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2. personal finance
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2005 Medical
Environmental Assessment
Presentation to Portfolio Strategy Group
January 2005
Prepared by Rick Veira
National Market Research, NW Region
1
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Executive Summary
Premium cost is the #1 issue for employers and the Northwest has been particularly
sensitive to health care costs since we’ve been hardest hit by the recession.
Despite a declining pool of insured residents, demand is high for health care services.
Employers continue to look for strategies to get their health care costs under control.
There is growing focus on consumer behavior as a contributor to health care costs.
KPNW and Regence BCBS dominate the Northwest marketplace in terms of market share
and consumer awareness. Despite our market prominence and quality, non-members
have a low overall impression of KPNW.
Due to economic improvements and in-migration, the opportunity for membership will grow
in the Northwest as the pool of commercially insured slowly rises. Key areas of
membership opportunity include: Clark County and the Westside, the Individual & Family
market and the Professional & Business Services sector.
KPNW can appeal to a broader employer base by demonstrating our value through
affordability and health outcomes and the continued evolution of our product portfolio.
As more of the costs are shifted onto the consumer, the definition of value is changing. We
will have a competitive advantage if we can provide the right information and the best
service. Our reputation can be our greatest advantage if we fully integrate it into our
organization and communicate our value to the world.
2
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Executive Summary
Similar to our competitors, KPNW’s profitability is trending upward. The underwriting cycle
has turned and our competitors are searching for membership growth.
There is an inverse relationship between our premium increases relative to our
competitors and our premium favorability. Very preliminary data shows KPNW needs an
increase of 8-9% in order to maintain our premium favorability in 2006.
Key assumptions for 2005-2006:
Improvements to the economy will slowly increase the size of the commercial market which
will increase the opportunity for KPNW.
Health care costs will continue to outpace inflation, but solid profit margins, the need for
membership growth and continued cost-shifting onto consumers should drive the premium
trend down. Premium trends will be 8-9% in 2006 and 7-8% in 2007, net of benefit buydowns.
Strong demand for health services means insurers will struggle to control costs. Our
competitors’ best defense is to manage their risk pool.
The impact of consumers shouldering more of the costs of health care will materialize. The
health care industry will interact with consumers in new ways. They will be forced to deliver
good service and accountability. Our competitors will develop more consumer-oriented tools.
With the exception of Medicare, there will be no major health care reform.
3
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Table of Contents
Purpose of the Environmental Assessment…………………………. 5
Key Northwest Market Trends………………………………………….. 6
KPNW’s Position in the Market…………………………………………. 12
Improving Our Position: Opportunities and Threats……………….. 20
Premium Increases in 2005 and Beyond……………………………… 27
External Assumptions……………………………………………………. 30
Conclusions………………………………………………………………... 31
Appendix - Competitor SWOT Analysis………………………………. 32
4
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Purpose of the EA
The Environmental Assessment enables KPNW leaders to
develop plans that maximize opportunities and mitigate risks by:
Providing a high-level understanding of the Northwest trends
Identifying local divergence from nation trends
Creating understanding of KPNW’s position in the marketplace
More specifically, this Environmental Assessment is intended to:
Bring knowledge to KPNW’s rate decision
Create a set of external assumptions for 2005, 2006 and 2007
5
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Contents
Key Northwest Trends
6
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Key Northwest Trends
Slow economic recovery has taken a toll on the size of our health
insurance market.
The Size of the Commercially Insured Market*
Oregon experienced one the biggest
increases in the uninsured rate in the
nation from 2000-01 to 2002-03.
1,600,000
Oregon now has a higher percentage of
1,500,000
- Oregon: 15.9%
- US: 15.4%
Members
uninsured individuals than the nation.
1,400,000
OHP Standard closed to new enrollment
last summer adding another 20,000
uninsured to the ranks.
2002
2003
2004
1,300,000
Q1 02 Q2 02 Q3 02 Q4 02 Q1 03 Q2 03 Q3 03 Q4 03 Q1 04 Q2 04 Q3 04
But it appears the commercial market has bottomed out.
Most economists believe the recovery is underway.
