YOU MAY NEVER HAVE HEARD of Hygeia Travel Health. The Toronto-based health insurance company’s clients are the insurers of foreign tourists to the United States and Canada. Say a sightseeing Spaniard falls and needs hip replacement surgery. Hygeia works with the traveler’s home-country health insurance provider, finding a local doctor and handling the paperwork. But while Hygeia may not be a company most Americans have occasion to learn about firsthand, it does have a lot to teach CIOs about evaluating IT projects. Last year, the company developed a structured process to help it analyze and select from among multiple investment alternatives, and it has already used it successfully on 27 projects.
The travel health market has grown radically during the past few years, and Hygeia has grown along with it. Hygeia is basically a middleman between a foreign HMO and a network of American doctors and hospitals. Any HMO has a network of doctors who, in return for a guaranteed customer base, give the HMO discounted rates. Hygeia basically does the same thing. It has a network of American doctors to whom it guarantees a customer base of sick travelers?a profitable clientele, since most require only minor treatment and never come back for follow-up visits. Hygeia then passes the savings along to the foreign HMO, which would otherwise be forced to pay full price to a doctor not on its plan.
In 2000 the privately held 6-year-old company, which has 52 employees, grew 300 percent. This year, CIO Rod Hamilton expects growth of another 300 percent to 500 percent. “Last year it was a good ’wow’ situation,” he says. “We were able to cope with it. It’s not ’wow’ now. This is a frightening situation.”
Case in point: Hygeia had a relatively easy time hand-processing the 20,000-plus claims submitted in 2000. But in 2001 that number will grow by 300 percent, and within five years, says Hamilton, it should reach millions.
With the company growing so quickly, each business project has to be successful either in raising revenue, cutting costs or substantially increasing Hygeia’s standing with its customers, says Hygeia CEO Virgil Bretz. Last summer Hygeia developed a process through which every project?whether it’s a new e-commerce system or simply a change to the website?is evaluated.
The process itself is relatively straightforward. The project evaluation committee, consisting of six senior executives, splits into two groups. One group includes CIO Hamilton, along with the heads of operations and research and development, and analyzes the costs of every project. The other group consists of the two chief marketing officers (for insurance providers and payers) and the head of business development, and they analyze the expected benefits. The groups are permanent, and to stay objective, they don’t discuss a project until both sides have evaluated it. The results are then shared, both on a spreadsheet and in conversation. Projects are then approved, passed over or tabled for future consideration.
Bretz says the process works for two reasons. First, it considers only objective measures, such as revenue possibilities and costs. That way, Hygeia avoids favoring pet projects and other potential hazards. “The process is very deductive,” says Bretz. “We see all the options and then find the winners.”
The process also fosters communication among departments. The committee meets every Monday to discuss and evaluate new proposals. It is a large time commitment, but Bretz feels it builds understanding and consensus within the organization.
Hygeia uses the same process to examine every proposed project. The benefits team?led by David Angelone, chief marketing officer for providers?estimates three things: the impact on revenues, the impact on profitability in the first year and client retention. The team makes its estimates using past experience at Hygeia, information about its industry and projections about future business prospects. Later, it will compare these estimates with the costs team’s findings.
The following three examples show how the same process was used on unrelated projects for very different outcomes.
1. THE ALL-OUT SUCCESS STORYIn 2000 Hygeia’s sales department proposed hiring dedicated account managers for the company’s six largest customers. Angelone says the benefits team, in three meetings, discussed all the possible benefits of hiring two new account managers. For example, they concluded the new managers would allow for closer tracking of clients and their needs, and would lead to better contracts and more efficient processes for handling claims. The team estimated that the account managers would increase sales by $700,000 per year.
The benefits group also concluded the closer ties to big customers would reduce costly errors, such as by preventing customers from filing incomplete claims. Committee members also felt that the dedicated managers would lead to longer-lasting relationships with key customers and that those relationships would only become more profitable in time. They estimated it would increase customer loyalty by 10 percent. Overall, the benefits team felt it could increase the company’s profits by 0.75 percent by hiring the two account managers.
The costs team, led by CIO Hamilton, considered three principle costs: recruitment, training and salary. Recruitment and training was figured at 18 weeks with a cost of $1,600 per week, based on Hygeia’s standard cost from past experience. Adding salaries to this calculation brought the total cost to $108,800 per person, or a total of $217,600 for two positions. Since that was expected to return more than $700,000 in new revenues alone, the executives immediately approved the project.
