Disruptive innovation threatens insurance industry

Jim O'Neil

If you haven't heard of the business term "disruptive innovation," I'm sure you at least would recognize examples of the phenomenon that has completely upended many industries. Southwest Airlines might be the most prominent case of disruptive innovation, whereby smaller, usually upstart, companies operating under a different business model disrupt an existing market, often replacing outdated technology. The companies usually focus on a previously overlooked set of consumers and then expand throughout the market by lowering prices below their competitors.

In Southwest's case, the low-cost airline focused only on short flights within Texas using a vastly different business model than the market leaders. Southwest later expanded its market presence by keeping fares much lower than other airlines. Southwest became a game-changer in the airline industry as the big airlines overhauled their business models and offerings.

What does this have to do with health insurance? It seems it's the next industry due for a disruptive innovation. Or at least that's what the folks at Deloitte predict. "The specter of Disruption should have incumbent group providers not merely looking over both shoulders, but under every rock and around every corner for possible threats," according to a new report from Deloitte Consulting.

That's a pretty strong call to arms. But the authors back up their claims throughout the report, arguing that the insurance market's reform-driven changes could add upwards of 60 million new consumers to the individual insurance market, many of whom will purchase coverage through health insurance exchanges. This dramatic shift from a business-to-business model to a business-to-consumer model essentially opens the door for a new crop of upstart companies with their own innovative approach to the stayed way of business.

Deloitte predicts that these new companies, at first, will sell health plans via exchanges, allowing consumers to customize their insurance coverage to keep premiums low.

"The way is clear for smaller players, and even entrants from other industries, to pioneer new business models built on new technologies to set themselves on a trajectory of innovation-driven growth that could reinvent the industry as a whole," the authors warn. "All that these products need to be in the early going is better than nothing (and compliant with relevant regulation and legislation)."

Successful new entrants to the insurance market probably will base their business model on "rapidly improving enabling technology," Deloitte says, that will eventually allow the smaller companies to compete in the group market, offering higher levels of customization and lower costs than the big insurers.

"In other words, not only are ACA-driven market changes likely to increase the size of the individual segment, but changes in competitive dynamics could leave group carriers unable to hang on to the segments they currently have," the report says.

Have I scared you enough yet? Fortunately, there's good news to share in addition to all this ominous forecasting. According to the report, insurers should be wary of three potential types of new entrants--banks, Medicaid- and Medicare-only insurers and certain retailers like Walmart. Deloitte says that if insurers can recognize and understand the forces behind disruptive innovation and the specific types of entrants to the market, they can begin adjusting their own business models.

"In this way, they can position themselves to be the beneficiaries of Disruptive change, rather than its victims," the report says.

I bid insurers good luck. -Dina (@HealthPayer)