Dyng, Surviving or Thriving - english - 2017

Dying, Surviving or Thriving

Fund for the sick?

Or partner for health?

Strategic analysis of the Swiss health insurance market

Content Editorial

3

1

Executive summary

4

2

Study design

6

3 Background

3.1

3.2

The Swiss healthcare system 3.1.1 Unbridled cost increase 3.1.2 Increasing burden on private households Swiss health insurance market 3.2.1 A saturated market and intense competition 3.2.2 Government policy as a core determinant 3.2.3 Tightened regulation 3.2.4 Business model of health insurers under scrutiny

8 9 9 12 14 14 15 15 16

4

Starting point: basic needs of the insured

18

4.1 4.2 4.3

20 22 24

5

Changing customer attitudes toward healthcare data

26

5.1 5.2 5.3

27 32 33

6

Strategic options: evolution or revolution?

Living healthy Getting healthy Living with a medical condition Data exchange: willingness and concerns of the insured Opportunities with smart data management New players in the healthcare market

34

6.1

Evolutionary strategies (surviving) 6.1.1 The ultra-efficient health insurer 6.1.2 The differentiated health insurer

36 36 37

6.2

Revolutionary strategies (thriving) 6.2.1 The multi-sector health insurer 6.2.2 The healthcare data manager 6.2.3 The specialized medical condition partner 6.2.4 The integrated health partner

38 39 40 41 42

7 Conclusions

44

8 Contacts

46

9 Sources

47

2

| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

Editorial Six months ago, we launched our series of strategic analyses of the insurance market with the “Dying, Surviving or Thriving” study. Our aim is to give insurers practical and thought-provoking impetus as regards their strategic positioning. While our first study focused on common strategic challenges faced by all insurers, our first sector-specific study is dedicated to Swiss health insurers.

We see particularly intense strategic pressure in the health insurance market: in tandem with healthcare costs, premiums are increasing virtually unbridled, just as calls for government intervention are getting louder. At the same time, the industry is in the grip of intense competition and undergoing unparalleled transformation spanning government policy, regulation, demographics and medical technology. Despite these powerful dynamics, health insurers are slow to overhaul their strategies.

In this study, we assess the current strategies and show how health insurers can refine their business models. Beyond targeting their operating costs, they have to increase efficiency in the healthcare system and tap new growth potential. Drawing on the current strategic advantages, such as customer proximity or operational efficiencies and capabilities, health insurers are called upon more than ever before to create and capture economic added value for the insured. Otherwise there is a threat of further government intervention or even a resurgence of the debate about a nationally centralized healthcare system. Health insurers should therefore take action, before somebody else does.

We believe that it is still a good time to evaluate new business models. Digitization will play a key role in this context: previously unimagined data volumes and analytics fundamentally improve prevention, early diagnosis and the treatment of diseases. As a result, carriers can shift their focus from acting as funds for the sick to actually forging partnerships for health. However, this innovation potential also attracts providers from outside the industry. Such disruption can increase pressure on health insurers to take strategic action.

Overall, we would urge health insurers to systematically evaluate their strategic options and to rigorously take advantage of them. That is the only way that our health insurance system will remain affordable in the long run.

Rolf Bächler

Dr. Alexander Lacher

Yamin Gröninger

Co-Leader Health Insurance

Co-Leader Health Insurance

Leader Insurance Business Development

Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market |

3

1 Executive summary Swiss health insurers must systematically review and sharpen their strategic positioning. Then they have to realign their business models accordingly. That is their only chance to stay competitive in the medium to long term, in view of the transformation of the healthcare sector driven by government policy, regulation, demographics and medical technology.

Dying, Surviving or Thriving Health insurers have a choice between three fundamental strategic options: 1) They can choose to do nothing, endangering their existence and the current health insurance sector in the medium to long run – and die.

2) They can optimize and evolve their established business models – and survive.

3) They can fundamentally transform and revolutionize their business models, tapping into new potential revenue pools – and thrive.

Cutthroat competition, limited innovation scope and few options for creating value Switzerland‘s health insurance sector is highly regulated, limiting health insurers‘ scope for innovation and entrepreneurial activity.

In addition, it is not permitted to make a profit from the basic insurance business, and allowed only within a narrow margin in the supplemental insurance business. At the same time, health insurers are engaging in cutthroat competition. And finally, health insurance premiums primarily cover the still extensive catalog of basic healthcare benefits. In order to grow profitably in this challenging environment in the long term, carriers need to innovate and be clear about their intent and mission.

The cost and premium explosion threatens the healthcare sector Innovation is also urgently needed in view of the unbridled increase in healthcare costs. Between 2014 and 2030, healthcare costs in Switzerland are expected to increase by 60% to CHF 116b. That would mean that health insurance premiums would rise from the current CHF 396 on average per person and month

4

to CHF 826 by 2030. Primary cost drivers are advances in medical technology, an increasing incidence of chronic diseases and an aging society. This significantly lowers the purchasing power of private households. A large portion of the population will no longer be able to afford compulsory health insurance. The federal government and the cantons – ultimately, the taxpayer – have to plug these holes.

Centering on the basic needs of the insured It is in the interests of all stakeholders in the Swiss healthcare system to ensure its high quality while keeping the cost increase in check. If health insurers rigorously center on the basic needs of the insured (living healthy, getting healthy and living with a medical condition) they can adequately address this symmetry of interests. Failure to do so would signal the end to the health insurance system, as it would become unaffordable.

Digital healthcare data and technologies enable new potential offerings Entirely new opportunities are emerging for such an alignment toward the basic needs of the insured thanks to technological innovation: for instance, wearables for measuring health data, apps and sensors exponentially increase the volume of usable healthcare data. Almost half of the insured in Switzerland already record health data, according to an EY survey. Of the survey respondents, 60% are willing to share their data with health insurers, provided they get financial or other advantages in exchange. This would allow the development of innovative preventative care and treatment. Those are appealing incentives for companies from other industries to enter the health insurance sector; such disruptors increase pressure on established health insurers to take strategic action.

| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

Evolution or revolution of the business model?

Health insurers have to decide whether they intend to remain active in their established market or completely realign their business model. In the first case, they can aim to become cost leaders or to differentiate themselves with innovative services (evolution).

In the second case, they can draw on their existing strengths to create new products and services or enter into new business segments (revolution). Four strategic options are conceivable: 1) Extend the range of insurance to other lines of business such as non-life or life insurance 2) Aggregate, analyze, process and offer health data 3) Specialize in selected medical conditions 4) Accompany the insured throughout their lives as their health partner Now is the time to act Irrespective of the option selected, health insurers need a coherent and consistent strategy, and they need to operationalize it quickly and rigorously. Smart alliances with service providers or technology corporations can accelerate the operationalization of such strategies. Despite unrelenting political and regulatory pressure, health insurers have enough leeway to enhance their business models and products. But speed is of the essence: at present, insurers still control customer touchpoints and have extensive healthcare data available. Drawing on advanced technology, players should actively benefit from this starting position and the first-mover advantage.

Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market |

5

2 Study design While acknowledging that the health insurance system is also fundamentally shaped by government policy, the state, service providers and the insured, this study focuses on Swiss health insurers.

As far as cost increases in the health insurance system are concerned, the interests of health insurers, the insured, the state and policymakers are symmetric. In contrast, service providers do not have a direct incentive to put the brakes on rising costs, at least not in the near term. For instance, in Switzerland, the density of hospitals exceeds the international average and generic drugs cost almost twice as much as in its bordering countries.

The methodology used in the present study is based on hypothesis-driven investigations by industry specialists and business analysts from EY. Extensive volumes of data were analyzed, including the annual reports of health insurers and statistics issued by the Federal Office of Public Health (FOPH), the Federal Social Insurance Office (FSIO) and the Swiss Financial Market Supervisory Authority (FINMA). EY conducted a survey of approximately 450 individuals on their willingness to record health data and share them with health insurers. Also factored in were insights and experience from EY‘s audit and advisory services clients in the Swiss health insurance market. Finally, key insights were also gleaned from interviews with executives of leading Swiss health insurers.

6

Our special thanks goes to Titus Kretzschmar (1abtik) and Ricardo GarcĂ­a (EY) as well as Manuel Heuer and Lukas Ammann (Dacadoo).

Although legal and regulatory requirements substantially define the strategic leeway for health insurers, these aspects are not at the focal point of this study. The investigation focuses on presenting foreseeable and strategically relevant developments and scenarios, including the dilution of the catalog of basic healthcare benefits, the introduction of income-dependent premiums, the increase in deductibles and co-payments recently demanded by parliament or the resurgence of the debate about a nationally centralized healthcare system.