2004 marks the first year of job gains for Oregon following three straight years of loss.
7
* Sum of fully-insured Group and Individual & Family
business of the major insurers in the Northwest market.
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Key Northwest Trends
Premium cost is still the #1 issue for employers.
“Oregon businesses have identified health care as one of the most serious cost
problems they face.”
-- Oregon Business Plan Leadership Summit, 12/6/04
Similar to the national trends, health insurance premiums in the Northwest have
significantly outpaced inflation for the 6th straight year.
The Northwest is more sensitive to health care costs since we’ve
been hit the hardest by the recession.
Unemployment Rate
For 3 ½ years, Oregon has had the
7.0
Oregon
6.0
US
5.0
4.0
3.0
snail’s pace.
8
2004
2003
2002
2001
2000
1999
1995
2.0
1998
We been climbing out of a recession at a
8.0
1997
recession with the highest unemployment
of the nation’s largest cities.
9.0
1996
Portland has been ground zero for the
Portland/Vancouver
10.0
Unemployment Rate (%)
highest, or second highest,
unemployment rate in the nation.
Source: Bureau of Labor Statistics
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Key Northwest Trends
Employers continue to look for strategies to get their health care
costs under control.
Plan design changes continue to be the first line of defense to keep the premium trend
down, i.e., increasing deductibles, coinsurance, limiting eligibility for spouses or
dependents, etc.
Employers are also looking to:
Consumer-directed plans such as HSAs
Self-funding
Health management programs
Oregonians and Washingtonians should expect no relief in health
care costs from state government in the near future.
Malpractice reform failed in Oregon in November.
The Oregon legislature’s primary focus is changing the tax system, funding for K-12
schools, and the financial impact of Measure 37 (land use measure).
There is some talk of a mandate-free benefit plan for small businesses in Washington
but major reform is unlikely give the political environment.
9
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Key Northwest Trends
Despite a declining pool of insured residents, demand is high for
health care services.
Population growth in our region, the aging of Americans and advances in technology
have fueled a capital expansion boom among hospitals.
While total employment in Oregon contracted from 2001 to 2003, employment in the
health care sector expanded by 10+%.
Since demand is strong, hospitals have the upper hand in negotiating with insurers.
Although some local hospital margins are nearly double-digits,
hospitals are not completely recession-proof.
Six of eight major area hospitals had smaller margins in 2003 than 2001 including:
OHSU, Providence St. Vincent, Legacy Emanuel, SWMC, Legacy Good Samaritan and
Salem Hospital.
Hospitals are reporting bad debt and charity cases up due to the rise in uninsured
individuals.
Occupancy rates declined slightly in 2003 which may have been due to consumers
postponing discretionary procedures.
10
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Key Northwest Trends
There is growing focus on consumer behavior as a contributor to
health care costs.
The percentage of obese and overweight Oregonians is growing. Health care costs of
obese individuals are 37% higher than normal weight individuals1.
Studies show that the five most costly medical conditions accounted for 1/3 of the
growth in health care spending from 1987 to 20011.
Program-wide, 5% of Kaiser Permanente members incur over 50% of total costs2.
The health care industry is attempting to shift toward disease
management and health promotion.
Our competitors are offering value-added programs such as online health risk
assessments and health coaches as well as discounts on health clubs and safety
equipment.
1
11
2
Health Affairs
George Halvorson
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Contents
KPNW Market Position
12
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
KPNW Market Position
KPNW and Regence BCBS dominate the Northwest marketplace.
The market position of carriers has remained relatively stable over the past three years.
Although Regence BCBS has been shedding members at a rapid rate, they’re still the
largest carrier in the market.
There are many other carriers in our region but on a total membership basis, most have a
very small portion of the market.
Market share varies by size segment.
30%
27%
Individual and Group Mark et
25%
21%
18%
20%
15%
Other
1%
Fortis
PacificSource
2% 2%
Aetna
United Healthcare
Lifewise
13
2% 2%
Great West
3% 3% 3%
Cigna
5% 4%
ODS
Providence
0%
KP
5%
PacifiCare
6%
Health Net
10%
Regence BCBS/HMO
Market Share
Commercial Market Share
in the KPNW Service Area, 2004
Source: 2004 Market Tracking
Survey; Self-reported health plans for
the commercial market; Also includes
self-funded.
