Strategic Analysis
of
Presented by:
Jason Fisher
Naji Kayruz
Lisel Lifshitz
Ayman Omar
Veronica Sarmiento
UnitedHealth Group (UHG) is a diversified health care management company that has cobbled together, through a series of acquisitions. UHG is currently one of the largest publicly traded insurance firms in the country. Responding to the new consumerism, UHG’s products offer members a greater choice than most firms in selecting providers and managing their care, at relatively similar out-of-pocket costs. Although UHG strives to coordinate and standardize care across the company, it allows individual plans autonomy in the implementation and development of programs to meet market and consumer needs.
UHG insures more than 45 million lives in a variety of insurance plans. The company traces its beginnings to the early 1970s when it was formed as a not-for-profit HMO by a Minnesota physician medical association.
The company offers a continuum of health care products and services. The main lines of business are its health insurance products including HMO’s, Point-of Service (POS), Preferred Provider Organizations (PPOs) and indemnity products. Income from the combined health insurance products generated more than 85% of the company’s revenue in 1997. Other revenue-generating products and services include behavioral health, utilization management, worker’s compensation, specialized provider networks, third-party administration, health evaluation services, and information systems.
The company is organized into five business segments: United Healthcare (small employers and consumers), Ovations (seniors), Uniprise (large organizations), Care Services (portfolio of health and well-being companies), and Ingenix (data, information, research, analysis and applications).
UHG follows a conservative growth strategy, but is determined to establish multi-site national operations to serve large employers. It can afford to acquire more plans and is pacing itself to build Medicare enrollment.
Managed care products are targeted to appeal to the self-directed consumer wellness and healthcare movement. Its “Choice” open-access product was one of the first such products in the country. Through its focus on choice-based products, the company attempts to educate members and to bring them into the healthcare decision process.
UHG is a dominant managed care insurer in the Midwest and Southeast, but the HMO market share drops significantly in the West and Northeast. Over the last five years, the company has acquired more than a dozen regional health plans, allowing it to build key market positions in several areas.
UHG’s strong management teams have produced industry-leading financial performance, generating a gross profit of $6.608 billion on revenues of $25.02 billion in 2002. UHG is also adept at integrating multiple acquisitions. UHG’s sound image and reputation has resulted in a 95% member retention rate. The company is developing medical management skills, with focus on pharmacy and cardiac disease.
Key personnel:
CEO: William McGuire, MD
CMO: Lee Newcomer, MD
Chief Information Officer: Paul LeFort
Porter’s model for industry analysis is not very applicable to the health care sector, including UHG, due to several reasons. First, Porter’s Model relies heavily on analysis of external forces facing a certain industry. This is partly true in UHG’s case, but it does not address the most important issue, which is the interdependence within the industry. A key factor in the analysis of this industry is the relation among the different entities involved, which include patients, physicians and health care insurance companies. Second, Porter’s Model overlooks how this industry might be affected by government imposed regulation such as prices of medical drugs, and Medicaid & Medicare programs (which many health care insurance companies base their reimbursement). This industry can be severely impacted, either positively or negatively, by any new government actions. One such example is when the government passed a law that allows patients to sue their insurance companies, if they felt they had a bad outcome related to certain services being denied, despite the fact that they were entitled to such services. Such a law can drive health care insurance companies to being less restrictive on what services the patients can obtain, so as to avoid the possibility of a lawsuit. Third, Porter’s Model is considered a reaction to the whole industry, and is not a good choice for companies required to be proactive and ready for change. Although Porter’s Model might not be the best way to evaluate this industry, it will be used to give us an overview of the whole industry, and it will not be used for any in-depth analysis due to the limitations that have been previously discussed. Fourth, Porter’s model fails to address the complexity logic used by UHG, which according to Lengnick-Hall and Wolff[1], achieves the ability to influence other parties by better understanding and manipulating the underlying forces and attractors that create order in the ecosystem. This is different from Porter’s model, which relies on positioning the firm in the least vulnerable position to those external forces. External forces facing most organizations are buyers, suppliers, substitutes and potential entrants, and these entities usually determine the level of rivalry among existing firms. The following is an analysis of each of these external forces within the health care insurance industry, and their impact on the competition and rivalry among the different firms.
There exists a very strong rivalry among existing firms in the health care insurance industry. Competition is cyclical depending on the type of insurance contracts offered. In this industry, competition takes place whenever contract negotiations occur between a certain firm or organization and an insurance company. Once the two parties have signed a contract, competition slows down till the time of contract renewal, when it will return to a fierce environment again. Of course, when multiple contract negotiations are occurring, competition will take the traditional form of competition like in other industries.
Potential entrants do not present a major threat to the competition in this industry. This is due to the fact that competition in the health care insurance industry depends on crucial knowledge, technology or know-how, the need for economies of scale, and large capital requirements. There is an experience curve in the health care insurance industry as well. This experience represents the ability of the company to price different contracts in a way, which are both beneficial to the customer and to the company. In order to set up such contracts, the company refers to past experiences, relies on statistical and probability analysis, and considers eventual payoffs for each contract. The more experienced the firm is, the better the contract will be for the company. This is why most firms might be deterred from competing in the health care insurance industry.
Due to the high cost of medical care, substitutes do not seem to be a big threat in this industry. Possible substitutes to having health insurance are self-insurance, where one pays out of pocket for all medical services, government sponsored insurance, company-sponsored insurance, or some type of medical reimbursement plans. Health care insurance companies are responsible for a majority of the health care delivery costs, and the substitutes (mentioned above) account for a fraction of these costs. In general, it can be less expensive for people to obtain medical care through purchasing health insurance, rather than paying for medical services through personal means.