Chapter 3 analyzes the Swiss healthcare and health insurance system and provides an assessment of current strategies. Chapter 4 shows how health insurers can tap into new sources of value creation by addressing the basic needs of the insured. Chapter 5 explores in detail the strategic opportunities afforded by digitization, before chapter 6 distills the insights from the previous chapters into actionable recommendations and explains specific strategic options. We conclude by explaining why Swiss health insurers have a favorable window of opportunity to launch innovations and boost value creation in the long term.

| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market |

7

3 Background Although the Swiss healthcare system delivers leading performance, it is tightly regulated and expensive. In the basic insurance business, health insurers have no options for creating value, and they are tightly constricted in the supplemental insurance segment. At the same time, healthcare costs are perpetually rising, driven by regulation, government policy, medical technology and social developments. This cost increase is testing the limits of the Swiss healthcare system‘s viability.

8

| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

3.1 The Swiss healthcare system The cost of the healthcare system is growing unbridled. Private households bear a big burden. If premiums continue to rise, a large portion of Switzerland‘s population will no longer be able to bear the cost of compulsory health insurance in future, never mind supplemental insurance.

3.1.1 Unbridled cost increase

Above-average increase in healthcare costs (%, indexed 1990)

Increase in healthcare costs by spending area (CHF m)

Although the Swiss healthcare system‘s high quality is undisputed, the system is tightly regulated and expensive compared with other industrial nations. Cost increases have been huge: between 1990 and 2014, healthcare costs climbed from CHF 26.9b to CHF 71.2b, which is an increase of 165%. Economic output only grew by 90% and the population by 23% in the same period.

Increase since 1990 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 1990

28 364

2005

2010

2015

31 880

+12,4%

20 335

21 455

22 214

23 694

24 860

+22,2%

7304

7334

7447

7316

7321

2042

2167

2298

2385

2483

+0,2% +21,6% +9,1% +1,3%

2979

2000

31 312

31 162

29 138

71 167

69 226

67 533

64 574

62 495

Healthcare costs (nominal) Population GDP (nominal) Source: FSO1.

+13,88%

+165%

1995

Increase since 2010

Total increase since 2010

1471

2010

3037

2011

1443

2960

2012

Inpatient treatment Outpatient treatment Preventative care

1451

2983

2013

1536

3018

1605

2014

Sale of healthcare products Other services Administration

Source: FSO2.

Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market |

9

3 Background

The greatest cost increase can be seen in outpatient hospital treatment: between 2010 and 2014 these segments increased by 22% to CHF 24.9b. In the same period, the cost of inpatient treatment rose by 12% to CHF 31.9b. The shift toward outpatient hospital services reflects, among other things, new medical possibilities as well as hospital financing incentives. Under these incentives, health insurers and the cantons jointly assume the costs of inpatient services since 1 January 2012. In contrast, the costs of outpatient hospital services are borne by hospitals alone.

In general, the Swiss healthcare system has significant inefficiencies, partly on account of a lack of coordination of care, excess supply involving unnecessary services or excessive demand by the insured.

Aside from structural inefficiencies in the healthcare system, three further core drivers of costs have been identified: advances in medical technology, an increase in the incidence of chronic diseases and an aging society.

In its “Health2020” report (“Gesundheit2020”), the Federal Council assumes that a more efficient healthcare system could save 20% of healthcare costs.3

Even incremental improvements are typically associated with hefty price hikes. In addition, improvements in diagnostics boost volumes and, in turn, costs.

Expensive advances in medical technology For years, the healthcare sector has seen impressive technological advances. But in contrast to other industries, like IT, where increasing computing performance is associated with price reductions, medical improvements drive costs upward. Whereas the price of smartphones, for instance, decreased worldwide by 20% between 2012 and 2015, the cost of stents, computer tomography scans or colonoscopies rose in the same period.

Chronic diseases among the Swiss population (percentage of Swiss resident population aged 15 and older)

15%

16% 14% 14%

13%

12%

11% 11%

12%

8%

8%

5%

6%

7% 4% 2%

Allergies

High blood pressure

1997

2007

Osteoarthritis, rheumatism

Depression

2012

Sources: FSO , Hacking Healthcare .

5

10

6

| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

Migraines

Cancer

4%

3%

3%

4%

Diabetes

The potential to improve the efficiency of the Swiss healthcare sector is considerable. The insured have to assume more personal responsibility. And new incentives are needed to make sure that service providers do not administer unnecessary or ineffective treatments.

Increased incidence of chronic diseases More people than ever before suffer from high blood pressure, allergies, osteoarthritis and rheumatism, depression, migraines, cancer and diabetes. One-third of the Swiss population already suffer from at least one of these chronic diseases.4 The increased incidence of these non-communicable diseases reflects, on the one hand, the aging population, but it is also a consequence of a shift toward sedentary lifestyles and unbalanced eating habits.

The impact this has on costs is substantial: Of the total annual cost of the healthcare system, no less than CHF 52b (80%) is attributable to the treatment of chronic diseases.7 In the case of outpatient treatment, the share has reached 87% in the interim, and is set to increase further.

An aging population The Swiss Federal Health Insurance Act (HIA) today provides for age-independent premiums for adults aged 26 or older. That means that younger insured persons make a solidarity contribution to the cost of the older insured, whose healthcare costs exceed the premiums they pay. Increasing life expectancy combined with low birth rates accentuate this redistribution. In view of this growing burden on younger generations in compulsory health insurance, politicians are debating measures to ease the load, e.g., by introducing lower premiums for young adults or larger premium reductions for children.

Development of age structure in Switzerland (1971-2015)

Years 104 96 88 80 72 64 56 48 40 32 24 16 8

Persons 80 000

60 000

1971 Source: FSO

40 000

1990

20 000

0

20 000

40 000

60 000

80 000

2015

.

8, 9

Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market |

11

3 Background

3.1.2 Increasing burden on private households

cost contributions and out-of-pocket payments by the insured (24.5%).

Private households pay two-thirds of healthcare costs: in the form of health insurance premiums (36.6% for basic health insurance and 7.2% for supplemental health insurance) as well as through

In 2014, the burden on private households totaled CHF 48b, corresponding to CHF 493 on average per person and month.

Financing of healthcare costs by source (2008-2017, CHF m)

Development of premiums and salaries through 2030 (%, indexed 1996, projected with CAGR 1996-2014)

Effective development 80 000

280

70 000

240

60 000

63% by private households

50 000 40 000

Forecast 2030: Premiums of CHF 826

200 2014: Premiums of CHF 396

160 120

30 000 37% by government and companies

20 000 10 000 0 2008

2009

2010

2011

2012

2013

2014

Private households: Other ďŹ nancing Private households: Cost contribution HIA, IPA and out-of-pocket payments

80 40 0 1996 2000 2004 2008 2012 2016 2020 2024 2028

Salary increase Sources: FOPH11, FSO12, EY.

Private households: Cost of IPA insurance premiums Private households: Cost of HIA insurance premiums Companies: Social security contributions Government: Payments for social security (including premium reductions, means-tested social benefits from 2008 onwards) Government: Payments and benefits Source: FSO10.

12

| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

Premium increase

Loss of purchasing power by private households Because salary growth has been outstripped by the increase in healthcare costs for years, the purchasing power of individual private households has declined significantly in some cases. In 2015, 2.2 million people, or 27% of Switzerland‘s insured population, were reliant on subsidized health insurance premiums.13 The public sector spent more than CHF 4b on premium reductions.

This redistribution would have been even greater if cantons had not reduced their contributions over the last few years.

There are no indications at present that the cost and premium increase is flattening out or, indeed, reversing. By 2030, the average burden from premiums will increase to 11% of income; in 2014, it only came to 6%.14 That would significantly exceed the target pursued by the federal government with its premium reductions to limit the maximum burden to 8% of taxable income.

According to EY analyses, healthcare costs will increase by more than 60% to CHF 116b by 2030. The effect of loss of purchasing power is even greater if we factor in out-of-pocket payments by private households.

If premium growth holds steady, a large portion of Switzerland‘s population will no longer be able to bear the cost of compulsory health insurance in future, never mind supplemental insurance.

The financial collapse of basic insurance in the medium term cannot be ruled out unless decisive countermeasures are introduced.

In such an event, calls would grow louder for the government to take action by means of regulatory and market intervention, or perhaps even the introduction of a nationally centralized healthcare system.

Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market |

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3 Background

3.2 Swiss health insurance market Swiss health insurers are engaging in cutthroat competition. At the same time, the market environment is significantly shaped by government policy and regulation. This puts severe constraints on the options available to companies to create value.