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
KPNW Market Position
We have surpassed Regence BCBS as the #1 carrier in Mid-Sized
employer groups.
Group Market Share
in the KPNW Service Area, 2004
YTD, Regence BCBS has lost
nearly 80,000 Group
members. Their Mid-Sized
groups were particularly hard
hit. They are targeting the 2200 employer size market in
2005.
100.0%
90.0%
Other 14%
80.0%
70.0%
P acificSo urce 5%
Health Net 8%
growing stronger in the Small
Group market, taking market
share from multiple carriers.
Providence is a growing threat
in Jumbo groups. They’ve
increased their market share,
likely due to the launch of their
self-funded product.
Health Net 8%
60.0%
50.0%
40.0%
10.0%
Health Net 4%
P acifiCare 3%
P ro vidence 7%
KPNW
18%
30.0%
20.0%
Other 29%
P acificSo urce 2%
LifeWise 2%
LifeWise 7%
PacifiCare 8%
PacifiCare and Health Net are
Other 24%
Regence
BCBS/HMO
27%
ODS 5%
Pro vidence 7%
KPNW
29%
Regence
BCBS/HMO
17%
P acificSo urce 2%
LifeWise 1%
PacifiCare 5%
ODS 7%
Providence 9%
KPNW
17%
Regence
BCBS/HMO
26%
0.0%
Sm all Em ployers
2-50
14
Mid-Size Em ployers
51-999
Jum bo Em ployers
1000+
Source: 2004 Market Tracking Survey; Self-reported health plans for
Employer-Sponsored coverage; Also includes self-funded.
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
KPNW Market Position
Consumers think of Regence and KPNW first, but rate Providence
the highest.
Thanks to Regence BCBS/HMO and KPNW’s prominence in the Northwest, they are
“top of mind” for most consumers.
Yet both Regence BCBS/HMO and KPNW are outshined by Providence’s reputation.
Providence, who was mentioned far fewer times as “top of mind,” was rated highest overall as
a health plan among consumers.
Non-members rank KPNW lower on: quality medical care, choosing a primary care provider
and seeing the same primary care provider.
2004 KPNW Ad Tracking Benchmark
2004 KPNW Ad Tracking Benchmark
Overall Impression of Health Plans
Top of Mind Unaided Health Plan Awareness
non-KPNW member
40
16
% ranking health plans 9 or 10
35
30
% of First Mentions
non-KPNW members
18
25
20
15
10
5
14
12
10
8
6
4
2
0
Regence BC/ BS
Kaiser
P ermanente
P rovidence
Health P lan
Health Net
0
Cigna
P ro vide nc e
H e a lt h P la n
15
P ac if icS o urce
R ege nc e
BC/BS
P a cif iC a re
Ka is er
P e rm a ne nt e
H ea lt h N e t
Source: 2004 Ad Tracking
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
KPNW Market Position
KPNW outperforms the competition on most quality measures…
KPNW outperformed both PacifiCare and Providence Health Plans on over two-thirds of
the HEDIS measures.
The Member's Perspective
Competitive
Advantage
Our members are loyal, proud
10
5
16
Would Definitely Recommend
Would Definitely Renew
Pride in Being a Member
Health PLAN Rating
Health CARE Rating
-20
See Personal MD/AC
Competitive
Disadvantage
MD/AC Listened
-15
Regular Access
-10
MD/AC Spent Enough Time
-5
MD/AC Rating
0
Plan Delivers on What They Promise
Competitive
Parity
Have Personal MD/AC
less satisfied than the market
with regards to access and
the patient/provider
interaction.
(Gap between KPNW and Competition)
15
of their membership and
willing to recommend us.
However, our members are
KPNW Competitive Position Relative to
All Health Plans in the NW Market
20
Time on Phone
…but our service has
areas for improvement.
Source: 2004 Market Tracking Survey
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
KPNW Market Position
Similar to our competitors, our profitability is trending upward.
