Building better health plans: spending more time on research before launching a new health plan can lead to greater innovation and reduce expensive rework.

Everybody's doing it--innovation! From high tech wonders like MP3 players and camera cell phones, to automotive breakthroughs and blockbuster drugs, it seems that every industry is blazing new trails through innovation and new product development.

Well, almost every industry. What is the legacy of innovation in the U.S. health-insurance industry over the past decade or two? Managed care that came and went? An impenetrable set of health plans with complicated terms and conditions? Bills that are harder to decipher than ancient Egypt's Rosetta stone? It's not exactly an impressive track record, most people would agree. But things are starting to change.

Driven by such powerful forces as escalating costs, the shift toward a consumer-driven marketplace, and new information technology, health plans have started to focus on significantly upgrading their innovation capabilities. Booz Allen Hamilton recently completed a study of several leading health plans, as well as world-class companies from other industries, to identify innovation best practices and to understand the current state of play in new product development among health plans.

Despite proclamations of "customer focus," many health plans do not have a disciplined approach to understanding the hierarchy of needs among their customers. For health plans, this means understanding what's most important for both benefit sponsors (typically employers) as well as end-users (the employee or consumer). Many health plans, we found, have launched new products without explicit market testing to confirm their value.

However, leading health plans are putting in place a number of rigorous methods of capturing rich market insight, and are going beyond traditional market research to capture useful information at all touch points--from enrollment through customer service. All of these sources of information are now being used to understand customer needs and develop advanced segmentation to help guide new product development.

Given that many health plans substantially under-invest in capturing and using market insights, our analysis revealed that several of these companies are spending roughly three quarters of their product development budgets on building their products over and over again prior to launch. Since insufficient energy is focused on valuable pre-build activities--such as assessing the product concept, developing a value proposition, evaluating a business case, and designing high level product specifications--new offerings either do not address high-priority customer needs or do so only after significant rework. This rework is expensive--it leads to launch delays, escalating systems costs and wasted resources. More advanced health plans are capitalizing on improved market-sensing capabilities, rapid prototyping, and other pre-build disciplines to design and test new offerings prior to full build.

Perhaps one of the most exciting findings from our research is the progress that some health plans are making in moving to a modular approach to designing and assembling new offerings. Capitalizing on lessons learned from some auto manufacturing and technology companies, several leading health plans are creating an integrated product book of record to house all of the approved components that a consultative sales force or customers can use to assemble new offerings tailored to their needs. Sophisticated rules engines are emerging to help guide the assembly of components and maintain strict compliance with regulatory requirements. Advanced companies are also beginning to expand the definition of product to include an ever wider range of both product and service attributes--from benefit plans, funding arrangements, and network options to alternative service levels and program options, including disease management.

Pioneers of this modular approach are experiencing a number of advantages, including faster time to market, more efficient plan set up and significant reductions in downstream errors in claims processing, customer service, and billing. Early signs suggest that customers also value the choice and operational advantages that this new approach brings.

But to get these product development capabilities in place, several plans are finding that they need to move from a fragmented, part-time resource-driven approach to a new process with increased discipline and dedicated, cross-functional teams that develop real expertise in designing, launching, and monitoring the performance of new offerings. If these new efforts continue to bear fruit, perhaps health plans, too, can join the ranks of world-class innovation companies--and get in the business of "delighting" their customers.

David Knott is a managing partner, Cristina Ripperger is a principal and Vineet Madan is a senior associate, all based in Booz Allen Hamilton's New York office. Martha Wofford is a senior associate in the firm's Boston office. They all can be reached at [e-mail].