3.2.1 Saturated market, intense competition Switzerland is among the countries worldwide with the greatest insurance density. Of total household income, 9.2% is spent on non-life insurance premiums.15 Of that amount, 63% is spent on basic insurance and 16% on supplemental insurance in accordance with the Swiss Federal Insurance Policy Act (IPA).

In the health insurance industry, a few large carriers compete alongside a large number of relatively small providers with regional or even local operations. There is a high degree of concentration: of the 57 health insurers that offer compulsory health insurance, the largest 10 dominate almost 90% of the market; 17 health insurers, in contrast, count less than 10,000 insured persons.16 Competition between providers of basic insurance is intense – on the one hand, the insurance product is regulated and thereby homogenous and, on the other, the cost of changing providers is low. This results in price competition.

14

In addition, comparison portals like Comparis spur switching between health insurers.

Supplemental insurance is offered by 54 companies.17 As in basic health insurance, a few providers account for the majority of the business in an oligopolistic structure: the 10 largest companies have a combined market share of 80%. In contrast to the basic insurance business, however, the number of providers of supplementary health insurance is on the rise. There are signs that private insurers are increasingly interested in offering supplemental health insurance policies. Current examples include AXA and Zurich, which are already important providers of sickness benefits insurance. It is also conceivable that providers from other industries will enter the market. Overall, such new entrants will intensify competition in the market.

Unlike in the basic health insurance business, competition in the supplemental health insurance business is not concentrated solely on services but is also manifest in product design. However, preventative product controls by FINMA set relatively tight restrictions on innovation. The aim is to ensure insurance coverage, since private health insurance is similar to social security in nature and insured persons who reach a certain age or have an adverse medical history can in effect no longer switch providers of supplemental insurance without risking not being able to find any or comparable insurance coverage.

| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

Regulatory requirements on health insurers are ever tightening. Administrative costs are increasing as a result, and health insurers are exposed to major compliance risks.

3.2.2 Government policy is a core factor

3.2.3 Tightened regulation

In view of the steady rise in healthcare costs, political debate on the healthcare system continues unabated. The executive and legislative arms of government thus remain central factors in determining the strategic environment in which Swiss health insurers operate.

Regulatory pressure on Swiss health insurers is relentless and, like government policy, constitutes a factor of strategic relevance.

Health insurers view the increasing mesh of red tape and dual supervision by FOPH and FINMA as one of the central strategic challenges.18

In its “Health2020� strategy, for instance, the Federal Council looks at potential measures for mitigating healthcare costs. Such measures would have a substantial impact on health insurers.

Despite being rejected several times at the ballot boxes, the idea of a nationally centralized healthcare system reemerges time and again. Somewhat unlikely at present is the curtailment of the catalog of benefits under the HIA, as it would inevitably be associated with what is popularly referred to as a two-class medical system. In contrast, the catalog is being extended step by step, for instance, with the inclusion of complementary medicine in 2009.

Finally, the introduction of a compulsory nursing cost insurance as a fourth pillar is currently being considered.

New decrees such as the Swiss Federal Health Insurance Supervision Act (HISA) or the planned FINMA Circular on corporate governance impose tighter regulatory requirements on health insurers. One specific example are the tougher equity requirements imposed on providers of basic health insurance: in 2015, two health insurers failed to satisfy the requirements of the HIA solvency test; in 2016, 14 insurers already reported solvency rates below 100%. In the supplemental insurance business, similar FINMA requirements on discounts and rates restrict the opportunities of insurers to create value. Providers of supplemental health insurance base additional requirements on their Own Risk and Solvency Assessment (ORSA), a duty to prepare a report on their financial position and introduction of an independent compliance function.

Another subject of debate in the political arena is intervention aimed directly at the insured. For instance, parliament is currently trying to increase the minimum deductible. The aim is to encourage the insured to take on more personal responsibility and to discourage them from seeking medical or hospital treatment in bagatelle cases. Also under consideration are income-dependent premiums or tax increases to finance rising healthcare costs.

Add to this stricter application of FINMA and FOPH supervisory practice in industry matters and customary practice that had previously been tolerated, increasing the exposure of health insurers to compliance risks along with severe penalties and negative publicity. Regulators have their eye on the market leaders in particular.

Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market |

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3 Background

3.2.4 Business model of health insurers

under scrutiny Measured by volume, basic health insurance makes up the majority of the health insurance business in Switzerland. However, that is mainly due to the extensive catalog of benefits under the HIA. This notwithstanding, there is intense competition in the business for mandatory HIA benefits: organic growth is only possible at the expense of other providers.

There is limited potential to grow through mergers and acquisitions in the basic health insurance business. This is because many

smaller and medium-sized health insurers are intent on remaining independent as long as possible despite regulatory and compliance pressure. This is likely attributable to the weak ownership structures and the lack of pressure from profit-oriented shareholders.

Zero-sum game in the basic health insurance business Another peculiarity of social health insurance of strategic relevance is compensation of risk, which is intended to counteract any deficiency in solidarity between the “young and healthy” and the “elderly and sick”. Such a “hunt” for good risks no longer pays off.

CAGR number of insured persons (2010-2015, %)

Basic insurance market: growth versus compensation of risk

20 Groupe Mutuel 15

10 Assura

CPT 5

Concordia

Helsana

SWICA

Visana

Sympany

0 CSS −5 −500

−250

Sanitas 0

250

500

Ø Average annual risk compensation payment per insured person (avg. 2010-2015, CHF) Circle size corresponds to number of insured persons 2015

Net recipient

Net payer

Sources: FOPH19, EY (group perspective).

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| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

750

For instance, between 2010 and 2015, Assura paid compensation of more than CHF 500 on average per year and insured person, while Helsana received roughly CHF 300 in return. Compensation of risk will gradually be refined further through 2019; the cost of medication and medical history will also be taken into account in future. This redistribution prevents health insurers with low risks offering lower premiums in a bid to gain market share. Compensation of risks is thus a zero-sum game.

Meager earnings and growth potential in supplemental insurance Income and growth potential is similarly limited in the likewise highly regulated supplemental health insurance business under the IPA. However, what is at work here is the redistribution from the younger to the older insured: health insurers can only build up sufficient aging reserves by selling supplemental insurance to the young insured.

Revenue from premiums of 10 largest health insurers, share of HIA and IPA (CHF m)

6000

27%

20%

4000

15%

37% 80%

73%

2000

36%

10%

85% 63%

64%

90%

28%

24% 16%

72%

76%

84%

30% 70%

Sanitas

Concordia

KPT

Sympany

0 Helsana

HIA

CSS

Groupe Mutuel

SWICA

Visana

Assura

IPA

Sources: FOPH20, FINMA21, annual reports, EY (group perspective).

Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market |

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4 Starting point: basic needs of the insured

The basic needs of the insured are the starting point for enhancing the business models of health insurers. They can be served even better in future with datadriven innovations. In order to tap into the associated value-added, health insurers have to play an active role.

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| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

Safeguarding the Swiss healthcare system‘s high quality while keeping the cost increase in check: that is the common interest of the government, health insurers and the insured. This symmetry of interests is especially manifest in the three basic needs of the insured: living healthy, getting healthy and living with a medical condition. If health insurers can improve the way they address these needs, they can mitigate the rise of healthcare costs while tapping into new opportunities to create value. Numerous examples from Switzerland – and many more from further afield – are testament to this new direction.

Basic needs in healthcare

Living healthy

Basic needs Getting healthy

Living with a medical condition

Source: EY.

Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market |

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4 Starting point: basic needs of the insured

4.1 Living healthy Cost control begins with preventative healthcare. However, a mere 2.2% of total healthcare costs are spent on prevention in Switzerland. This provides an indication of the considerable need for innovation. New technology and data analytics offer health insurers unimagined possibilities for providing individualized healthcare advice.

Basic need "Living healthy"

Exercise advice

Nutrition advice

Living healthy

Predictive risk analytics

Predictive risk analytics play a central role. Based on large volumes of data, it will be possible in future to identify health risks often correlated with lifestyles, such as cardiovascular disease or type II diabetes.

New findings from behavioral science and what is referred to as „gamification“, that is the introduction of gaming elements such as point systems or rankings, can enhance the effectiveness of healthcare advice. The focus of these efforts is on nutrition and exercise. Healthy food and regular physical exercise do more than simply reduce healthcare costs, they also directly improve the well-being of the insured. In addition, mental health advice improves the chances of avoiding mental disorders, or their early identification and treatment.

Such solutions, however, are premised on the recording and analysis of personal data. An EY survey reveals that insured persons in Switzerland are quite willing to share their data with health insurers – provided they obtain advantages in return (see Chapter 5).