Thanks to rate increases, six of eight local carriers have improved their margins.
KPNW is more financially stable than most of our competitors. Our profitability has been
more consistent.
Insurers with consistent and growing profits over the years will be aggressive with price in
2005 and beyond: Providence, Health Net and potentially PacificSource.
Underwriting Ma rgin by Insurer
1998 - Q3 2004
10%
8%
6%
2%
0%
-2%
-4%
Growing
and
Profitable
Growing
and
Profitable
Growing
and
Profitable
Growing
and
Profitable
Lifewise
-8%
Health Net
-6%
Regence
BCBS/HMO
17
PacificSource
Providence
PacifiCare
ODS
-10%
KPNW
Underwriting Margin
4%
Source: DOI Filings
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
KPNW Market Position
Year to date, KPNW is tied with Health Net as the second fastest
growing health plan.
Our membership growth in 2004 was a convergence of several factors including: our
price position, Thrive campaign, good relationship with brokers, new products and
aggressive sales targets.
The underwriting cycle has turned and our competitors are searching for membership
growth as well.
Change in Commercial Membership
Group and Individual Members
Regence
BCBS/
HMO
PacifiCare
Providence
ODS
Kaiser
Lifewise
PacificSource
Health
Net
2001
-9,000
-11,000
-70,000
-20,000
11,000
11,000
9,000
-18,000
2002
-68,000
-25,000
-63,000
-32,000
2,000
13,000
4,000
5,000
2003
-35,000
-10,000
2,000
-13,000
-2,000
-13,000
28,000
28,000
Q3 04
-77,000
-15,000
4,000
5,000
14,000
17,000
-1,000
14,000
2001 – Q3 04
Change
-180,000
-50,000
-58,000
-40,000
14,000
17,000
30,000
47,000
18
Source: DOI Filings
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
KPNW Market Position
In existing Large Business Accounts, our rate position dipped in
2003 but appears to be on the rebound in 2004.
KPNW need a 10-12% rate advantage to maintain our market share and 12+% to
improve market share.
KPNW maintained at least a 10% premium favorability over the past 5 years.
Preliminary results show our rate
position is less than 5% in lost
groups.
KPNW Rate Position
Large Business Group Only
14%
11.9%
12%
Rate Favorability
Among lost prospects, our
rate position was significantly
less favorable than existing
groups.
12.4%
11.4%
11.2%
10.1%
10%
8%
6%
4%
2%
0%
2000
2001
2002
2003
2004*
*Preliminary results
19
Source: Competitive Rate Study
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Contents
Improving Our Position:
Opportunities and Threats
20
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Improving Our Position
Due to economic improvements and in-migration, the opportunity
for membership will grow in the Northwest.
Oregon will reach pre-recession employment levels this year (2005). Employment
growth will hover at or below 2%.
The fluctuation in energy prices has been a shock to the economy and is the greatest
risk to employment growth moving forward.
The Northwest population will grow much slower than the mid-1990s, but will still be
slightly higher than US average.
Employment Growth, US vs. Oregon
Source: Oregon Office of Economic Analysis, December 2004 Forecast
US
7.0%
Oregon
KP Commercial Grow th
6.0%
4.0%
3.0%
2.1%
1.8% 1.6%
2.0%
1.0%
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
-1.0%
1988
0.0%
1987
% Change in Employment
5.0%
-2.0%
-3.0%
21
Source: Oregon Office of Economic Analysis
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Improving our Position
The Medicare program is changing significantly in 2006 yet our key
competitors will remain the same.
All Medicare Advantage carriers (formerly Medicare+Choice) will be offering pharmacy
benefits in 2006 (part D). Our rate position is expected to improve in 2006 as our ability
to manage pharmacy costs is reflected in our rates.
Although our rate position will improve, we won’t be the lowest cost carrier in our
market.
We will have new competitors like Regional PPOs and stand-alone PDP (prescription
drug plans) but we expect minimal market demand for these types of plans.
Carriers may have difficulty covering entire regions which include rural areas.
The metro area rates will be higher since they will reflect the cost of covering rural areas.
