Throughout 2009, heightened economic uncertainty among worldwide economies has caused tremors in the health insurance industry. Although the financial turmoil was a factor in the shift in business and IT priorities for health insurers — according to Gartner's June 2009 Healthcare Payer IT Budget and Staffing Survey, cost cutting and consolidation of services/software cracked the top-10 list of IT and business initiatives — the political climate unsettled health insurers the most. With the final shape of health insurance reform in the U.S. still to be determined, health insurers are researching new models for their business strategies and operations. Against this backdrop, health insurers have turned their attention to business process outsourcing (BPO). Gartner has seen nearly a 40% increase in BPO interest (compared with 2008) as measured by client inquiries, one-on-one sessions with analysts at the 2009 Healthcare Summit, and client access to Gartner research.

This research provides a glimpse into the client inquiries Gartner received in 2009 regarding the use of BPO among health insurers. What follows are the questions that health insurers asked Gartner the most about BPO in 2009.

Historically, health insurers drove BPO primarily via cost cutting. However, cost-based benefits no longer dominate sourcing agendas. BPO is not only for health insurers in financial distress, but also for those that want access to process expertise or focus on their businesses' differentiators.

Specific drivers include:

• International Classification of Diseases, 10th edition (ICD-10)
• System integration and consolidation initiatives as a result of merger-and-acquisition (M&A) actions
• End of license and maintenance contracts
• Internal lack of specialized resources
• Need for faster speed to market for new products

However, several factors have prevented interest from evolving to action:

• Health insurers' attachment to internal business processes. Too many insurers cling to their internal processes because they are a result of the company's cultural and technical history.
• Outsourcing adverse cultures.
• Market and product volatility.
• Lack of proven solutions.
• Unattractive return on investment (ROI).

The BPO market for health insurance is segmented by service model, delivery model and sourcing model (see Figure 1). BPO services for health insurance are oriented toward cross-industries (horizontal) and specific industries (vertical). BPO providers offer health insurers' services in two ways:

• Horizontal services that BPO providers can leverage across many industries, such as call centers, human-resource-related functions and standard financial services
• Vertical-specific services that address the needs of a specific industry, such as claims entry, provider management and CRM for the healthcare industry

The vertical market of BPO services for health insurers comprises three delivery models:

• Discrete processes, such as imaging and claims entry
• End-to-end processing, such as full core administrative systems or CRM
• Business process utility (BPU) for standardized solutions on a "pay as you go" transaction basis

Health insurers' adoption of BPO began in the discrete-process delivery model, with many insurers outsourcing their imaging and data entry processes. Adoption of the end-to-end model grew specifically for full core administrative suites and customer retention services. The BPU model represents the evolution of BPO to highly standardized processes, featuring quick-to-market solutions for business processes that have become commodities — for example, provider credentialing and standard reporting.

Health insurers also categorize the BPO provider market by those that operate onshore in the U.S. and those that operate offshore. In acknowledging the market's preference for U.S.-based outsourcing services, providers have tried to blur the distinction with new approaches. For example, India-based BPO providers, such as Patni Computer Systems and Wipro Technologies, have established U.S. centers to provide services closer to their U.S. clients.

When health insurers think about outsourcing services, they face a dizzying array of complexity, spanning multiple delivery models, from enterprise-level support to vertical-specific support. Every BPO service model is available to health insurers. Outsourcing delivery models include IT outsourcing (ITO), BPO, BPU and knowledge process outsourcing (KPO — see the "Service Model" in Figure 1). Gartner offers the following definitions:

• ITO is a service bought via a multiyear contract with an external service provider or outsourcer for the day-to-day management of IT operations.
• BPO is the delegation of an IT-enabled business process to a third party that owns and runs the process according to a defined set of metrics.
• BPU is BPO with standardized processes and a unified, one-to-many technology platform.
• KPO is a new term that has emerged to distinguish a specific type of BPO that has a higher valued-added or differentiating capability.

Early health insurance outsourcing deals were based on ITO and featured the outsourcing of data centers or network management. With the emergence of BPO, insurers began to outsource their business processes, such as claims processing. BPO has since evolved to include BPU services, which feature highly standardized processes. For example, large hardware companies' recent acquisitions of service firms have ushered in a market for the development of a standardized (low-cost) health insurance benefit product that would provide a BPU solution for health insurance. KPO enables the outsourcing of knowledge-heavy business processes, such as medical underwriting.