Mental health advice

Source: EY.

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| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

Case studies The Headspace app encourages daily meditation and helps users improve their mental health. Headspace leverages gamification functions, such as social media, in order to motivate users.

With the digital nutrition advice offered by Zipongo, users get personalized menu recommendations in real time. The advice given factors in biometric data, personal preferences, nutritional requirements and daily offers in surrounding canteens and eateries. Tools for planning meals and shopping lists are also provided by the app.

In Switzerland, too, insurers have introduced services in their offering aimed at encouraging the insured to lead healthy lifestyles.

Pay as you live (PAYL) Health insurance premiums linked to personal lifestyles: that‘s what the concept “pay as you live” (PAYL) proposes. Healthcare data recorded using smartphones and wearables are analyzed in order to motivate the insured to adopt a healthier lifestyle. That enables savings in healthcare costs, a portion of which is passed on to the insured in the form of premium discounts.

Case studies In other countries, health insurers are already actively using PAYL models. For instance, US insurer John Hancock records the fitness data of its insured. Customers who exercise regularly get premium discounts on their life insurance. And customers who take a yearly health checkup, and do not smoke, get even more benefits.

Oscar, a digital health insurer in the United States, uses online tools for submitting applications and offers a physicians‘ platform as well as various telemed services. Oscar uses fitness trackers and compensates insured persons with Amazon vouchers if they clock up a certain number of steps. The carrier also offers payment discounts for those who vaccinate against the flu.

CSS myStep uses electronic step trackers to encourage holders of CSS supplemental insurance policies to exercise more and to take ownership of their health. Physical activity data is transmitted to CSS daily. Users that hit agreed targets (7,500 or 10,000 steps a day) get credit on their healthcare account. An affiliate of CSS, the online insurer Sanagate is working on offering the digital preventative care range of Dacadoo to its customers.

Swica‘s healthcare platform Benevita works on a similar principle: its users get life-cycle-oriented and personalized advice about exercise, nutrition and well-being. And the insured can benefit from premium discounts, provided they cultivate a healthy lifestyle.

Similar products are offered in Australia. The insurer Medibank gives free wearables to customers who take part in its healthcare program. Medibank rewards the insured, not just for physical activity, but also for buying fruit and vegetables.

Together with the insurer NIB, the Australian airline Qantas offers its own health insurance. Qantas Assure rewards customers who exercise frequently with bonus points. The insurance offering is unique in that it targets frequent flyers, a customer group that already has an affinity for bonus programs.

In Switzerland, PAYL offers are only possible for supplemental insurance, and the size of discounts is limited. If insurers want to offer price cuts beyond that, they have to demonstrate the actuarial effects of lifestyle changes. In public debate, PAYL is criticized for weakening solidarity among the insured and because the physically disadvantaged are punished; for instance, people with walking disabilities are excluded from models with step trackers. Health insurers have to carefully weigh up the associated reputational risks.

Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market |

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4 Starting point: basic needs of the insured

4.2 Getting healthy When the insured get sick, what they want most is to get well again quickly. Medical care should be flexible in terms of timing and place; by that token, inpatient treatment should be avoided to the extent possible. The treatment itself should be permanently available, state-of-the-art and convenient.

Expert knowledge is considered a given, as is the avoidance of healthcare risks. If costs arise, the insured expect insurers to assume these quickly and pragmatically.

By influencing service delivery, health insurers can exercise greater control over costs. This can be done by removing the mandatory contractual duty or through performance-linked contracts with physicians or hospitals. As a result, innovative, effective and efficient treatment would be promoted.

Basic need "Getting healthy"

Cost assumption

Flexible care

Getting healthy

Case studies Particularly in the United States, numerous start-ups can be seen that have undertaken to optimize the cost of treatment. Take the US driving service Uber: its UberHealth pilot project is demonstrating how home delivery of flu vaccinations is reaching people who would not have vaccinated otherwise. The service is based on a mobile platform that can handle various medical services from delivery of medication to patient transport.

Oscar, a digital health insurer also operating in the United States, uses online tools for submission of applications, a physicians‘ platform and various telemed offers. In addition, the carrier has partnership arrangements with hospitals and pharmaceutical retailers, enabling it to increase its cost efficiency.

Optimal treatment

Source: EY.

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| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

The rise in healthcare costs is unavoidable.

But it can be slowed.

The preventative program of the US company Omada Health allows health insurers and employers to lower the risk of chronic disease and, in turn, treatment costs. To this end, Omada combines individual measures and equips users with wearables. Personal health coaches, an online peer group for daily feedback and continuous support are designed to ensure commitment.

The two US health insurers Cigna and Aetna have entered into results-linked agreements with Novartis. If the medication Entresto, which is used to treat heart disease, fails to demonstrate the desired effects (measured in terms of a decrease in the hospitalization rate), the pharmaceuticals manufacturer will grant the insurers a discount. The US health insurer Harvard Pilgrim has entered into comparable agreements with Amgen for the cholesterol-lowering drug Repatha and with Eli Lilly for the diabetes drug Trulicity.

Swiss health insurers are also getting involved Swiss health insurers, too, have launched services aimed at optimizing treatment costs. With the Medgate app, CSS wants to improve telemed advice. This not only facilitates the process of seeking advice, it is also possible to use a smartphone to order medication or send images of changes to the condition of skin or eyes for a checkup. In the insurance plan Medpharma, offered by SWICA in collaboration with its TopPharm partner pharmacies, the insured agree to visit one of the over one hundred TopPharm pharmacies across Switzerland for the initial consultation or avail themselves of a telephone healthcare advice session with Sante24.

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4 Starting point: basic needs of the insured

4.3 Living with a medical condition Chronic disease is the cause of a large share of healthcare costs (see Section 3.1.1). Its significance is growing in step with society‘s longevity and today‘s lifestyles. It is therefore all the more important that innovative approaches are found to reduce the cost of treating chronic diseases.

Basic need "Living with a medical condition"

Disease advice

Monitoring

Living with a medical condition

Effective and efficient treatment

Exchange of experience

This includes digitally supported therapies and predictive monitoring. The better the monitoring and care of patients suffering from chronic diseases, the easier it is to avoid the cost of emergency and long-term treatment.

Innovative business models: avoiding emergencies Digitization fundamentally changes the treatment of chronic diseases. Smart use of sensors and analytics can improve patients‘ quality of life while lowering the costs incurred due to emergencies. This affords health insurers an opportunity to create value for the insured through individual advice and support services, and to contribute to lowering healthcare costs. Digital monitoring requires smart aggregation and analysis of all data available.

Case studies Developed by North Carolina State University, the Health and Environmental Tracker (HET) uses wristbands equipped with sensors to measure not only the user‘s medical data, but also various environmental factors, including ambient temperature, humidity, ozone concentration or volatile organic compounds.

Predictive algorithms can then be used to predict asthma attacks and to warn users early so that they can either adjust their behavior or change location.

With Proteus Discover, a sensor developed by Proteus Digital Health, it is possible to track when patients take their medicine.

Source: EY.

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| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

Dangerous and costly emergencies can be avoided by providing patients suffering from chronic diseases with smart care.

About the size of a grain of sand, the sensor is linked to the medication and, once administered, it transmits the time and the patient‘s personal data, such as pulse and physical activity. That allows physicians to monitor whether patients are adhering to the prescribed medication times and whether the drug is effective.

The US Food and Drug Administration (FDA) has approved the sensor in combination with a drug for preventing high blood pressure. This technology helps increase compliance of medication and contributes to a more effective treatment of chronic diseases. It is estimated that, in the United States alone, annual healthcare costs of between USD 100m and USD 300m are incurred because patients do not take their medication as prescribed.22 The company Dexcom offers a digital solution for diabetes patients. A metering device worn on the abdomen records glucose levels around the clock, a smartphone receives the data and sends patients alerts when their glucose levels are too low. The FDA-approved service is sold in many countries, including Switzerland.

The medtech company Vifor Fresenius Medical Care Renal Pharma concentrates on patients who suffer from chronic renal conditions. In mid-2017, the company launched an algorithm to alert patients of impending anemia. The aim is to create an integrated healthcare service encompassing pharmaceutical products, dialysis and clinical services with predictive algorithms.

This is intended to avoid severe episodes of anemia and expensive treatment.

In Switzerland, too, digital monitoring is used. The Care4Cardio healthcare program of the health insurer Sanitas supports heart failure patients in their daily lives. To quickly and accurately identify early warning signs, patients record the weight and their physical condition daily. In the event of any anomalies in the data transmitted electronically, an expert contacts the patient.