For consumers that want a choice of providers, Health Net’s PPO is already available.
The Northwest has a high managed care penetration and PDPs are only available to enrollees
with Medicare Supplemental or Traditional plans.
Our major competitors will remain the same (Regence, PacifiCare and Health Net PPO)
and are anxious to grow membership and build loyalty before the 2006 overhaul takes
place.
Sterling Life and Health Net have significantly lowered rates in 2005 than in recent years.
PacifiCare instituted a lean pharmacy benefit in 2005.
22
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Improving Our Position
Key areas of membership opportunity include…
Clark County and the Westside
Clark County typically out outperforms the nation in employment and population growth.
Employment growth in 2005 will be 3% and at least 2% in 2006 and 2007. Oregon’s K-12 budget
issues may push more families into Clark County.
Our market share on the Westside is lower than other areas yet this is one of our fastest growing
areas for membership growth.
The Individual & Family market
The direct pay market increased in 2003 and 2004. If the economy stumbles or new jobs don’t
offer health coverage, this market could grow.
We can leverage the in-migration trends if we develop relationships with new residents. Loyalty
should lead to better member retention.
Early retirees are looking for insurance options. 8% of employers eliminated retiree benefits in
2004 and this rate is expected to snowball in the future1.
The Professional & Business Services sector
Businesses in fields such as accounting, engineering, advertising and clerical services are part of
the fastest growing sector in 2005, 2006 and 2007.
Many of these firms employ highly educated workers who are more likely to seek out information
on maintaining their health, information online, etc.
1
23
Hewitt Associates
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Improving Our Position
We can appeal to a broader employer base by...
Demonstrating our value through affordability and health outcomes
Due to our integrated nature, we have greater leverage over health care costs than our
competitors. Our competitors’ best defense is to protect their risk pool.
Employers expect KPNW to have lower rate increases due to our innovative model. We need a
10-12% rate advantage to maintain our market share and 12+% to improve our market share.
Employers want to know how rates are derived and see ROI, i.e., productivity, quick return to
work, etc. If KPNW can provide meaningful outcome data, we will have a competitive advantage.
The continued evolution of our product portfolio
We need a broad array of price points to fit the diverse needs of employers. For instance, in
groups where KPNW failed to make the sale, “benefit design not offered” was the second most
frequent reason for not choosing KPNW.
More employers are moving toward single source solutions. Since we tend to have a lower market
share and lower premium favorability in groups with multiple carriers, we need emphasis a
strategy that helps us become single source solution.
A self-funded offering should improve our position, particularly in National Accounts. The number
of self-funded plans KPNW is competing against has been increasing, and our premium
favorability is lower against these plans. Locally, ODS and Providence are growing threats in this
market.
Our position will be threatened if we offer more solutions but don’t implement them well.
24
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Improving Our Position
For consumers, the definition of value is changing. We need to
provide…
The right information, at the right time, in a language they understand
As more of the costs are shifted onto the consumer, the manner in which consumers make
decisions is changing. Our competitors provide tools such as the average costs of common
medical services, online access to claims and benefit information, and health coaches.
Our fee schedules must be available, understandable and competitive. Hospitals in California are
already required to provide cost information about their most commonly charged services.
Providing members information, without the best service, will put us at risk.
A greater emphasis on service as consumer expectations evolve
If our benefits designs are essentially the same as our competitors, our service levels will have a
greater impact on member satisfaction, retention and growth.
As consumers share more of the cost of health care, they will be more sensitive to administrative
hassles. Members will be less willing to tolerate long wait times on the phone or for medical
appointments.
Consumers will look for different ways to access health care. Our competitors are responding by
providing members with access to online consultative services (Regence & ODS). KPNW has a
competitive advantage since we can link members to their personal providers, whereas many of
our competitors cannot guarantee access to their members’ personal physician.
25
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Improving Our Position
Our reputation can be our greatest advantage or our biggest
obstacle. KPNW needs to…
Refine our reputation through customer interaction
We have opportunities for improvement in service measures including Time on the Phone.
The language we use can negatively impact our reputation. The term “HMO” has a negative
connotation in this country.
