<ol>
<li>Develop a structure to address the problem</li>
</ol>
<ul>
<li>The interviewee should lay out a structure for analyzing the case.</li>
<li>The interviewee could have determined that revenue is not relevant to this case based on information given in the Case prompt, so the interviewee should focus on cost.</li>
<li>Costs in this case break out into fixed costs and variable costs:
<ul>
<li>Variable costs (medical costs – claims made by policyholders)</li>
<li>Fixed costs (administrative costs – e.g., marketing & sales, underwriting, finance, HR)</li>
</ul>
</li>
<li>Specifically, we will need to understand how these costs have changed in recent years.</li>
</ul>
<ol start="2">
<li>Brainstorm medical cost sources and solutions</li>
</ol>
<ul>
<li>Medical costs are the largest component of GHC’s costs. However, GHC’s medical costs are increasing faster than the national average. What are some potential reasons why this is taking place? What potential opportunities could you explore to reverse this trend?</li>
<li>Medical cost = (Number of claims per customer) x (Number of claimants) x (Cost per claim)</li>
</ul>
<p>Problems:</p>
<ul>
<li>GHC customers sicker on average</li>
<li>GHC customers older than average</li>
<li>Low deductibles incentivize more claims on average</li>
</ul>
<p>Solutions:</p>
<ul>
<li>Enhance wellness programs</li>
<li>Introduce pre-enrollment diagnosis to improve cost estimates</li>
<li>Increase marketing efforts toward younger customers</li>
<li>Increase deductibles</li>
<li>Conduct benchmarking study to determine competitors’ costs</li>
</ul>
<ol start="3">
<li>Calculate administrative costs</li>
</ol>
<ul>
<li>GHC administrative costs are also higher than average. The biggest driver of this is high cost of sales. GHC policies are sold through independent agents, each of which works with a ‘General Agency’ that acts as a sales support organization.</li>
<li>How much does GHC pay in commissions each year?</li>
<li>What are some potential approaches GHC could take to reduce its cost of sales?</li>
<li>What potential strategic issues exist with these approaches?</li>
<li>Total commission expense = $25 * 500,000 * 12 = $150,000,000</li>
</ul>
<p>Approaches:</p>
<ul>
<li>Reduce commission percentage</li>
<li>Cap commission to a certain level per year</li>
<li>Change commissions from percent of premium to flat fee (% increases annually with inflation)</li>
</ul>
<p>Issues:</p>
<ul>
<li>Agents could shift business from GHC to another carrier that pays higher commission</li>
<li>Agents would lose incentive to sell if their commission is capped</li>
</ul>
<ol start="4">
<li>Develop commission sharing arrangement</li>
</ol>
<ul>
<li>The team has decided to pay a flat commission directly to agents, and to pay the General Agencies a separate fee for the support services they provide to agents. If the total commission paid to both parties is set at $20 per member per month, what share should be given to the General Agencies?</li>
<li>If interviewee asks, explain they should find the maximum amount that should be allocated to the General Agencies.</li>
</ul>
<p>Additional information:</p>
<ul>
<li>General Agencies perform three activities: training, application processing, and performance management.</li>
<li>If GHC were to perform these activities internally, they would cost:
<ul>
<li>Training: $6,000,000</li>
<li>Application processing: $9,000,000</li>
<li>Performance management: $15,000,000</li>
</ul>
</li>
</ul>
<p>Potential approach:</p>
<ul>
<li>The total cost of the activities that General agencies perform is $30,000,000 (=$6,000,000 + $9,000,000 + $15,000,000).</li>
<li>There are 500,000 members and 12 months in a year.</li>
<li>The maximum amount of money GHC should be willing to pay the General Agencies for the activities performed is the per member, per month cost of these activities ($30,000,000 / (500,000 x 12) = $5)</li>
</ul>
<ol start="5">
<li>Provide client recommendation</li>
</ol>
<ul>
<li>Taking into account what you’ve learned thus far as well as your own additional hypotheses, what initiatives would you recommend to the CEO at this point?</li>
</ul>