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5 Changing customer attitudes toward healthcare data About 60 percent of the insured surveyed

by EY are willing or very willing to share their healthcare data with insurers, provided they set attractive incentives.

Roughly half of the insured record healthcare data today. The existing data basis of health insurers could thus be significantly built up, which would constitute a decisive competitive advantage in the development of innovative offerings.

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| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

5.1 Data exchange: willingness and concerns

of the insured Health insurers already have extensive healthcare and personal data from multiple sources today (e.g., age, gender, customer satisfaction or medical services used). Customers can add to this data basis extensive healthcare information using wearables, apps and other technologies. And it is also possible to indirectly obtain data of relevance for healthcare, such as purchasing behavior, from the internet and social media.

Health insurers have to be clear about what data they intend to use strategically. In the future, the key capability in this context will be less in generating data and more in aggregating and systematically analyzing data. Health insurers can draw on the services of third parties. Data protection is also a decisive parameter in this context: by that token, innovative legal approaches are needed to secure the legality of big data at all times in dialogue with the insured.

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5 Changing customer attitudes toward healthcare data

Recording of data is popular Customers are allegedly not yet willing to share their healthcare data with insurers: that is frequently the argument posed against data-driven innovation in healthcare. But the reality is quite different, as an EY survey* shows.

Almost 50% of those surveyed record data to obtain an overview of their athletic activities. Of that number, 46% are motivated by mere curiosity, and 42% by ambitions to achieve a fitness objective, while 36% seek to monitor their health.

Almost half of respondents already record healthcare data. Step and fitness data are most frequently measured. In contrast, other medically relevant information, such as blood pressure and cholesterol levels, are rarely compiled.

Why do some people choose not to record data? According to the findings, 48% see no benefit, 32% have no time and 23% have concerns about data privacy.

Personally recorded health data today (Multiple answers permitted)

Reason for recording data (Multiple answers permitted)

32%

Step data 26%

Fitness data 12%

Pulse data 8%

Sleeping cycle Blood pleasure

Obtain overview of athletic performance

4%

Curiosity

42% 36%

Monitor health Prevent disease

1%

Benchmark athletic performance against others

Cholesterol levels

1%

Other 6%

46%

Achieve a ďŹ tness objective or win a challenge

Blood sugar

Other data

50%

11% 10% 7%

Source: EY (n = 250).

Source: EY (n = 418).

Main arguments against recording healthcare data (Multiple answers permitted)

48%

No apparent beneďŹ t No time

32%

Other

26%

Data privacy concerns * From September to October 2016, approximately 450 people from German-speaking Switzerland were surveyed online. In total, 61% of participants were aged between 20 and 34, 39% were 35 and older. Of those surveyed, 52% were male, 48% female.

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Measurement devices are too expensive Source: EY (n = 224).

| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

23% 9%

The data shared with health insurers The willingness of the insured to share personal healthcare data with insurers is first and foremost dependent on the sensitivity of the information concerned. For instance, 43% of those surveyed are prepared to share tracked step data with their health insurer.

In the case of intimate data categories, such as personal wellbeing or alcohol consumption, the willingness to disclose information drops off sharply. However, it increases substantially again across all data categories in response to incentives.

Data categories shared with health insurers (Multiple answers permitted)

Step data Smoking habits

29%

11%

Body fat level

28%

12%

Blood pressure

24%

9%

23%

8%

22%

8%

Blood sugar

22%

9%

Personal medical history

22%

11%

Alcohol consumption

21%

10%

Eating habits

With advantage in return

32%

11%

Pulse data

Medical history of relatives

32%

13%

Health score

Stress level

32%

12%

Weight

Sleeping habits

33%

12%

Body mass index

Personal well-being

34%

17%

Fitness data

Cholesterol level

43%

16%

21%

8% 5% 7% 6%

18% 17% 14%

Without advantage in return

Source: EY (n = 409).

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5 Changing customer attitudes toward healthcare data

Discounts on basic and supplemental insurance premiums provide the greatest incentive for the insured to share their healthcare data. However, the regulatory scope for such discounts is tight in Switzerland: premium discounts are not permitted in basic health insurance, beyond alternative insurance models such as ENT, family physician or telemed models as well as voluntary deductibles. In supplemental health insurance, discounts are generally permitted, provided they can be justified on actuarial grounds. However, survey respondents also value various nonmonetary advantages, including personal healthcare advice.

When the insured see a clear benefit in return, their willingness to share their data with health insurers rises. Monetary incentives hold the greatest appeal, followed by tailored offers. Those who choose not to collect personal data, in spite of incentives, are primarily concerned about protecting their private sphere and data privacy, as well as fears that health insurers could use the data to their detriment.

Incentives for the insured to share healthcare data with health insurers (Multiple answers permitted)

Reservations about recording healthcare data (Multiple answers permitted)

Discount on basic health insurance

62%

Discount on supplemental health insurance

56%

Bonus program Discount on measurement device

30%

Individual healthcare advice

Remote health monitoring General health-related advice and tips Health and sports events

Monetary advantages

62%

Data are used to my detriment I’m concerned about data privacy

33%

56%

27%

Other

19% 18%

34%

It undermines solidarity

Source: EY (n = 346).

15%

Service advantages

Source: EY (n = 401).

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66%

I have no time or inclination to record data

20%

Individual preventative care

The insurer should not have access to these data

| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

23% 8%

How Sharecare generates healthcare data US company Sharecare offers digital health advice. Its offers are based on the "RealAge test", an online questionnaire that analyzes people‘s health condition and their "real" biological age. The catalog contains more than 100 questions on a range of topics, including exercise, smoking habits, medication consumption, high blood pressure or insomnia. Taking that as a basis, the company offers a series of personalized preventative programs. Sharecare is an example of how customers are willing to share healthcare data, provided they get a tangible advantage in return, in this case in the form of personalized advice. As of writing, more than 40 million people have completed the questionnaire, providing Sharecare with over 5 billion data points.

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5 Changing customer attitudes toward healthcare data

5.2 Opportunities with smart data management Health insurers can only create added value and lower benefit costs if they use smart methods to process the data made available to them. Data mining and predictive analytics methods enable personalized preventative healthcare and advice. The focus here is not on stand-alone solutions and fragmented products: what the insured want are integrated offers.

Any reservations that the insured might have as to lawful data use (data protection in the narrow sense) and data security have to be taken seriously. Health insurers need state-of-the-art protection mechanisms to ensure safe handling of their customers‘ sensitive healthcare data. After all, customer trust is at risk.

Capturing the opportunities Thanks to the extensive volumes of data already available, health insurers have a decisive advantage in the race for healthcare information. However, companies from other industries are gaining ground.

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The insurers risk losing their privileged starting position if they fail to play an active role in the handling of healthcare data.

Many health insurers are still waiting for market players or public authorities to take the first step toward integrated data management. Companies that use step trackers or fitness trackers as mere marketing, without creating added value for their customers, are only scratching the surface of digitization. A wait-andsee attitude is dangerous and unnecessary: under currently applicable data protection requirements, health insurers have ample scope to use data strategically. For instance, carriers can operate with the consent of the insured to use their data.

Ultimately, the onus is on the legislator to enable data-based discounts in order to lower healthcare costs in the long term.

| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

5.3 New players in the healthcare market Established health insurers have not been known to play a pioneering role in the handling of healthcare data. Instead, companies from other industries are assuming this part: they are encroaching on the healthcare market and leveraging their scale and know-how in data management in order to develop new business models. In this context, they are taking advantage of the fact that the infrastructure for recording healthcare data is already available in the form of wearables, sensors and mobile technology.

Case studies Technology giant Apple has launched a variety of products for recording and analyzing healthcare data with an iPhone or Apple Watch. An array of apps is available for this purpose: HealthKit merges data from a variety of sources and analyzes them for the user; CareKit offers tools for recording symptoms or medication and sharing this information with physicians; ResearchKit makes this data available to medical research. Given that HealthKit and ResearchKit are pre-installed on iPhones, about 2.4 million users are able to record their healthcare data in Switzerland today.

Apple is collaborating with IBM in the development of healthcare apps using data mining and predictive analytics.

Alphabet, Google‘s parent company, has likewise expanded its presence significantly in the healthcare sector over the last few years. Google enables users to track their health and record their fitness activities. The group has entered into a partnership with Novartis to develop smart contact lenses that help diabetes patients to monitor their blood sugar levels. Calico, another subsidiary of Alphabet, is seeking new approaches for halting the aging process, or indeed reversing it. In Switzerland, about 2 million smartphone users can download Google‘s fitness app. In the United Kingdom, Google has obtained direct access to healthcare information: its subsidiary DeepMind has partnered with the National Health Service to analyze the data of 1.6 million patients.

