of testing, learning, and iterating. Marketers are central to this process: they work to develop close relationships with product-development teams in order to inject their knowledge of user needs into how products are developed. That helps create a vision of the product from the user’s eyes, and one that engineering teams are eager to create. Achieving that shared vision between product developers and marketers is a key element of speed in formulating new products and features. The time-to-market benefits of better information and more fluid collaboration extend to a wide range of companies, sectors, and business functions. Consider, for example, how data and collaboration are increasing the speed and agility of B2B sales teams. (For more, see “Do you really understand how your business customers buy?,” forthcoming on mckinsey.com.) 6 See Pete Blackshaw, “How digital acceleration teams are influencing Nestlé’s 2,000 brands,”
interview by Michael Fitzgerald, MIT Sloan Management Review, September 22, 2013, sloanreview.mit.edu.
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Simplicity Complexity is the enemy of speed, which is a big reason why a number of leading marketers are reforming their organizations. Too often, expanding geographic footprints, product proliferation, and new arrays of channels and digital specialties have led to complex hierarchies, silos, communication gaps, and redundancies. But these can be tamed. For example, one telecommunications company realized that a cumbersome organizational structure was getting in the way of delivering the top-notch customer service that the CEO had designated as a strategic priority. He created a unit combining existing call centers and a newly formed social-media customer-care group. The leader of the unit reports directly to him. Proximity to the top of the company allows the new team to collaborate more smoothly across the organization, while signaling the importance of the customer experience. Many consumer marketers are using technology to reduce complexity. They are embracing internal social-media platforms to encourage the generation and sharing of ideas, which helps speed up problem solving across the organization. Daimler, meanwhile, reorganized its marketing and sales departments around the idea of the “best customer experience.” It created a new customer-experience function bundling several headquarters functions into one that maps the entire customer journey, with the goal of locking in a consistent brand experience throughout the world. Simplifying working relationships with advertising and other media agencies is another goal for many marketing organizations. Trade-offs abound: specialist agencies have expertise in new digitalcontent formats and delivery channels, but they aren’t always fullservice shops. Larger agencies offer more services, but the strengths of many still lie in traditional media. Marketers building teams of employees with strong skills in digital content and delivery are bringing more activities in-house, but bulking up can create complexity and slow things down. And of course, simplicity can’t come at the expense of great creative output.
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In our work with global marketers, including many leading-edge practitioners, we are seeing significant progress in each of these five dimensions. As you think about the implications of science, substance, story, speed, and simplicity for your organization, we suggest that you ask yourself five questions: 1. Are we taking advantage of the science of data and research to uncover new insights, or are we working off yesterday’s facts, assertions, and heuristics? 2. Do we fully exploit the power of marketing to enhance the substance—that is, the products, services, and experiences— we offer our customers, or are we just selling hard with a “me-too” mind-set? 3. Do we have a clear brand story that echoes through cyberspace, or do we feel that we aren’t quite capturing hearts and minds? 4. Have we created simplifiers within our organization, or have complex matrices become a logjam? 5. Are we faster or slower to market than our competition? Although this may seem like a lot to handle, the rapid changes and fast-breaking opportunities facing marketers in the 21st century suggest to us that the best ones will have good answers to all of these questions. In our opinion, those that do will not only enjoy abovemarket growth, they will define the next golden age of marketing. Jonathan Gordon is a principal in McKinsey’s New York office, and Jesko Perrey is a director in the Düsseldorf office. Copyright © 2015 McKinsey & Company. All rights reserved.
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S E P T E M B E R 2 015
Gender equality: Taking stock of where we are Dominic Barton, Sandrine Devillard, and Judith Hazlewood
Why are women still underrepresented at every level of today’s corporations?
There is a growing consensus among top executives that gender diversity is both an ethical and a business imperative. Yet progress is painfully slow. Despite modest improvements, women are underrepresented at every level of today’s corporations, especially in senior positions.
We’re quite cognizant of how difficult it is to make progress. Despite the fact that McKinsey has, for a number of years, been conducting research that has helped our firm and many other companies improve their gender balance—for example, through our Women Matter initiative,1 led by Sandrine Devillard, one of this essay’s coauthors—we’re not yet where we want to be. Women now represent about 39 percent of McKinsey’s entry-level hires, but occupy just 11 percent of the senior-leadership roles within the firm. There are currently four women (including Judith Hazlewood, one of this article’s coauthors) on our 30-member Shareholders Council. These numbers are certainly up from a decade ago, but less than we would like. Our ability to help our clients with their toughest problems depends on attracting and retaining the world’s best 1 For more about the research, visit McKinsey’s Women Matter page, at
mckinsey.com/features/women_matter.
