Annual Outlook

2011 OUTLOOK ON HEALTHCARE ECONOMICS & INNOVATION

Published By Psilos Group, May 3, 2011

EDITOR’S NOTE: This paper is the third Annual Outlook published by healthcare investment firm Psilos Group. The Psilos Annual Outlook is intended to provide investors, analysts, businesses, and policymakers with a guide to the issues and trends that will shape healthcare investing in 2011 and beyond. Since 1998, Psilos has fueled the development of companies, driving healthcare innovations that reduce cost, improve quality, and align incentives across payers, providers, and patients. The firm’s team has a total of 140-plus years of combined experience in healthcare management and investing, specializing in healthcare innovation and healthcare economics.

Health Reform: Transforming the Roles of Insurers and Consumers

Leading Healthcare Investment Firm Foresees Major Changes in Health Insurance Business Models as Individual Insurance Market Expands

Insurers Must Become Savvy Consumer Marketers; New Entrants Versed in Consumer Marketing Will Enter the Marketplace

Americans Will Become Active Healthcare Purchasers

It is becoming increasingly clear that key aspects of The Patient Protection and Affordable Care Act (PPACA), with its provisions for guaranteed issue healthcare coverage, will have more impact on businesses, consumers, and healthcare insurers than originally predicted. Psilos believes that the PPACA will accelerate sweeping changes to consumer-oriented business models and distribution channels, as well as increase the competition among insurance companies.

These changes have already beginning to occur, but they will accelerate rapidly post-2014, when the number of Americans shopping for their own health insurance will increase exponentially at the expense of the current model, in which most people either have their health insurance provided to them by their employers or simply remain uninsured. PPACA will force health insurance carriers to be much more consumer focused and efficient at finding new distribution channels in order to remain competitive. The most likely distribution channel for the exploding individual insurance market will be a new landscape of Internet and call center-based public and private health insurance exchanges (HIXs), supported by a broad landscape of insurance brokers who would serve as agents to the consumer. In fact, the Congressional Budget Office estimates that 24 million people will be buying insurance through HIXs by 2019.

A Dramatic Shift From Group Insurance to Individual Insurance Is On the Horizon

Implementation of PPACA will set off a dramatic expansion of the market for individual insurance, which will be derived both from increased coverage of the currently uninsured and the migration of a portion of the corporate employee-sponsored insurance market to individual coverage. This market expansion will result in significant changes for insurers, with individual coverage growing from approximately 10 percent of the commercial market today to between

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