Fully integrate our brand throughout the organization
There must be consistency in brand across all customer interactions. Brokers, employers and
members should walk away with the same message whether they visit our medical offices, log
onto our website or call our customer service center.
Communicate our value to the world
KPNW was ranked the #1 HMO in the country by Consumer Reports1
Our Thrive advertising should help improve our awareness in the community. We can take
advantage of the lack of brand advertising by our competitors.
Our reputation will be at risk if we don’t consistently tell our story.
1
26
Consumer Reports, 2003
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Contents
Premium Increases in
2005 and Beyond
27
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Premium Increases: 2005 and Beyond
There is an inverse relationship between our premium increases
relative to our competitors and our premium favorability.
Not surprisingly, we experienced higher membership gains in 2001 and 2004 when our
premium increases were lower than our competitors and our rate favorability grew.
The Premium Increase and Rate Position Dynamic
Large Business Group Only
8%
6%
KP below
market,
Rate position
improves
KP at parity
w /market,
Rate position
stable
KP above
market,
Rate position
decline
KP below
market,
Rate position
improves
% Change
4%
3.3%
2%
0.7%
0%
KPNW Commercial
Membership Growth
1.3%
0.5%
0.0%
-1.1%
-2%
-3.7%
2001:
4.7%
2002:
0.9%
2003:
0.8%
2004E: 4.9%
-2.3%
-4%
-6%
2001
2002
2003
2004*
Change in KPNW Rate Position
KPNW Premium Increases Relative to Competitor Increases
28
Source: Competitive Rate
Study; Includes KPNW groups
only; After competitor benefit
buydowns.
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Premium Increases: 2005 and Beyond
Very preliminary data shows KPNW needs an increase of 8-9% in
order to maintain our premium favorability in 2006.
Premium increases should decline as competitors target membership growth and
employers reduce benefit levels via cost-shifting.
Premium Increase - KPNW and the Market
Large Business Group Only
20%
18%
Premium Increases
16%
14%
Competitor Increase
for KPNW Groups
15.2%
14.6%
14.5%
12.4%
12%
11.5%
10%
8%
11.9%
11.3%
8-9%
11.3%
7-8%
9.5%
8.8% KPNW Increase (CRI)
6%
"The Market"
Competitor Increase
for KPNW Groups and
Non-KPNW Groups
4%
2%
0%
2000
2001
2002
2003
2004E
29
2005E
2006E
2007E
Competitor Increases
for KPNW Groups
from the Competitive
Rate Study. Increases
are post benefit
buydown.
“The Market” data
from 2004 Employer
Survey.
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
External Assumptions, 2005-2007
In the KPNW service area in 2005-2007:
Improvements to the economy will slowly increase the size of the commercial
market which will increase the opportunity for KPNW.
Health care costs will continue to outpace inflation but solid profit margins, need for
membership growth and continued cost-shifting onto consumers should drive the
premium trend down. Premium trends will be 8-9% in 2006 and 7-8% in 2007, net
of benefit buydowns.
Strong demand for health services means insurers will struggle to control costs.
Our competitors’ best defense is to manage their risk pool.
The impact of consumers shouldering more of the costs of health care will
materialize. The health care industry will interact with consumers in new ways.
They will be forced to deliver good service and accountability. Our competitors will
develop more consumer-oriented tools.
With the exception of Medicare, there will be no major health care reform.
30
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Conclusions
KPNW is well-positioned moving into 2005.
We’ve exceeded membership and margin expectations.
We’re more financially stable than the competition.
We outperform our competitors on the majority of quality measures.
We have a very loyal membership base.
Our premium favorability is 10+%.
We have the second highest market share in the Northwest.
What will it take for KPNW to be the #1 carrier in the Northwest?
We must have the ability to match our competitors’ benefits at a lower price.
The administration of our new products must be at least as good as our competitors.
Service levels need continued attention, particularly time on the phone.
Since our system is integrated, we need to have the ability to leverage our cost trend where our
competitors cannot.
KPNW has a strong brand. The entire organization must tell our story.
31
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Contents
Appendix
32
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Competitor SWOT Analysis
Regence BCBS/HMO’s house is in disarray.