With cost cutting no longer the sole driver of BPO, health insurers that seek to run their businesses more efficiently will consider BPO services for:

• Front-end processes: Claims data entry, imaging and mailroom services
• Core administrative functions: Member enrollment, benefits management, claims adjudication, and billing and capitation
• Customer service: A full spectrum of services

Insurers seeking to use BPO to grow their businesses and tap into skilled resources that they lack internally will consider BPO for:

• Provider management: Provider setup, credentialing, performance analysis and provider directories
• Care management: Precertification, referral authorization, discharge planning and case management
• Underwriting support: Quote generation, compilation of claims history, along with employee census files and medical history data
• CRM: Member acquisition, retention and service
• Communication processes: Production delivery and management of consumer campaigns to drive health behaviors

Healthcare insurers that seek to transform their businesses will consider BPO to help them achieve:

• Standardized benefit products: One-to-many benefit designs, which aid in administrative simplification.
• "Utility" delivery systems: Pay-as-you-go network options.
• "Medical home": As health insurers look to market a medical home model, BPO may be the vehicle to process administrative tasks, thereby allowing health insurers to focus on the coordination of home-based patient care.
• International market position: U.S. health insurers looking to expand beyond U.S. geographical boundaries.

Demand for health insurance BPO is strong. Gartner projects it to be one of the fastest-growing segments of the IT-enabled service industry in North America. As a result, the competitive landscape of BPO vendors represents a wide variety of providers and service offerings.

BPO providers include specialists and generalists, and top providers vary by geography and process. However, health insurers should not assume that every BPO provider that claims to offer health insurance BPO has industry experience and understands your business. While new entrants appear, we predict that the top end of the BPO market will continue to consolidate. To add breadth and depth to their offerings, the larger providers will acquire midsize and vertical BPO providers — i.e., those with healthcare expertise, such as ACS, EDS and Dell Perot Systems. Despite the growth of the market and its vendor participants, the number of providers in the BPO market is not sustainable at all levels. Consolidation will occur primarily through M&A activity instead of vendor failure.

Once a health insurer uses more than one vendor for front-end processes, core administrative applications, CRM or care management, it has, by default, a multisourcing strategy. However, as insurers move to a mix of internal and external resource provisioning, they must adopt a better-defined and managed sourcing strategy.

Many factors influence a sourcing strategy, including the insurer's near-term and long-term needs, IT services, market dynamics, and internal competencies for sourcing management and governance. Insurers must take a holistic approach to developing their sourcing strategies, ensuring that they reflect:

• Continuous alignment with business and IT strategies
• Continuous alignment with internal and external resources, capabilities and services
• A focus on ROI and the business outcome
• Guidance for IT investments, business process support issues and competency development
• Risk analysis, mitigation and management appropriate to the service and source

Gartner advises health insurers to create a sourcing strategy that addresses a set of scenarios, plans, directives and decisions that defines and integrates the internal and external resources necessary to fulfill their business objectives. In-house service delivery — and resources local to the organization to be served — are increasingly challenged by a mix of internal and external services, capabilities and resources, and geographic locations.

Just as standardization, industrialization and consumerization have transformed the IT services market, they are also beginning to influence the BPO market. These forces impact how enterprises value, buy and select services, and how providers develop, price and deliver services. The rise of standardization — and, therefore, the decline of customization — is an inevitable process affecting every industry.

This is a time of transition in health insurance, and the impact of this movement has yet to be fully felt by health insurers or health insurance BPO. In the administrative simplification details of healthcare reform, standardization of processes and systems is emphasized. Within BPO environments for health insurance, there will most likely be a bifurcated strategy that includes customized and standardized practices. Outsourcers are simultaneously responding to the "pull" of standardization (to enhance their ability to scale profitably), and are supporting a large base of "customized" environments. For example, HP, Dell, Xerox and their recent acquisitions of health insurance mainstays have specifically mentioned their intention to pursue standardized products.

Concurrently, health insurers have increasingly become interested in highly customized KPO services for underwriting and care management.

The many versions of U.S. healthcare reform all feature administrative simplification, which is enabled by standardization. With highly customized and interwoven business processes, health insurers may find BPO to be the best solution for standardization and associated administrative simplification.

Health insurers must:

• Closely examine the provider landscape before signing on a mission-critical partner. A provider must have strong skills in the relevant business processes, as well as industry expertise to help the business adopt the services. A good cultural match is key and should reflect whether you need a flexible provider or a strict provider (i.e., evaluate whether you need a carrot or a stick).
• Demand transparency from the BPO provider about how costs are built up and how services will run. Include it in your service-level agreements.
• Aim for a collaboration model that is focused on continuous improvements and efficiencies.
• Require proven disaster-recovery plans and abilities that have been tested and meet your business needs.
• Contract for explicit key performance indicator (KPI) management. Exploiting KPI tools that measure across the length of the process will deliver insight into how the project is performing.