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people, who can offer the diverse perspectives that enhance creative problem solving. Although we are glad to be making progress, including recently being named one of Working Mother magazine’s top ten companies for women,2 we know we would be a better firm if we had more top female talent. That’s why we have committed publicly, through the United Nations’ HeForShe initiative and the 30% Club,3 to some ambitious gender goals for our firm over the next five years—ones that won’t be trivial to achieve.
The persistence of the gender gap We believe there are several reasons the gender gap so stubbornly persists. For one, in many organizations, senior leadership has only recently committed itself to addressing this challenge. A Women Matter study showed that gender diversity was a top-ten strategic priority for only 28 percent of companies in 2010—and for a third of companies, it was not on the strategic agenda at all. It’s widely acknowledged that without a commitment from the top, nearly any major change program will fail. Our experience has been that top-down targets make a difference. We didn’t set explicit gender goals for McKinsey until 2014, and in just one year after doing so, our intake of female consultants has increased by five percentage points. We’re encouraged by this, and by the fact that a growing number of companies are recognizing the case for gender parity and declaring their determination to pursue and achieve it. Our hope is that initiatives like HeForShe, in which we are participating, are just the start of a growing wave of increased transparency and more ambitious goals. A second reason for sluggish progress has to do with the nature of the gender inequality issue itself, which, like many efforts to change organizational cultures, requires companies to take action across a broad range of factors and keep their managers aligned with multiple objectives for years at a time. Our research shows that the 2 For more, see “McKinsey & Co.,” Working Mother, September 9, 2015, on
workingmother.com/mckinsey-co.
3 For more about the United Nations’ HeForShe initiative, visit heforshe.org; for more
about the 30% Club, visit 30percentclub.org.
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focus in these interventions must be to help women better develop as leaders, and to design the conditions in which this can take place. Crucial aspects include sponsoring (not just mentoring), neutralizing the effects of maternity leave and ongoing parenting responsibilities on career advancement and wage increases, and evolving the criteria companies use for promotions to include a diversity of leadership styles. The complex dynamics of the gender issue create a variety of challenges. Consider sponsorship: it’s easy to say more is needed, but we’ve found that women at McKinsey are disproportionately sponsored by other women, which places a higher burden on our more senior women relative to senior men. This surely limits the sponsorship they are able to provide. Similarly, while the anytimeanywhere model that currently prevails in the corporate world has placed everyone under more pressure, the weight surely is heavier for women, who continue to shoulder a disproportionate share of the responsibility for managing home and family issues. These forces challenge women at McKinsey—a recent internal diagnostic confirmed the persistence of gender-based roles at home for many women at the firm—and we believe they are emblematic of those faced by women in many organizations. Addressing these interrelated gender issues is difficult, which brings us to a third reason change has been slow: major transformation efforts require steady, broad-based interventions over time. After an initial commitment from the top, significant changes can typically take as many as eight or more years, requiring the close and visible monitoring of progress by the executive team. It’s never easy and it’s rarely quick.4 Beyond the factors we’ve mentioned lies at least one other that is mostly exogenous to private-sector institutions. Economic equality for women, to no small degree, depends on achieving a sweeping set of social-equality reforms. Is it the business of executives to help solve broader social issues? We would say yes, provided they don’t distract from the very real issues executives face in their own organizations. 4 See “How to beat the transformation odds,” April 2015, on mckinsey.com.