The aim is to warn patients and physicians early on about serious disease, and thereby relieve the burden on the healthcare system

Swiss corporations from other industries are encroaching on the healthcare market Major Swiss corporations are also beginning to get involved in the healthcare sector. In 2010, Migros acquired a majority stake in Medbase, which has healthcare centers across Switzerland. In 2015, the retailer acquired a majority stake in Santemed, the healthcare centers of Swica. This created the largest network in Switzerland of primary medical outpatient treatment. At the same time, Migros is the domestic market leader in the fitness center market, and can refer its customers to its healthcare centers if necessary.

Beyond that, Migros has partnered with the telecommunications group Swisscom to develop a digital healthcare portal that helps customers lead a healthy and balanced lifestyle. With Swisscom Health Connect, Swisscom also offers a platform for the electronic exchange of healthcare data. This initiative is intended to improve collaboration between hospitals, medical practices, home care services, homes for the elderly and health insurers.

Patients are supposed to benefit from better care and more transparency. At the end of 2015, Swisscom Health was awarded a contract to construct and operate an e-health platform for the Berner Insel group.

Swiss Post also links up healthcare providers and patients with its modular e-health platform vivates. The company has already entered into a number of partnerships for the secure exchange of confidential patient data. Swiss Post customers include the Swiss Medical Association (FMH), the Swiss Pharmacists Employers‘ Liability Insurance Association (Ofac) and the Aarau and Baden cantonal hospitals as well as the cantons of Geneva, Vaud and Ticino.

AD Swiss is developing a third national platform; behind the project are Health Info Net and the Swiss Health Insurance Fund for Physicians.

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6 Strategic options: evolution or revolution?

Health insurers have to decide whether they intend to remain active in their established market or completely realign their business model. In the first case, they can aim to become cost leaders or to differentiate themselves with innovative services (evolution). In the second case, they can draw on their existing strengths to create new products and services or enter into new business segments (revolution). Irrespective of the option selected: health insurers need a coherent and consistent strategy, and they need to operationalize it quickly and rigorously.

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| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

Swiss health insurers are still not innovative enough.

So far, many “innovations” have served marketing purposes.

It is clear from an analysis of current strategies that the conventional business model of health insurers is at risk. Owing to the identical nature of products offered in basic insurance and the very similar products offered in supplemental insurance, competition in the Swiss health insurance market is primarily price-based.

Despite tightening regulatory pressure, non-organic growth has reached its limits due to the independence ambitions of small and medium-sized health insurers and the rather weak ownership structures.

Now is the time to act Health insurers have to strategically realign their business models. And speed is of the essence: political and regulatory pressure is mounting, and health insurers still have control over customer touchpoints. Health insurers should make the most of this closing window of opportunity and capture the first-mover advantage while drawing on advanced technology.

Determining the extent of change

Revolutionary (thrive)

Breaking free from the current business model, acting outside the system and being innovative — "winning in the blue ocean2"

How much change makes sense?

By reference to the product-market matrix of Ansoff23, in the course of their systematic search for a strategy, Swiss health insurers first have to decide whether they wish to grow within their established market (evolution) or create new insurance products and services and/or penetrate into new business segments (revolution).

The specific choice depends on a variety of factors and requires pragmatic, yet rational and consistent strategic planning. Strategies have to reflect how and why health insurers can obtain and maintain a competitive advantage. What strategic thrusts are needed today in order to be successful tomorrow?

On the one hand, this means that health insurers need to adopt a compelling response to external challenges posed by the market.

On the other hand, a strategy has to manifest the direction the company is taking internally, and how. Does it have the right people? Are the organization, incentive systems, processes and IT systems aligned toward the strategy? What shape will the transformation process take? Does the corporate culture reflect the strategic goals?

Viewed from the perspective of Porter‘s24 generic competitive strategies, both the evolutionary and the revolutionary strategic approaches aim to either become the cost leader or to stand out from the competition through new or enhanced products and services. Differentiation strategies can also be limited to specific geographies or customer segments (focus or niche strategy).

They are thus also accessible to smaller and medium-sized companies with limited resources.

In addition, successful cost leadership, differentiation and niche strategies mitigate the threat from new players based on economies of scale or learning-curve effects, high customer or brand loyalty or through technological and knowledge leadership.

In the following, we take a look at actual case studies to illustrate the concrete strategic development options available to health insurers, along with the factors that are decisive for successful implementation.

Evolutionary (survive) Being best-in-class in specific segments of the current market — “surviving in the red ocean1”

Source : EY. 1 The term "red ocean" refers to saturated, highly competitive sectors/markets in which all participants attempt to outperform their rivals and grow their market share of current demand.

2 The term "blue ocean" refers to non-saturated sectors/markets in which demand by far exceeds supply.

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6 Strategic options: evolution or revolution?

6.1 Evolutionary strategies (surviving) Health insurers can take an evolutionary approach to developing their business model by growing within the established market.

Based on their core competencies, they have to either drive toward cost leadership, differentiate themselves from competitors or position themselves in niches.

B2B sales structures

Underwriting

Operational handling

Health insurer focuses on risk transfer

What might appear self-evident in this regard is only rarely seen in practice, unfortunately: many health insurers have blurred strategic profiles that need sharpening.

6.1.1 The ultra-efficient health insurer If insurers are driving for cost leadership, they have to do so with a combination of efforts: capturing economies of scale and advancing up the learning curve, making technological-operational improvements or lowering fixed costs. It is possible to increase efficiency through process optimization and outsourcing of services to specialized third-parties or to the insured themselves, similar to the case of online banking. Digitization creates entirely new opportunities in this context. For instance, the insured can scan and submit medical bills themselves.

Economies of scale can be captured through the assumption and handling of healthcare risks on behalf of other health insurers or companies from other industries. That enables a better utilization of productive capacity, for instance in underwriting, the equity base and IT infrastructure. Health insurers can either operate in the B2B market with a white-label portfolio or under their own name based on sales arrangements as customary in practice.

B2B sales strategies are especially interesting for small and medium-sized health insurers who lack the scale needed to serve other basic needs of customers beyond risk transfer.

Focus on B2B business model

Finally, efforts to create product ranges that are as standardized as possible are of central importance for capturing efficiency gains.

Health insurers

Private brokerage

Industry

Source : EY.

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| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

Although this is the case in basic insurance on account of the legal requirements, many providers of supplemental health insurance struggle with a large number of insurance portfolios that have grown over time and are often closed, and that are difficult to combine or close for reasons attributable to supervisory law.

These heterogeneous portfolios of products raise the cost of administration to a huge extent in some cases.

Case studies The Swiss health insurer Sanitas largely sells its policies through private insurers (Allianz Suisse, AXA Winterthur, Baloise, Generali, Helvetia, Mobiliar, Swiss Life and Zurich) and opts not to operate its own network of brokers.

The cooperation arrangement between AXA PPP Healthcare and the UK media corporation Telegraph Media Group provides an example of a white label sales agreement between a health insurer and a player from outside the industry. The insurance products are marketed as Telegraph Private Health Insurance using the media firm‘s sales channels.

The global insurance group Allianz has consciously linked up to the mobility ecosystem. Since 2009, Allianz has been increasingly active as a white label supplier of tailored motor vehicle insurance for carmakers and dealerships. Such distribution agreements are in place with a number of manufacturers, with the brands under which the insurance policies are marketed, ranging from BMW, Ford and VW to Opel, Renault or Fiat. In Switzerland, for instance, the motor insurance of Allianz is sold under the brand BMW Motor Insurance. In this way, insurers get access to new distribution channels, although they forsake the customer touchpoint to some extent. Customers and the insured benefit from cheaper motor insurance offers, which they get from a single source when they buy a vehicle.

6.1.2 The differentiated health insurer Health insurers intending to impose higher prices in the market have to justify them with added value for the insured. From an economic perspective, the aim is always to create a unique value proposition that the insured perceive as important and worthwhile. This means that health insurers compete based on the different benefits for customers from their services in the basic and supplemental insurance business and through their products in the supplemental insurance business. As regards product attributes, the focus is primarily on the scope of coverage and benefits as well as the degree of variety and options.

In the basic insurance business, differentiation is limited to service quality on account of the legally defined catalog of benefits.

Examples of services accompanying products include increased customer proximity through networks of brokers, high-quality customer advice and distribution networks or fast settlement of benefit costs. For instance, some health insurers settle submitted bills within three days on average, compared with others who need eight times as long. Apart from such service differentiation, the supplemental insurance business also offers scope for product innovation.