Suppliers and Buyers are the most important players in the health care insurance industry. It is through the suppliers that this industry operating in a complex adaptive system develops its attraction, which could be viewed similar to a core competency in a resource based system. Health care insurance firms act as middlemen between the suppliers (Physicians, Hospitals, Clinics, Pharmacies) and the buyers (Businesses, Individuals, etc.). Buyers can be quite powerful because of the many products represented by the different insurance plans available to choose from. They are also willing to shop for the best price and value as it relates to quality and availability of healthcare services. It is the skill of managing these relationships, which determines the success of any firm. In a complex adaptive environment, it is advantageous to increase the sense making decision across all elements internal and external. In other words, insurance companies should develop a strategy in which their employees and affiliates (physicians etc.) can develop skills for making better decisions on their own, while being faced with continuously changing scenarios. This is what UHG has been advocating by giving more autonomy to its physicians, who feel free to make any decisions necessary to help the patient feel better without the need for prior approval of these services. This gives the physician a sense of responsibility and a sense of freedom to take the right and most ethical action needed. It also establishes a bond between the physicians and the insurance company. That bond makes the physicians think subconsciously of ways to save the company significant resources and lower its cost because of this new established relationship. This bond makes it more of a personal relationship, rather than just a contract to fulfill.
The strategy taken by UHG is clearly effective, as seen within their financial statements and leadership position in the industry. They obviously try to understand and manipulate the underlying forces and attractors that create order in the ecosystem by giving autonomy to contracted physicians, and this makes everyone who is part of that triangle (UHG, physicians, patients) happier. In the long run, they do experience the positive returns of such autonomy and flexibility. Physicians try to work closer with the company as they strengthen the new bond between them. Also, patients become more satisfied as a result of this autonomy, since their physicians can make instantaneous decisions regarding their treatment without prior approval from the insurance company. This strategy might need to be modified or enhanced at times to stay ahead of the competition, because it is a temporary “attractor” and not a core competency. In other words, these “attractors” are not sustainable in the long run if other firms in the industry develop the same strategy followed by UHG. Thus, these advantages are temporary and have to be enriched. This will be discussed in further detail within the recommendations section.
Some of the potential problems facing the organization as a result of external forces would be new government regulations and lawsuits from customers. The company has already decreased their risk of being sued, by giving physicians the autonomy to do whatever is necessary for the well-being of the patient. Government regulations can be potential opportunities or problems depending on the type of regulations implemented.
Although the previous discussion used the complexity logic as the one that the company uses, it is important to realize that UHG operates in a hypercompetitive market.
Hypercompetition is a condition of rapidly escalating competition based on price-quality positioning, competition to create new know-how and establish first-mover advantage, competition to protect or invade established product or geographic markets, and competition based on deep pockets and the creation of even deeper pocketed alliances.[2] Based on D’Aveni’s definition of hypercompetition, UHG is operating in a hypercompetitive market. The insurance industry is a service-based industry, due to the fact that they do not deliver a tangible product. The service they offer is financial security and payment for medical incidents. In general, a patient actually pays in much more to an insurance firm than the amount paid on behalf of the patient in a year. For instance, below is a table that shows a patient who visits a doctor every two months, is on constant medication, and needs lab work every four months.
It can easily be seen that unless a patient suffers from an unusual illness or severe injury, that the insurance offers a negative return to its customers. Therefore, if the customer knows he/she is receiving a negative return, he/she will most likely try to reduce the negative return as much as possible. In this situation there are two ways to reduce the negative return: (1) be sick more often, thus receiving more benefits (2) pay as little as possible for the most benefits. The latter is assumed to be the only viable and logically desired reason. Based on this reasoning, the insurance firms must compete on price-quality competition. In other words, the insurance firms are competing by offering the most benefits and quality services for the lowest price possible.
The healthcare insurance industry is constantly changing industry leaders through temporary advantages. Over time, healthcare coverage has changed from severe medical incident only to point of service (POS) to health maintenance organization (HMO) to preferred provider organization. Also, Medicare and Medicaid have changed the way the healthcare industry operates, in particular its payment schemes. These different offerings were temporary advantages for firms until the others in the industry quickly replicated them. In the past several years, the industry leaders have changed rapidly to include such names as: Aetna, Humana, Wellpoint, Oxford, and UnitedHealth Group. UHG currently is the industry leader and holds a well-developed temporary advantage. UHG gives physicians complete autonomy and does not require pre-authorization before treatments/surgeries. They also have created a user-friendly claims service via the Internet to expedite submission of forms and reimbursements. UHG also sets up a computer program to interact directly with each employers’ payroll system for more efficiency and accuracy of benefits. This customer service approach to all sides of the healthcare insurance system has created a loyal and trusting relationship between UHG and the physicians, employers, and employees. To emphasize the philosophy of customer service, it should be noted that UHG has the second highest number of employees in the healthcare insurance industry. Even with lower revenue per employee than the industry standard, UHG’s philosophy has created a first-mover advantage that is affording them the leading position in the industry. It will be interesting to see how long this temporary advantage will hold because it is based on trust and loyalty among all parties. The relationships founded may be hard to replicate and even harder to break.
The healthcare insurance industry tries to protect its current customers from competition by establishing contracts with employers. These contracts vary in time (6 month, 1 year, 3 years, etc.) and price, which has an inverse relationship with length of contract. It also tries to protect its customers by offering them the most convenience possible, thus trying to prevent customers from thinking of using competitors.