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The road ahead Is it, then, only a matter of time before gender equality will be achieved? Yes and no. To the extent that private and public institutions have made the necessary commitment from the top and are working to intervene in the ecosystem of change, we are confident they will, given time, reach their goal. Too many companies have yet to grasp the case for change, however, and still lack both commitment and a program of action. For these institutions, gender parity will take longer to achieve. As a member of the 30% Club, our global managing director Dominic Barton (also a coauthor here) is one of 47 US chairpersons and CEO members who have publicly committed to better gender equality at all levels. This commitment reinforces efforts we have under way to challenge fundamental mind-sets and behaviors inside the firm while setting (or continuing) in motion a number of initiatives in support of gender diversity. These range from new flexibility programs, adjustments to travel expectations, and upgrades to maternity benefits, among others. We’re working also to improve the quality of sponsorship women receive at the firm. A new diagnostic we’re piloting, for instance, aims to create transparency in the sponsorship arrangements among all our consultants, many of whom we have found to be unsure what good sponsorship entails or how to create it when it’s lacking. To help make all this happen, we now have a global team of managers fully dedicated to this issue, and a network of deeply passionate leaders actively driving this topic throughout the firm. We’re acutely aware that there will be surprises along the way. Here’s one: so far, a higher percentage of men than women have been taking advantage of some of our flexibility programs. Do some women at McKinsey, like their counterparts at many companies, worry that participating in such programs will raise questions about how committed they are to their careers? We hope not, but we are exploring ways to dispel any concerns—for example, by refining our “up or out” promotion system to ensure people can stay in the same roles for longer periods of time with no impact on their eventual advancement if they are at a stage in life where they need
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that flexibility. As a project-based organization, we think we’re reasonably well positioned to pull this off. Clearly, we don’t have all the answers. Gender inequality is a multifaceted, entrenched global issue. But our commitment to diversity and inclusion is an abiding part of our firm’s history and daily practice. That we have yet to achieve it only further strengthens our determination to do so. Dominic Barton is McKinsey’s global managing director; Sandrine Devillard is a director in the Paris office and has helped lead McKinsey’s research on gender diversity for more than a decade; Judith Hazlewood is a director in the New Jersey office and a member of McKinsey’s Shareholders Council. Copyright © 2015 McKinsey & Company. All rights reserved.
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Repelling the cyberattackers Tucker Bailey, James M. Kaplan, and Chris Rezek
Organizations must build digital resilience to protect their most valuable information assets.
For many businesses, the next wave of innovation and growth will likely involve intelligent analytics, rich mobile experiences, and “one touch” processes that require no further manual intervention. Success will depend on maintaining trust: consumers and business customers alike will accept nothing less than a complete assurance that the companies they engage with protect their highly sensitive data carefully in the hyperconnected information systems powering the digital economy.
When companies think about cybersecurity in such a world, most ask, “How can we protect ourselves and comply with standards or regulations?” instead of “How do we make confident, intelligent investments given the risks we face?” Many also treat cybersecurity primarily as a technology function rather than integrating it into business operations. As a result, they get the wrong answer about how to construct a cybersecurity program. The consequences are painfully clear: nearly 80 percent of technology executives surveyed report that their organizations cannot keep up with the attackers’ increasing sophistication. The solution, we’re convinced based on years of research and experience on the front lines, is to move beyond models that make cybersecurity a control function and toward what we call digital resilience: the ability to design customer applications, business processes, technology architectures, and cybersecurity defenses with the protection of critical information assets in mind (Exhibit 1). Digital resilience is the subject of our new book, Beyond Cybersecurity: Protecting Your Digital Business, and the focus of this article.
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Cybersecurity Exhibit 1 of 2
Exhibit 1
Companies need to move beyond cybersecurity as a control function toward a more integrated and resilient approach. High
Digital resilience 2014–20 Integration with broader IT and business processes
Cybersecurity not a priority Pre–2007
Cybersecurity as a control function 2007–13
Low
High Extent of security controls
Source: Tucker Bailey, James Kaplan, and Chris Rezek, Beyond Cybersecurity: Protecting Your Digital Business, April 2015
Given the size of the stakes and the solution’s cross-functional nature, progress requires senior-level participation and input. Unfortunately, top management often doesn’t engage. At roughly two-thirds of the companies we evaluated, the managers in charge of cybersecurity have no regular interaction with the CEO. So the launch—or relaunch—of a digital-resilience program gives the senior-management team an ideal opportunity to set and clarify expectations for how each of its members will help to identify and protect important information assets. This article describes six critical actions for any organization planning to achieve digital resilience. Reflecting on them will stimulate a dialogue among members of the top team about how they can work together to safeguard their company.