In the tightly regulated fields of basic and supplemental health insurance, well-grounded knowledge of supervisory regulation and early engagement in dialogue with the supervisory authorities are imperative for the successful operationalization of differentiation strategies.

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6 Strategic options: evolution or revolution?

6.2 Revolutionary strategies (thriving) Health insurers can revolutionize their business model by using their current strengths as a basis to penetrate into new business segments or develop new products and services. From an economic perspective, such a realignment entails the pursuit of new or additional opportunities for growth and value creation in the medium and long term.

Development dimensions Health insurers can develop and position themselves strategically within three product and service dimensions: • R  isk transfer: Concentrating on covering the economic consequences of disease (treatment costs and loss of earnings) for a consideration as core competence • H  ealthcare data management: Preparing, aggregating, analyzing and offering healthcare-related personal data • H  ealthcare services: Rendering healthcare services

Strategic development dimensions

IV

Healthcare data

II

A

I s sk Ri

Healthcare benefits

III

Source: EY.

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| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

A

Starting point

I

Multi-sector health insurer

II

Healthcare data manager

III

Specialized medical condition partner

IV

Integrated health partner

Within these strategic dimensions, it is possible to serve the basic needs of customers in a nuanced manner (see Chapter 4). In this context, insurers can enter into intelligent alliances with existing or new “disruptive� market participants (buy) or integrate such players (make). For instance, health insurers can offer healthcare services by networking with service providers or technology firms or by integrating these vertically. This can significantly increase the range of specific strategy options.

Successful strategies are not primarily dependent on company size or the capital available. What counts is the ability to innovate, decisiveness and clarity about the fundamental entrepreneurial course.

Specifically, it is possible to distinguish four revolutionary strategic options: 1) From health insurer to multi-sector insurer: supplementing the offering of health insurance to include new lines of business such as non-life and life insurance 2) The healthcare data manager: aggregating, analyzing, processing and offering health data 3) The specialized medical condition partner: providing integrated and data-driven support for certain diseases 4) The integrated health partner: providing integral and data-driven healthcare support throughout the life cycle of the insured

6.2.1 The multi-sector health insurer As multi-sector health insurers, health insurers supplement their present product range to include lines of business such as non-life or life insurance. Depending on their personal circumstances, holders of health insurance policies can buy additional insurance solutions from a single source. Insurers can offer supplemental insurance policies either directly via separate legal entities or through alliances with other insurers.

In practice, such sales arrangements between health and private insurers are typically reciprocal (cross-selling).

From an economic perspective, diversification with insurers involved in other sectors is justified on the grounds of economies of scope and is relatively common practice. To that extent, the approach does not appear particularly revolutionary at first sight.

However, economies of scope through diversification are frequently overestimated: to actually capture these effects, it is imperative that existing production factors and capabilities are in fact better utilized with the additional insurance products. Diligent operational planning and implementation are essential.

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6 Strategic options: evolution or revolution?

6.2.2 The healthcare data manager As managers of healthcare data, health insurers refine their frequently extensive volumes of customer data in return for compensation. They can aggregate, analyze and process the data either in-house, in collaboration with specialized data analytics companies or through integration of the latter. Within the bounds of data protection restrictions imposed by law, they can either use the processed data and insights gleaned for their own insurance business, or sell them to third parties, including service providers, pharmaceutical manufacturers or research institutions.

Health insurers as healthcare data managers

Health insurance with focus on data

CRM

Social media

External data

Processing of healthcare data can thus become a new business segment.

For once, regulatory parameters ease the ability of health insurers to develop strategically: with the new Swiss Federal Law on Electronic Health Records (FLEHR), healthcare data can be accessed anytime and anywhere, provided the patient agrees to the creation of an electronic record. However, hospitals and care homes are the only service providers that are required to take part, and they have a transitional period of three years to introduce the system. Outpatient service providers can take part on a voluntary basis. Private e-health platforms also ensure secure data exchange (see Section 5.3).

Although medium-sized and large health insurers meet the preconditions to position themselves as managers of healthcare data, no company has as yet pursued this strategic approach.

That said, some specialized data analytics companies have established themselves in Switzerland and could conceivably serve as cooperation partners (see Section 5.3).

Case study Human API, a platform from California, provides healthcare data from a variety of sources in real time. The company aggregates data from hospitals, laboratories and pharmacies, incorporating digital patient records, mobile devices, wearables and sensors.

Service providers, companies active in the telemed space, fitness companies and developers of health apps use the data.

Aggregating, analyzing and processing healthcare data

Increasing efďŹ ciency of in-house insurance business

Additional revenue streams

Source: EY.

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| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

6.2.3 The specialized medical condition partner If health insurers develop in all three aforementioned strategic dimensions (risk transfer, management of healthcare data and rendering of specialized healthcare services), they can position themselves in the long term as lifelong health partners for the insured (see also Section 6.2.4 below).

An initial step along this path is positioning the insurer as a specialized partner for a medical condition, i.e., focusing on specific diseases and providing extensive support to the insured within data-driven networks.

Case study Health insurer Helsana offers its customers treatment at Martini-Klinik in Germany; the share of costs covered depends on the hospital insurance chosen. The private clinic specializes in the treatment of prostate cancer. With roughly 2,200 prostate cancer operative procedures per year, Martini-Klinik is the largest prostate cancer center worldwide. Medical outcomes and patient surveys are systematically compiled and filed in electronic patient records. Quality assurance is top priority: every three months, the outcomes of operative procedures of physicians are analyzed; successful physicians then provide advanced training to their weaker colleagues. The treatment outcomes of former patients are surveyed and documented over many years. This information, exceeding 20,000 data records, is used in the research of prostate tumors.

Strategic alignment toward selected diseases (Taking diabetes as an example)

Hospitals

Family physicians

Specialist consultants

Health insurer with focus on diabetes

Aggregation and analysis of patient-related treatment data and development of disease-speciďŹ c treatment

Service performance

Products

Benchmarking of treatment outcomes

Clinical pathways

Performanceoriented remuneration

Digital therapy

Increased efďŹ ciency

Peer-to-peer advice

Source : EY.

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6 Strategic options: evolution or revolution?

6.2.4 The integrated health partner Healthy and sick insured persons are provided with extensive therapeutic and preventative support within data-driven networks with service providers. Owing to the applicable regulatory framework, this full service can only be operationalized in the supplemental insurance segment. However, positive effects on basic health insurance are likely, since both insurance policies are typically contracted together in practice.

In addition, a health partner offers them the assurance that the best treatment is always proposed thanks to the monitoring and analysis of their personal data. At the same time, the carriers can broaden their revenue base.

At the beginning of the life cycle, the aim is to identify potential congenital disabilities or disorders requiring special treatment. In order for customers to remain healthy, an individual guide with specific advice is prepared, including nutritional and psychological advice. In the event of disease, the therapies are digitally supported in that the service provider can access the medical history and healthcare data of the insured in real time. At the same time, health insurers can measure, compare and reward the progress, success and costs of treatment. Everybody benefits from the associated quality improvements and cost savings. If a chronic disease cannot be avoided despite prevention measures and early detection, the aim is to secure the patient‘s quality of life to the extent possible.

Integrated health partner

The operationalization of this integrated approach is by far the most demanding. The costs measured in terms of money, time and human resources, combined with the associated risks, can likely only be born with contractual cooperation arrangements or mergers between health insurers and service providers.

alth partner He

How do I How do I How can I stay healthy? get healthy? avoid chronic disease?

As integrated health partners, carriers can build up lifelong, trust-based relationships with their customers, who benefit from advice and treatment being rigorously aligned to their personal needs.

How can I avoid the deterioration of my condition?

Source : EY.

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| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

As integrated health partners, health insurers can develop into lifelong partners for the insured, whether they are healthy or sick.

Case studies Kaisers Permanente (KP) provides an example of vertical integration of service providers by a health insurer. The largest private US health insurer also has a chain of hospitals. Over many years, KP has integrated a variety of service providers, and today it operates a large number of clinics, hospitals, laboratories and pharmacies. The group has 8.7 million members and employs more than 150,000 people, including 40,000 nursing staff and 14,000 physicians. Customers who buy health insurance can obtain medical services from the KP group only. Thanks to this integrated healthcare, KP captures efficiency gains that it passes on to customers in the form of attractive insurance premiums. A look at the handling of data reveals further advantages of integration: the medical database of KP Health Connect contains all medical data of the insured. That enables the optimization of preventative measures, therapy pathways and treatment outcomes.

The US health insurer Humana also aims to become a lifelong partner around healthcare for its customers. Humana develops individual plans designed to keep customers fit and help them achieve their health objectives. The offering spans advice on wellness topics as well as programs of partner organizations such as Weight Watchers.

