The Economic Impact of Digital Transformation

data analytics CSC blogs

In the first part of this blog series, I wrote about how and why digital transformation should become a strategic priority for payers based on the emerging trends in the health insurance market. In this second part of my blog I will focus on the ways digital transformation impacts a payer’s economic and financial performance and facilitates its drive toward organizational transformation.

By Boris Rachev, Global Health Economist, CSC

Payers that employ consumer and provider engagement, optimization solutions, data operationalization and innovation achieve a large near-term reduction in selling, general and administrative (SG&A) costs. It is absolutely realistic to assume, for example, that on average, payers would save roughly 10% to 15% of their SG&A costs, i.e., $15 billion to $25 billion industry-wide[1]. The exact amount would vary from payer to payer, but this is just to give us a measure of the scale.

This, of course, is just an example. I’m confident that in the next 5 years “digital” could significantly decrease spending on medical services. Sounds counter-intuitive, I know, because investment in technology is supposed to increase spending but I share the opinion that predicting the increase in costs would be more than offset by lower utilization of more expensive services. For example, the bulk of the savings would come from the substitution of lower-cost services for more expensive alternatives, e.g., virtual visits could decrease the need for in-person consultations, etc. In addition, digital transparency tools that inform consumers about variations in provider pricing could encourage them to seek out lower-cost providers. By making it easier for patients to access healthcare, digital technologies could improve patient outcomes and lower the rate of hospital admissions and readmissions. All this points to big savings for the patient-consumer, and for payers and providers as well.

Digital transformation means organizational transformation

Most payers are still traditional siloed organizations that have been optimized for specialization and efficiency. As a result, it is really hard to challenge the status quo and suggest new ways of working. Business leaders are often resistant to innovation and cross-functional collaboration.

Only very senior leaders, the C-suite, can ensure that “digital” and the culture that goes with it, is embedded across the organization – a prerequisite for achieving maximum impact. And only very senior leaders can decide what the ultimate goals should be. But what to do?

Leverage the transformation through external stakeholders

Patient-consumers, providers, employers, insurance brokers – all of these external stakeholders have a specific role in, and journey through, the healthcare system. Such journeys can be digitized. For patient-consumers: enrollment, billing, claims submissions/processing, and issue resolution. For payers and providers: digital analytics. Digital solutions can help payers to credential providers, design networks, and improve reporting to providers, employers, and brokers.

Break functional silos and set goals

Building cross-functional teams for each of these journeys and encouraging an extraordinary level of cross-functional collaboration is the next logical step. Cross-functional teams should have a clear mandate for change. They are important for redesigning the prioritized journeys, and they are also a key element in changing organizational mindsets. Once the teams are set up, leaders should challenge them by setting goals and setting quantitative targets.

Allocate resources efficiently

Allocating resources efficiently is key. The IT budget does not need to increase dramatically to sustain the digital transformation. Rather, money in the existing budget should be shifted toward the prioritized digital investments. Practical experience has proven once again, that high-performing innovators devote about two-thirds of their innovation budgets to market disruptions and near-term ROI, while low-performing innovators spend two-thirds of their budgets on maintaining their current operations[2]. Digital transformation requires digital talent. Leaders will need to ensure that their organizations have it by identifying and retaining existing talent and bringing new talent into the organization.

Optimize the value of two-speed IT

Disposing of all legacy IT infrastructure while moving toward digital transformation is not an option, so the goal is really twofold: Adapt as much of the old infrastructure as possible so it can support new digital approaches and pick the best new successful innovations. A staged approach can be used to achieve both goals and CSC specializes in it.

Stage one: Payer partners with a health IT company builds a digital foundation by designing new services that integrate and standardize the existing data models within the (usually fragmented) legacy infrastructure. Such services should make it possible to quickly integrate new applications with the legacy infrastructure by creating standard “services-based” interfaces (e.g., the CSC ServiceNow solutions partnership), while reducing the integration and testing costs that can make it cost-prohibitive to experiment.

Stage two: Payer accelerates the shift from old to new by increasing the amount of money allocated to new systems and services. Continuing investments in old systems should be made only if those systems can be upgraded or modernized (at reasonable cost) to meet the needs of the new digital approaches. Additional investments can then be made to improve products that show solid signs of success.

All in all, for payers, the business case for digitization is strong. Not only can it improve financial performance in the short term, but over the long term it holds the key to increasing consumer satisfaction and fending off attacks from disruptive entrants.

[1] The US spends about $3 trillion on healthcare annually and about half of it flows through non-government payers. SG&A spending accounts for 10-11% of this $1,500 bln, or $150-$165 bln. If that amount, in turn, is reduced by 10-15%, the savings would be in the range of $15-$25 bln.

[2] Data from McKinsey & Co.

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