2. THE NO-GOLast year, the marketing department proposed purchasing a claims database filled with detailed information on the costs of treating different conditions at different facilities. Hygeia was to use this information to estimate how much money insurance providers were likely to owe on a given claim if a patient was treated at a certain hospital as opposed to any other. For example, a 45-year-old man suffering a heart attack may accrue $5,000 in treatment costs at hospital A, but only $4,000 at hospital B. This information would allow Hygeia to recommend the cheaper hospital to its customer. That would save the customer money and help differentiate Hygeia from its competitors.
The benefits team used the same three-meeting process to discuss all the possible benefits of implementing the claims database. Members of the team talked to customers and made a projection using Hygeia’s past experience and expectations about future business trends. The verdict: The benefits team projected a revenue increase of $210,000. Client retention would rise by 2 percent. And overall, profits would increase by 0.25 percent. “Small stuff,” acknowledges Hamilton. “But we didn’t know that going in.”
The costs team, meanwhile, came up with large estimates: $250,000 annually to purchase the database and an additional $71,000 worth of internal time to make the information usable. Put it all together and it was a financial loss of $111,000 in the first year.
The project still could have been good for marketing?maybe even good enough to make the loss acceptable, Hamilton says. But some of Hygeia’s clients were also in the claims information business and therefore potential competitors. This, combined with the financial loss, was enough to make the company reject the project.
3. FURTHER REFINEMENT In early 2001 the payer marketing team proposed a project to automate the system for processing doctors’ smaller claims by integrating the processing with Hygeia’s website.
The proposal came out of an important observation: Most of the company’s revenue comes from claims for in-patient hospital stays, clinical tests and the like, which can run more than $100,000. These claims represent about 20 percent of Hygeia’s business and 80 percent of its revenues. The remaining 80 percent of business consists of physician claims, most of which are less than $1,000 and often less than $100. In many cases, the cost of paying someone to process these claims, and thus get the discount promised to customers’ health plans, is actually greater than Hygeia’s processing fee. Sometimes, Hamilton says, Hygeia processes these claims for larger clients and absorbs the financial hits. Many times, Hygeia simply pays the bills in full. The project proponents reasoned that if the physicians’ claims forms could be moved online, allowing doctors to fill out the forms themselves, then it would eliminate staff processing costs for these small claims.
The benefits team estimated that the project would help the company recover $840,000 in revenue. Based on assessments of past business and projections for future growth, the team also estimated that the project would provide for a 5 percent profits increase and a 10 percent rise in customer retention.
The costs team, meanwhile, determined that building a fully automated application that could handle the claims would cost $266,000 (about 104 weeks’ worth of an application developer’s time, at $1,600 a week, plus contingencies for consultants and two full-time data managers).
In this case, the assessment teams felt the costs did not outweigh the benefits. However, the project depended on two applications: the automated processing and the online claims entry. Each one would have to be built, then the two would have to be integrated. So, when the two teams returned to the table, they reached a compromise: To speed development and limit the cost, the applications would be built but not integrated.
Collecting the data online but processing it after the data had been checked by the data managers was a substantial improvement over the current system and still allowed Hygeia to guarantee processing within 24 hours. It’s not real-time, but it’s still fast. And Hygeia could have the system in place sooner.
After the Green Light
Once a project has been approved, it gets added to one of two lists, depending on its size. Typically, the line dividing large and small ones is a cost of $100,000. Hygeia generally pursues three large projects at a time, says Hamilton, provided that the primary workload falls in different business areas. Small projects are spread out in similar fashion, although, says Hamilton, “usually eight out of every 10 are IT projects.”
Hygeia weighs two factors when determining the order in which to undertake the projects. The first is the bottom line: How much money will a project return? In this case Hygeia relies on the committee’s estimates and proceeds based on which promised the largest financial return. For many of the smaller projects, such as redesigning the company website, the dollar benefit is hard to calculate. In these cases, the committee looks at the benefit to customers, the unquantified product of the benefit team deliberations. Hamilton acknowledges that this is less objective than the financial estimates used to evaluate large projects. But since these are small projects, they tend to take less time and Hygeia can pursue a number of them at once.
Of the 27 projects that have gone through the process so far, 14 have been approved. “I have a high degree of faith [in the process],” Bretz says. “I am betting the future of the company on it.”