Strengths
Strong brand strength and extensive provider network. The
Blue Cross Blue Shield name is well-known. Provider networks
are attractive for employers looking for choice. Networks range
from 2,300 to 10,000+ providers.
Regence Membership & Profitability
losses. Regence tends to have very high rates in the groups they
share with KPNW, often +20% higher. They discontinued their
HMO business and lost PPO members as well. Despite high
rates, Regence has a history of being unprofitable.
Opportunities
Ability to control pharmacy trend. Regence internalized their
pharmacy benefit management, saving $150 million in 2004.
Underwriting Margin (bars)
Weak rate position, financial history and membership
700000
3.0%
500000
2.0%
300000
1.0%
100000
0.0%
.
Inability to generate sales momentum and boost morale.
Regence must replenish membership losses and return to
profitability during a turn in the underwriting cycle. This will be
especially difficult as restructuring, leadership changes,
membership and financial losses have caused many employees
to look for new jobs.
33
-100000
-1.0%
-300000
-2.0%
-3.0%
-500000
-4.0%
-700000
-5.0%
-900000
1997
Threats
Regence HMO
4.0%
1998
1999
2000
2001
2002
2003
Q3
2004
Total Membership (lines)
Regence BCBS
Weaknesses
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Competitor SWOT Analysis
Providence Health Plans is a growing threat.
Strengths
Strong quality reputation. Providence benefits from the
name and recognition associated with the health system.
Providence ranks significantly higher on Health Care Rating
than KPNW 1 and on Overall Impression of health plan2.
ranks significantly lower on Customer Service than KPNW 1.
Opportunities
Expanding product portfolio and entering the Individual
market. Providence is responding to market demand in 2005
by offering an HSA. Providence will also introduce an
Individual & Family product in mid-2005.
400000
7.0%
6.0%
300000
5.0%
4.0%
200000
3.0%
2.0%
1.0%
0.0%
0
-1.0%
-2.0%
-100000
-3.0%
-4.0%
-200000
1997 1998 1999 2000 2001 2002 2003
Threats
Ability to improve customer relations. Tighter cost
management, such as pre-authorization for imaging services,
could increase customer dissatisfaction.
1
2004 CAHPS Competitor Survey
2 2004 Ad Tracking
34
100000
.
Q3
2004
Total Membership (lines)
Struggles with member customer service. Providence
8.0%
Underwriting Margin (bars)
Weaknesses
Providence Membership & Profitability
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Competitor SWOT Analysis
Health Net continues to grow via aggressive pricing.
Strengths
Aggressive rating. Health Net has been very aggressive
Underwriting Margin (bars)
Weaknesses
Divided attention of leadership. Steve Lynch has a dual
role as CEO of the local Health Net and COO of the
Western Region (CA and AZ).
Opportunities
Growth in the Medicare. Health Net should have
premium advantage over any new Medicare PPO
competitors in 2006.
8.0%
200,000
6.0%
150,000
4.0%
100,000
50,000
2.0%
-
0.0%
(50,000)
-2.0%
.
(150,000)
-6.0%
(200,000)
-8.0%
(250,000)
-10.0%
(300,000)
1997
Threats
Sustainability of low premiums. Health Net has been
seen as overly aggressive on some groups and may raise
premiums or forgo margins in the near future.
1
2004 CAHPS Competitor Survey
(100,000)
-4.0%
35
1998
1999
2000
2001
2002
2003
Q3
2004
Total Membership (lines)
Health Net Membership & Profitability
with rates for several years yet still continues to be
profitable.
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Competitor SWOT Analysis
LifeWise is primarily a small group competitor.
Strengths
Consistent profitability and broad provider network.
LifeWise has maintained healthy margins which allows them
to be more flexible with their rates. Their broad provider
network appeals to the segment of the market interested in
“choice.”
members, LifeWise has only 3% of the market share in our
service area. Their growth may have come from areas outside
KPNW’s service area.
Opportunities
16.0%
175000
14.0%
150000
12.0%
125000
10.0%
100000
8.0%
.