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1. Identify all the issues It’s nearly impossible to have an intelligent perspective on how well a cybersecurity function performs without first understanding which information assets are at risk. When companies fail to do so, they can make the wrong downstream choices. One financial institution started its program by assessing regulatory requirements. Two years later, it had made some technical progress but had spent a lot of money and devoted almost all of its efforts to protecting consumers’ personal data, to the exclusion of other important information assets. Companies must assess the risks in an integrated way. An attacker doesn’t just have to defeat their processes for identity and access management (I&AM) or for detecting intrusions; it must defeat a system of defenses spanning different types of controls. The attacker will have a much harder time if those defenses interlock. Unfortunately, many companies assess each element—intrusion detection, I&AM, data protection, incident response, and the like— separately. They neglect to evaluate how these controls combine to protect important information. Finally, companies must go beyond traditional protections of the perimeter. We often hear executives say that they want to have a security-control assessment. Unfortunately, that starting point frames the exercise around tactical issues, such as the efficacy of the intrusion-detection tool kit or of the antimalware environment. The result, too often, is that any change occurs within an extremely limited security framework. To accomplish something real, companies must typically make substantive business-process changes in the context of broader strategic and operational considerations. Effective cybercapability assessments not only address existing protocols, personnel, and tools but also governance, controls, the security architecture, and delivery systems.
2. Aim high but toward a well-defined target A cybersecurity plan should be aspirational but attainable—and simple enough to explain so that its leaders can build organizational support. After companies identify the priority business risks, they
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can then target three types of mechanisms to step up the security of their information assets: business-process controls (changes to end-user behavior and business processes beyond IT), broader IT controls (changes to the IT architecture as a whole), and cybersecurity controls (the discrete technological changes designed to protect information, such as encryption, I&AM, and security analytics). Many companies focus too much on cybersecurity controls and thus create unnecessarily expensive and intrusive systems. Ideally, they should draw on all three types of controls. Actions should be prioritized by the number and nature of the business risks they address and the extent to which they require the organization to change. Any plan should synthesize the broad set of improvements, initiatives, and actions into a short list of major strategic themes. Those of one healthcare provider included the following: â&#x20AC;˘ The protection of personal health information as it moves through the entire business system, from patients to doctors to hospitals and, when relevant, to supporting vendors. â&#x20AC;˘ Detecting and responding to cyberevents to minimize harm to the business and the disruption of care for patients. â&#x20AC;˘ Scrutiny of insider activities, both accidental and intentional, at the same level that external activity receives. This final point particularly deserves attention. Many companies focus their resiliency programs on external attackers, not threats from insiders. The themes the healthcare provider identified, taken together, enabled managers to describe this change program to senior managers, to rally the staff around it, and, ultimately, to track and measure progress.
3. Work out how best to deliver the new cybersecurity system Once a company has identified its cybersecurity goals, turning aspirations into realities requires an array of operational processes,
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such as updating access rights for accounts, assessing the vendors’ security capabilities, and reviewing the security architectures of applications. Historically, business and IT managers alike have often viewed such controls as a brake on the organization’s ability to get things done. And, frankly, many aspects of cyberprotection do act as constraints. For example, new safeguards to protect vital information assets will require much more granular policies on passwords and access rights. That can strain existing processes, make the business less agile, and frustrate employees and customers. Bear in mind, however, that no implementation can be expected to proceed without some turbulence. The leading cybersecurity organizations learn by doing. They push themselves aggressively— drilling, iterating, and refining the construction of ready and flexible defenses. This approach may also reveal processes that can be radically enhanced. One insurance company, for example, dramatically upgraded its operations by segmenting requests according to their complexity. Making this change helped the business eliminate rework and allowed it to run its core security processes in parallel, improving both productivity and response times by 30 percent. Determining the cybersecurity organization’s roles and reporting relationships will be critical, as well. Building resilience requires seniority and visibility. In our experience, it’s valuable for one executive—often called the chief information security officer—to have sole organizational ownership for all aspects of cybersecurity. Typically, this executive reports to the CIO, but, increasingly, he or she will also have a solid or dotted reporting line to the chief risk officer or to another business executive. This sort of structure shows that cybersecurity is as much a business issue as a technology one and helps cut through complexity when companies must implement changes quickly. Improving skills and resources may be one of the most demanding and important aspects of a digital-resilience program. Given the tightness of the cybersecurity labor market, it may help companies to focus on their retention efforts. They also ought to draw from nontraditional talent pools, such as young professionals in the
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military or the intelligence communities, or from strong problem solvers elsewhere in the organization—or competitors.