The health insurer Sanitas offers holders of supplemental insurance policies an array of health programs, in some cases within an insurance product, either temporarily or permanently available. Benefits include healthcare coaching for people with heightened risk of cardiovascular disease, with back pain and for preventing falls. Working together with a personal adviser, suitable measures are put together; regular telephone coaching sessions support the program. To ensure mental health, Sanitas is collaborating with Gaia, a provider specialized in online and mobile healthcare offerings. The coaching program includes web-based services for depression, stress, anxiety or sleeping disorders.

The depth and breadth of integrated offerings today is illustrated by the Swiss railway operator SBB: together with BMW, Mobility and PubliBike, SBB has launched the mobility ecosystem SBB Green Class. This ecosystem is designed to fully cover customers‘ needs for mobility in cooperation with a variety of market participants. For an annual fee of CHF 12,200, test customers can benefit from the following offers without restriction: first-class train travel, use of a BMWi3 electric car, mobility car sharing, park-andride parking spaces near train stations as well as the rental of PubliBike bicycles. The offer has met with great interest: about 2,000 people applied to be among the 100 testers.25

In Switzerland, too, some health insurers are trying to gain traction as health partners. However, they only have fragmented coverage of customers‘ basic needs at present.

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7 Conclusions

Swiss health insurers have a good window of opportunity to launch innovations and tap new potential for value creation: at present, they still control customer touchpoints and have extensive healthcare data available. They have to actively and decisively capture these competitive advantages in order to prevail against new, disruptive market participants, or enter into smart alliances with them. However, the greatest threat to health insurers lies in the practically unbridled cost explosion in the healthcare system. Calls for political and regulatory intervention threaten their entrepreneurial room to maneuver. Hesitant companies risk not only their market position, but ultimately their existence.

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| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

Fear not change, fear stagnation.

Lao-Tse, Chinese philosopher

This study shows that the established model of health insurers is under pressure. There is a lack of potential for creating value (basic health insurance) or the potential is highly restricted (supplemental health insurance). Although health insurance enjoys legal "protection" through the obligation to have basic health insurance and the contractual conditions in the supplemental insurance business, competition within this framework is intense nonetheless. Having said that, the practically unbridled cost explosion across the entire healthcare system constitutes the greatest threat to Swiss health insurers. Calls for political and regulatory intervention are getting louder and threaten to further curtail health insurers’ already limited entrepreneurial room to maneuver.

On the one hand, health insurers therefore need to increase and capture the added value for their insured. On the other hand, they have to influence the efficiency of the healthcare system in the long term. Health insurers have a variety of strategic options available that they must develop based on a pragmatic, yet diligent, assessment of strategies.

They must decide whether they wish to grow within their established market (evolution) or create new insurance products and services and/or penetrate into new business segments (revolution).

Of critical importance in this context is the perspective of the carriers‘ specific strengths and the rapid development of technology, which is allowing providers from other industries to enter the healthcare market. Health insurers have a competitive edge over these players: they control customer touchpoints and have valuable healthcare data at their disposal.

Will health insurers take advantage of these opportunities? Do they have the ambition to play an active role in the Swiss healthcare market? Are they prepared to be a dominant force in the healthcare system as an innovative partner? If health insurers delay in sharpening their strategic position, they risk their market positioning in the medium term and their existence in the long term.

So far, health insurers have been reticent. New products and digitization efforts have primarily served marketing purposes. In contrast, there has rarely been any apparent willingness to fundamentally rethink the business model and the product range. Yet other industries are demonstrating the revenue potential that can be tapped with innovative business models. For instance, Schindler has developed from a producer of elevators to a true service company that systematically pursues digitization: sensors supply real-time information about the state of equipment so that maintenance teams can be deployed on time before malfunctions occur. Health insurers can move down similar avenues.

But this requires rethinking the status quo: the objective is no longer to increase the number of insured persons and the volume of premiums. Instead, decision-makers have to create clarity about their organization‘s mission and intentions. What is needed is entrepreneurial courage and a disciplined approach to defining the strategy. For the most part, this requires time and reflection.

Limited resources, in contrast, can be compensated for by entering into smart alliances. That‘s how funds for the sick become partners for health. And everybody benefits.

They can leverage this advantage in direct competition against, or in a variety of cooperation arrangements with, the “disruptors”.

Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market |

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8 Contacts Authors Yamin GrĂśninger Leader Insurance Business Development

Dr. Alexander Lacher Co-Leader Health Insurance

+41 58 289 39 01 yamin.groeninger@ch.ey.com

+41 58 289 43 12 alexander.lacher@ch.ey.com

Co-authors Misel Marusic Business Analyst

Julius Scheidt Business Analyst

Edvin Rimpo Business Analyst

+41 58 289 43 97 misel.marusic@ch.ey.com

+41 58 289 43 95 julius.scheidt@ch.ey.com

+41 58 289 44 30 edvin.rimpo@ch.ey.com

Rolf Bächler Partner

Sabine Betz Partner

Florian Liebe Executive Director

+41 58 289 44 95 rolf.baechler@ch.ey.com

+41 58 289 36 37 sabine.betz@ch.ey.com

+41 58 289 46 83 florian.liebe@ch.ey.com

Experts

Bernhard Schneider Senior Manager +41 58 289 42 20 bernhard.schneider@ch.ey.com

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| Fund for the sick? Or partner for health? Strategic analysis of the Swiss health insurance market

9 Sources 1

Swiss Federal Statistical Office: Kosten des Gesundheitswesens seit 1960 (Neuchâtel 2016).

2

Swiss Federal Statistical Office: Kosten und Finanzierung des Gesundheitswesens 2014 (Neuchâtel 2016).

3

Swiss Federal Office of Public Health: Gesundheit2020: Die gesundheitspolitischen Prioritäten des Bundesrates (Berne 2013).

4

Swiss Federal Statistical Office: Schweizerische Gesundheitsbefragung 2012 (Neuchâtel 2014).

5

Swiss Federal Statistical Office: Schweizerische Gesundheitsbefragung 2012 (Neuchâtel 2014).

6 W.I.R.E. (eds.): Hacking Healthcare (Zurich 2015).

7

Wieser et al.: Die Kosten der nichtübertragbaren Krankheiten in der Schweiz (Winterthur 2014).

8

Swiss Federal Statistical Office: Statistik des jährlichen Bevölkerungsstandes (ESPOP) (Neuchâtel 2010).

9

Swiss Federal Statistical Office: Statistik der Bevölkerung und der Haushalte (STATPOP) (Neuchâtel 2010).

10 Swiss Federal Statistical Office: Finanzierung der Gesundheitsausgaben nach Finanzierungsquellen (Neuchâtel 2016).

11 Swiss Federal Office of Public Health: Statistik der obligatorischen Krankenversicherung 2015 (Berne 2016).

12 Swiss Federal Statistical Office: Schweizerischer Lohnindex, Landesindex der Konsumentenpreise 2015 (Neuchâtel 2016).

13 Swiss Federal Statistical Office: Obligatorische Krankenpflegeversicherung (OKPV): Kennzahlen zur Prämienverbilligung (Neuchâtel 2015).

14 Swiss Federal Office of Public Health: Monitoring 2014: Wirksamkeit der Prämienverbilligung (Berne 2015).

15 Swiss Federal Statistical Office: Detaillierte Haushaltsausgaben 2012-2014 (Neuchâtel 2016).

16 Swiss Federal Office of Public Health: Faktenblatt 2016: Kennzahlen (Berne 2016).

17 Swiss Financial Market Supervisory Authority FINMA: Annual Report 2015 (Berne 2016).

18 Martin Eling: Gesundheit 2020+: Aktuelle strategische Herausforderungen und Handlungsfelder in der sozialen Krankenversicherung, I VWHSG Schriftenreihe, Band 60 (St. Gallen 2016).

19 Swiss Federal Office of Public Health: Statistik der obligatorischen Krankenversicherung 2015 (Berne 2016).

20 Swiss Federal Office of Public Health: Statistik der obligatorischen Krankenversicherung 2015 (Berne 2016).

21 Eidg. Finanzmarktaufsicht FINMA: Versicherer Report 2015 (Berne 2016).

22 Aurel O. Iuga/Maura J. McGuire: Adherence and health care costs, Risk management and health care policy 7/2014 (Auckland 2014).

23 Harry Igor Ansoff: Corporate Strategy (New York 1965).

24 Michael E. Porter: Competitive Strategy: Techniques for analyzing industries and competitors (New York 1980).

25 NZZ, 8 January 2017: Enormer Ansturm auf Kombi-Angebot für Schiene und Strasse.

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