Consumer-Directed Healthcare by Mango

Former lab industry executive generates national attention with his strategic analysis

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CEO SUMMARY: This former laboratory executive declares that Consumer-Driven Healthcare Plans (CDHPs) are “the most significant development in health insurance since the widespread introduction of HMOs in the 1980s.” Paul Mango, now at McKinsey & Co., has plenty of good news for lab managers and pathologists. He predicts that CDHPs will drive deep reforms across the American healthcare system.

RECENTLY A FORMER LAB INDUSTRY EXECUTIVE received nation- al attention for his strategic thinking on a key issue in healthcare: consumer-directed healthcare.

Not only is Paul Mango causing healthcare experts to pay attention to his views on this subject, but his thoughts should be studied by lab executives and pathologists. Mango is predicting significant changes to the American healthcare system, driven by the growing acceptance of consumer-driven healthcare by the American public.

Today, Paul Mango is a consultant for McKinsey & Co., the respected international consulting firm. Paul Mango’s name is still familiar to many in the laboratory industry because of his leadership in creating the Reference Laboratory Alliance(RLA), a regional laboratory network that included 40 hospitals in and around Pittsburgh, Pennsylvania.

While working at Pittsburgh’s Institute For Transfusion Medicine in the mid-1990’s, Mango was the business mind behind the design and execution of RLA. When the competing Allegheny and UPMC health systems acquired most of the community hospital members of RLA, Mango resigned to return to work at McKinsey & Co. He still lives and works in Pittsburgh.

Health Strategy Issues

I’ve stayed in contact with Mango over the years. At McKinsey, he is continually involved in consulting for healthcare organizations. This work has lead him to study the impact of consumer choice on healthcare. The fruits of this strategic thinking are now reaching the public. In January, The Wall Street Journal published an opinion piece by Mango and his McKinsey colleague, Vivian Riefberg, on consumer-directed healthcare.

In recent months, McKinsey published the nation’s first study of consumer responses to Health Savings Accounts (HSAs). Since this new form of health benefit plan became available last year, more than 1 million people have enrolled in such plans.

Four McKinsey consultants, including Paul Mango, produced the new study. The opening sentence will grab the attention of lab managers and pathologists. The authors of this study declare Consumer-Directed Health Plans (CDHPs) to be “arguably, the most important development in health insurance since the widespread introduction of HMOs in the 1980s.”

THE DARK REPORT concurs with this assessment. Over the past ten years, we have regularly emphasized the growing role consumers play in the American healthcare system. This has allowed our clients and regular readers to factor this trend into the strategic planning done within their laboratory or pathology group.

A good introduction to Mango’s predictions about how consumer-driven health plans will change the healthcare landscape is contained in the story reproduced below. This was published in the Wall Street Journal last January.

For clinical laboratories and anatomic pathology groups, Mango’s predictions promise much good news for laboratories. He expects that consumers will increasingly take responsibility for choosing their providers. They will base these choices on how they perceive the balance of quality versus cost offered by a physician, a hospital, and a laboratory.

What follows is Mango’s predictions about how the health insurance industry must respond to the consumer-driven healthcare trend. It makes for interesting reading, since Mango expects a radical restructuring of the traditional health insurance industry. I’ll bet that these positive changes to payers can’t come too soon for most pathologists and laboratory managers!


UNITEDHEALTH GROUP’S acquisition of Definity, a tiny insurer with one of the first consumer-driven health plans on the market, is only the latest in a series of moves by the nation’s big insurers to position themselves in the emerging market for health savings accounts (HSAs). How many employees ultimately end up in these plans remains to be seen. What is clear, however, is that even modest adoption of these plans will revolutionize the $1.8 trillion healthcare industry.

Previous efforts to reform the U.S. healthcare system have yielded disappointing results. This time may be different because the new “consumer-driven health plans” address some of the fundamental problems of the current system. For instance, the new HSAs largely end the third-party payer system that has separated consumers from the costs of their healthcare choices. With the ability to accumulate unspent funds and invest them, tax-free, rather than the “use it or lose it” feature of previous health savings accounts, they give consumers a strong incentive to avoid unnecessary care and become more cost-conscious.

The new HSAs also put pressure on medical providers to improve the quality of care and service they deliver to consumers, while maintaining a competitive price. By creating a new consumer culture in healthcare, just 15% of insured Americans choosing these plans will usher in significant change for the industry.

Although it is too early to predict exactly how the industry will evolve, today’s integrated health-insurance model could well split into four distinct businesses. This will create new competitive threats and opportunities for industry incumbents and entrants alike. These four businesses are:


Group health insurers today look at perhaps a half-dozen variables, such as gender, average age, and the type of work in which an employee base engages. Individual insurance products, like automotive, consider hundreds of variables and use very sophisticated models to assess risk. These players may be better positioned than traditional group-oriented health insurers to confront the risks of individual medical insurance and underwriting. Health insurers will need to either develop or acquire these skills if they are to sustain their leadership position in this part of the value chain.


The Third Party’s Over…
The ability to draw the right amount from multiple payment sources (primary and secondary insurance, the HSA, the employee’s pocket and, perhaps, an employee line of credit) will become an essential skill. Companies offering consumer-driven plans will need to report HSA balances to employees on demand, preferably in real time, much like ATMs allow bank customers to see their balances. Today’s health insurers lack these capabilities. Third party payments specialists, such as those now serving credit-card issuers, are already evaluating opportunities in the industry.


Making informed healthcare choices is complicated. In other industries, such as personal computers, automobiles, and financial services, objective agents exist to better inform consumer choices. Similar infomediaries, such as WebMD, have emerged in health care. Given the legacy of consumer mistrust stemming from the days of strictly-managed HMOs, independent advisers and patient health advocates have a strong competitive opening.


Consumer-driven health plans now need to specify funding and asset management options for employees. As many as 20 financial institutions have announced plans to market HSAs, in much the same way as they do Individual Retirement Accounts, 401(k)s, and 529 plans for educational expenses.

In each of these four businesses, incumbent health insurers’ positions are open to attack from new entrants. They will need to decide whether to try to build the new skills themselves, acquire them, or partner with others. The growth and popularity of the new HSAs is exceeding expectations, so resolving these questions quickly will be vital. Insurers, asset managers and banks have already announced several key acquisitions and alliances that will exclude others from locking up the best partnerships.

The smart money is already moving fast to stake out its place in the new marketplace. Hold on for what promises to be an interesting ride.

Paul Mango and Vivian Riefberg are partners of McKinsey & Company.


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