The Need for Outsourcing in Health Insurance December 2013
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Many health plans have begun expanding their BPO strategies by going offshore, increasing savings by as much as 30% to 40% Overview – The Need for Outsourcing in Health Insurance • U.S. health insurance industry is facing a number of cost related challenges, including regulatory compliance and rising medical costs due to the environmental factors in the industry • On an average, 40% to 60% of a health plan’s employee base is involved in back-office tasks that add no strategic value—representing a substantial drain on management resources – As a result of the driving need to reduce administrative costs, onshore outsourcing has become an established industry practice with proven results
• Recently, many health plans have begun expanding their BPO strategies by going offshore, increasing savings by as much as 30% to 40% – Companies such as Aetna, Humana, WellPoint and others have set a historical precedent by actively exploring relationships with BPO service providers in countries like India
Advantages of Offshore Outsourcing in Health Insurance • Offshore outsourcing represents a unique opportunity for the healthcare industry: – Moving a large number of back-office or non-critical processes offshore positively impacts the bottom line and shareholder value
– Cost savings present a competitive advantage by introducing health plans at a lower price point. Since offshore outsourcing reduces overall cost, it allows the healthcare organization to reduce the premiums and funnel more funds into care management – It gives health plans an opportunity to re-engineer processes, increase technology automation and take advantage of time zone differences, thereby increasing productivity and reducing turnaround times
The processes that can be taken offshore with the least degree of risk and highest degree of ROI include:
Process Claims Administration Customer Service Member Management
Risk
Cost Savings
Complexity
ROI
Medium Medium Low
High Medium High
High Medium Low
High High Medium
Source: News Articles; SGS Research
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Health care payer BPO industry to be a $1.2 billion market, which is forecasted to increase to $1.9 billion by 2014 Business Process Outsourcing – Healthcare Payers • Business Process Outsourcing (BPO) services provided to the health care Payer industry include claims and enrollment processing, customer service, analytics, medical management, finance and accounting, procurement, and print management • According to HfS Research estimates, health care payer BPO industry to be a $1.2 billion market, which is forecasted to increase to $1.9 billion by 2014 – 90% of this market services payers with more than $5 billion in revenues – Primary growth will be driven by increased transaction volumes and new administrative cost reduction initiatives
Payers Rarely Switch Service Providers • Payers are really conservative. In an industry where average BPO contract terms lasts less than five years, 55% of payers’ contracts have terms of six years or more
Length of Payer BPO Contracts 37% 29%
26%
8% 3 years or less
4-5 years
6-8 years 9 years or more
Payers and Use of Technology • Payers rarely leverage service provider technology. Only 7% of contracts used service provider platforms and 11% of contracts required service providers to provide improved reporting
How Payers Leverage Service Provider technology 82%
Client System
11%
7%
Service Provider Wrapper System
Service Provider System
• Processes such as data entry in “front-end” processes where paper claims and enrollment forms are entered. Service providers are asked only 20% of the time to provide their own technology solutions
Front-End Processes: Use of Technology 56%
Client System
24%
20%
Service Provider Wrapper System
Service Provider System
Source: News Articles; SGS Research
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Payers are outsourcing work to India & Philippines mainly focusing on manual processing of claims, enrollment, billing and Service Payers and Outsourcing Services • Payers are extremely tactical with their outsourcing initiatives
– 48% of all contracts are FTE-based and 32% are based on transaction fees – 40% of contracts had no gain sharing incentive. Those that did focused on sharing process efficiencies, not transformational value • Payers have outsourced little of their value chain – Payers focus on outsourcing manual processing of claims, enrollment, and billing (35%), while service falls far behind (21%)
Healthcare Payer Outsourcing Destinations • The Philippines is gaining importance in Payer outsourcing destination after India – Unlike financial services and property, casualty, and life insurance, Payers have a strong interest in the Philippines (37%) • Payers tackle outsourcing alone – Only 5% of contracts were negotiated with the assistance of outsourcing advisors or consultants • HfS Research also found that none of the Payers used advisors to stand-up governance teams
Healthcare Payer Value Chain Outsourcing Focus Claims, Enrollment, and Billing
35%
Service
21%
Network Management
10%
Marketing and Sales
7%
Pricing and Actuarial
6%
Medical Management
4%
Administrative Functions
4%
% of Outsourced FTEs by Destination India
53%
Philippines
37%
US Mexico
5% 2%
South America
1%
Caribbean
1%