75000
6.0%
50000
4.0%
25000
2.0%
Ability to respond to the market. LifeWise can leverage
0.0%
their flexibility in benefit designs. They offer a variety of costsharing PPO and Indemnity plans as well as an HSA.
Threats
Obtaining provider discounts in our market. Due to their
small size, it may be difficult for LifeWise to obtain significant
provider discounts in the Portland market.
1
2004 CAHPS Competitor Survey
36
0
1999
2000
2001
2002
2003
Q3 2004
Total Membership (lines)
Relatively small carrier. Although they have been growing
Underwriting Margin (bars)
Weaknesses
LifeWise Membership & Profitability
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Competitor SWOT Analysis
PacificSource struggles to make inroads in the Portland market.
Strengths
Flexible and innovative. PacificSource was the first to
launch CDHPs as well as web-based solutions such as
claims and eligibility systems for members, providers
and brokers.
PacificSource Membership & Profitability
150000
125000
Underwriting Margin (bars)
Weaknesses
Minimal penetration in our market. PacificSource’s
small size makes it difficult for them to get good
provider/hospital rates which, in turn, has contributed to
their high premiums in this market.
Opportunities
6.0%
100000
4.0%
75000
.
50000
2.0%
25000
Growth outside PDX. PacificSource is growing in
southern Oregon, an area where other insurers lack
interest.
0.0%
Threats
Acquisition of TPAs. PacificSource acquired 2 TPAs in
the past several years which increased their capabilities
and help them appeal to a broader employer base.
1
2004 CAHPS Competitor Survey
0
2000
37
2001
2002
2003
Q3 2004
Total Membership (lines)
8.0%
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Competitor SWOT Analysis
ODS strives to be the top local self-funded carrier.
Strengths
Capability to self-fund. ODS is a bigger player in the
1000+ eligible employer market due to their ability to
administer self-funded products. This capability might
also allow them to re-enter the State of Oregon account
as one of our competitors.
Weaknesses
Reputation as a dental carrier. Although ODS has the
6th largest medical market share in our market, they’re
still primarily known as a dental insurer.
Opportunities
Increase financial strength and reputation with new
ventures. ODS expanded into Alaska with their selffunded product hoping to reap the same hefty profits
generated by Premera in this market.
4.0%
200000
2.0%
100000
0.0%
0
-2.0%
-4.0%
-100000
.
-200000
-6.0%
-300000
-8.0%
-400000
-10.0%
-500000
-600000
1997 1998 1999 2000 2001 2002 2003
Small player in fully-insured market. Although the
self-funded market is growing, if this market flattens,
ODS has less presence in the fully-insured market.
2004 CAHPS Competitor Survey
300000
-12.0%
Threats
1
6.0%
38
Q3
2004
Total Membership (lines)
Underwriting Margin (bars)
ODS Membership & Profitability
2005 MEDICAL ENVIRONMENTAL ASSESSMENT
Competitor SWOT Analysis
PacifiCare is a big player in the Medicare market
but a relatively small carrier in the Northwest.
Strengths
Backing of large corporate headquarters and strong
Medicare player. PacifiCare can leverage the $12 billion revenue
of its parent company as well as their reputation as a Medicare
carrier.
hassles for members. Systems issues have created challenges
for launching new products and implementing provider contracts.
Opportunities
Pushing towards product innovation and a statewide
presence. PacifiCare retained their HMO, but is no longer
promoting it. They recognize the need for an array of products.
They are expanding their PPO to other portions of Oregon and
building a proprietary network.
Threats
May be targeted for acquisition. There are rumors that
UnitedHealthCare is positioning to become a national Medicare
Advantage player and PacifiCare’s business would enhance their
position.
39
200000
100000
2.0%
0
0.0%
-100000
-200000
-2.0%
-300000
-4.0%
-400000
1997
1998
1999
2000
2001
2002
2003
Q3
2004
Total Membership (lines)
Computer systems incompatibility and administrative
4.0%
Underwriting Margin (bars)
Weaknesses
PacifiCare Membership & Profitability
Contact Information
Rick Veira
National Market Research – Northwest Region
Richard.M.Veira@kp.org
40