4. Establish the risk–resource trade-offs Different companies have different degrees of tolerance for risk, depending on their sectors, cultures, and overall business strategies. There is no simple metric for quantifying an organization’s risk profile, including with respect to cyberattacks. Rather than trying to formulate some highly abstract (and therefore largely meaningless) statement of a company’s appetite for risk, the executives responsible for cybersecurity should present senior leaders with three or four pragmatic options representing different levels of risk reduction and resource commitments. For example, a North American bank’s cybersecurity team laid out an ambitious program that represented an enormous change for it. The team noted that some of the proposed security measures were essential to achieve a minimum level of responsible practice. Others were standard at the bank’s peers and provided additional protection for the bank’s most important information assets. A final set of actions deemed more cutting-edge was directed at sophisticated attackers. The team used this framework to develop three security options (with progressive levels of protection and resource commitment) and to describe which types of business risks each would address. Although the effort was time consuming, it gave senior managers a practicable set of options. It sparked a robust discussion about how much additional capital investment, operating expense, and management attention the company could devote to its cybersecurity program and how much each option would reduce risk. Perhaps predictably, the bank’s senior management decided that it had a responsibility to go beyond the bare minimum. However, because the institution lacked the global footprint (and resources) of the largest financial players, its leaders also decided that investing in relatively cutting-edge protections against the most sophisticated attackers did not make business sense. Instead, the bank settled on a middle option: making sure it had appropriate protection for its most important information assets.
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5. Develop a plan that aligns business and technology Once a company has assessed its cybersecurity capabilities, defined its appetite for risk, and agreed on an organizational model, it must develop a plan that aligns the business with the technology. Regulatory requirements, while important, should not be the sole foundation of the new, technology-driven controls. One insurer, for example, started down this path and found that its program didn’t create change in its business units. Indeed, most senior executives barely knew what the program did. The insurer was able to right itself only after it took time to rethink its most important assets and business risks and then tailored its cybersecurity protections to meet them specifically. To do so, it had to comb through the portfolio of each business to assess its information assets, identify businessprocess changes needed to protect critical data, and implement leading-edge technology controls. And the company had to tackle these actions, as much as possible, in order of greatest impact. Companies can reduce their vulnerabilities and increase their overall security significantly by implementing many IT improvements, such as the private cloud, desktop virtualization, software-defined networking, and enhanced application development. An integrated cybersecurity plan must take these elements into account. What’s more, its leaders must spend lots of time with the leaders of other internal technology programs to understand existing initiatives, see that they have the greatest and best possible impact on security, and ensure that they are in line with the company’s broader cybersecurity program.
6. Ensure sustained business engagement Cybersecurity is a high-stakes topic, so it is a CEO-level one. Attaining digital resilience also requires more than just throwing resources at the problem. Indeed, we’ve found that additional cybersecurity spending doesn’t necessarily bring the management of cyberrisks to maturity (Exhibit 2). Because cybersecurity demands hard decisions that affect many functions across a business, digital resilience requires an actively engaged senior-management team. The company’s leaders must signal—with their time and attention—
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Cybersecurity Exhibit 2 of 2
Exhibit 2
Big spending cannot buy mature cyberrisk management. Cyberrisk-management maturity, on scale of 1 (low) to 4 (high)
Median
4.0
Punching above their weight
Well-protected or highly concerned?
The unprotected
Throwing resources at the problem
3.5
3.0
2.5
2.0
1.5
1.0 0
1
2
3
4
5
6
7
8
9
10
IT-security spending as a % of total IT spending Source: Tucker Bailey, James Kaplan, and Chris Rezek, Beyond Cybersecurity: Protecting Your Digital Business, April 2015
the importance they attach to protecting information assets. That engagement must not only be sustained but also reinforced through clear actions and the inclusion of cybersecurity objectives (such as the achievement of major program milestones) in the senior teamâ&#x20AC;&#x2122;s evaluations and incentives. Of course, this approach means additional work for the executives involved. But the result is a more nimble and better-prepared organization.
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The resiliency levers described in this article represent a fundamental change in how most business organizations interact with IT, how IT addresses security, and how a robust portfolio of interconnected long-term safeguards can emerge and evolve. There are no shortcuts or pat solutions. Indeed, any cybersecurity program for a sizable institution will involve hundreds of individual design and implementation decisions. Senior, cross-functional oversight is essential to avoid a mere patchwork of compromises that will undermine digital resilience. Given the stakes, nothing else will do. The authors wish to thank Alan Marcus and Derek O’Halloran for their contributions to this article. Tucker Bailey is a principal in McKinsey’s Washington, DC, office; James Kaplan is a principal in the New York office; and Chris Rezek is a senior expert in the Boston office. This article is adapted from Beyond Cybersecurity: Protecting Your Digital Business (Wiley, April 2015), by Tucker Bailey, James Kaplan, Alan Marcus, Derek O’Halloran, and Chris Rezek. Copyright © 2015 McKinsey & Company. All rights reserved.