Western Europe
1%
Source: News Articles; SGS Research
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Other Industry Estimates
Source: News Articles; SGS Research
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Industry Case Studies (1/3) Name of the Company
:
BlueCross BlueShield of Vermont (BCBSVT)
Name of the Vendor
:
Computer Solutions and Software International
Description of Services
:
In 2008, BCBSVT employed VUE Compensation Management, a Microsoft .NET framework-based application developed by Computer Solutions & Software International (CSSI) Before implementing the technology, BCBSVT paid brokers a percentage of insurance premiums. As premiums rose, commission payouts increased from $3 million to more than $10 million
Expected Efficiencies
:
A strategic investment in VUE Compensation Management has facilitated BCBSVT to disburse 85% of broker payments electronically It enabled BCBSVT to decouple broker commissions from insurance premiums,
reduce manual interventions by 97% and go paperless with broker commission statements BCBSVT was able to streamline processes and fix errors, thereby saving nearly $500,000. Additionally, the time spent processing commissions has gone from 65 hours per month to only six, and as the organization continues to go paperless
The new technology has saved BCBSVT nearly a half-million dollars within the first year on the new system, with an expectation of an additional $2 million in savings over the course of the implementation Source: News Articles; SGS Research
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Industry Case Studies (2/3) Name of the Company
:
Blue Cross and Blue Shield of Kansas City (BCBSKC)
Name of the Vendor
:
HP
Description of Services
:
Business Intelligence (BI) solutions
Expected Efficiencies
:
According to BCBSKC, the BI program generates an annual benefit of $3.85 million. These savings stem from improved data management efficiency, reduced medical costs through health improvement initiatives, elimination of outsourced disease management programs and increased revenue through customer retention
According to the IDC study, while enhancing the company’s business agility and competitiveness, the program led to a six-year benefit of approximately $23.1 million and a return on investment (ROI) of 332%
Name of the Company
:
Blue Cross Blue Shield of Massachusetts
Name of the Vendor
:
IBM
Description of Services
:
IBM will be responsible for help desk services, data center operations and applications support
Expected Efficiencies
:
Blue Cross Blue Shield of Massachusetts expects to save $16 million annually from the five-year contract
Source: News Articles; SGS Research
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Industry Case Studies (3/3) Name of the Company
:
Blue Cross & Blue Shield of Rhode Island
Name of the Vendor
:
Perot Systems Corp.
Description of Services
:
Under the 10-year arrangement, valued at $570 million, Perot Systems will deploy its DIAMOND enterprise technology and transform the health insurer's back-office operations (document services, mail services, claims processing, membership enrollment, and cash disbursements)
Expected Efficiencies
:
“The company plans to save another $100 million in hard costs by outsourcing to Perot, as well gaining the intangible benefit of being able to focus on its new strategic direction rather than spending its resources on the tactical processes of paying a claim better.” David Zink CIO and Governance Executive at Blue Cross & Blue Shield of Rhode Island
Name of the Company
:
Cigna
Name of the Vendor
:
Satyam, Siemens
Description of Services
:
IT outsourcing
Expected Efficiencies
:
CIGNA studied the potential savings of sending IT work offshore. The company estimated that by replacing 200 IT workers with foreign labor, it could save $3.7
million in the first year and $16.8 million in the second year. The analysis assumed an offshore wage of $20 an hour, compared to a U.S. wage of $75 an hour Source: News Articles; SGS Research
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In recent years, Companies have been reducing its workforce in non-core areas and outsourcing the same roles more economically
In 2005, CareFirst BlueCross BlueShield laid off 134 employees as it outsources data-entry work for claims to ACS “The outsourcing would save $7.6 million a year, which would result in better pricing for customers” – Jeffery W. Valentine, a CareFirst spokesman
In 2010, Blue Cross and Blue Shield of North Carolina laid off as many as 90 people who work in data entry and outsourced some of their data entry work to the Philippines, while some will be done by contractors in North Carolina The layoffs are part of a long-term strategy to pare 20% from the organization's annual $1 billion budget by 2014
“Many of the affected employees work on scanning paper claims, a decreasing function that can be performed more economically through outsourcing In 2011, Highmark Inc. began the process of outsourcing some work overseas and has offered several rounds of buyouts to employees, hoping to shed hundreds of positions in its administrative locations.
– J. Bradley Wilson, CEO, Blue Cross
The company hopes the outsourcing can save in excess of $300 million over a three-year span
Source: News Articles; SGS Research
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Thank You
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