U.S.News & World Report named Harvard Pilgrim Health Care (HPHC), the No. 1 commercial health plan for the last three consecutive years. That’s a dramatic recovery from the deathbed days of 1999 when the insurance company lost $227 million and fell into receivership.
Outsourcing turned out to be the transfusion it needed. “The people at Perot Systems played an integral role in saving the company,” says Bob Trombly, Harvard Pilgrim’s deputy chief information officer (CIO).
Harvard Pilgrim currently has 1.1 million members. Today, Perot has 640 employees processing over 10 million claims annually for HPHC.
Harvard Pilgrim also outsourced its IT operations and application development to Perot Systems. The service provider is supporting over 2,000 end users.
1999: “Hemorrhaging badly”
In 1999, Trombly says the insurer was “hemorrhaging badly.” The patient history was clear: Harvard Pilgrim had completed a series of corporate mergers but had never rationalized the business processes and IT systems, especially after the merger between Harvard Community Health Plan and Pilgrim Health Care, which created the current corporate entity.
“The environment was an indigestible spaghetti of convoluted interfaces between platforms fed by broken business processes,” says Trombly. Ron Hill, Perot Systems’s client executive for Harvard Pilgrim, says the insurer was running multiple versions of the same system. HPHC also stored a lot of critical information on legacy systems that made analyzing data difficult.
The result: “We could not deliver timely, consistent, or accurate claims processing services to our providers and ultimately to our members,” recalls the deputy CIO. “The phone rang constantly. People wanted to know where their claims were and when they were going to be paid.” The challenge: to unify the business processes and rationalize the systems architecture.
Harvard Pilgrim hired a new CEO “who realized right away he was going to need help,” says Trombly. He hired Perot Systems to help him diagnose the problems.
Harvard Pilgrim previously selected an IT platform: AMISYS. “Perot Systems had considerable expertise in that IT platform. We didn’t look at a lot of other suppliers. We were in desperate shape and didn’t have a lot of time,” says Trombly.
The Harvard Pilgrim executive says a number of consultants studied the situation and “were happy to tell us, ‘Your pants are on fire.’ But we knew that. We needed someone to say, ‘Could I put that fire out for you?'”
He says the Perot Systems consultants looked at the IT issues and immediately made suggestions to rationalize them. “For us, that counted a lot more than a lot of stodgy RFP responses,” he explains. So the discussion evolved into an outsourcing transaction.
Trombly admits at the outset he was “one of the skeptics.” He says Ross Perot Sr.’s reputation preceded him. “I thought it would be difficult for a company born on the edge of Harvard Square that is loosey-goosey to work with a guy who made white shirts and dark suits the culture at EDS,” says Trombly.
Perot Systems had some thinking to do, too. “The question was: Could they hold on long enough to make the turnaround?” says Hill.
The transition started with claims operations. The claims department had full boxes stacked to the ceiling waiting for review.
“We had a bunch of different contracts, legacies from the various mergers. So when a claim came in, it was like a Las Vegas slot machine. Was it going to pay at the right rate? Were we going to get the member’s claim to the right platform? It was something of a crap shoot,” says the deputy CIO. “It was wild,” he recalls.
For example, two claims might not pay the same way because the system routed one incorrectly, or the provider wasn’t properly set up to adjudicate against the right contract. Trombly says Perot Systems helped Harvard Pilgrim sort out the inconsistencies and standardize the process. “Once they straightened the system out, they set to work on eliminating our huge backlogs,” he notes.
Initially, Perot Systems just wanted to do the IT– what Trombly calls “the high-end stuff”– and not the claims business process outsourcing (BPO). “They were really reluctant. But the irony is, they did a spectacular job on the claims BPO,” says Trombly. “They got our claims processing straightened out in very short order.”
On the people side, Harvard Pilgrim moved more than 600 people to Perot Systems. “The HR teams on both sides did a tremendous job,” says the deputy CIO. They worked very hard to standardize the benefits and carry them over wherever they could. “They gave people straight answers to questions even if it wasn’t what they wanted to hear.” In every successful outsourcing the HR teams are the unsung heroes, he posits.
He says ironically a few employees who didn’t want to work for Perot Systems — who left before the outsourcing — rejoined the team in later years when they realized Perot Systems “hadn’t disturbed the culture at Harvard Pilgrim.”
Trombly says this employee resistance to outsourcing was natural because its largest competitor had outsourced its IT operations and did it in a very “ham-handed” fashion. Many of its employees lost their jobs. Its outsourced employees filed a class-action suit and eventually won compensation for their treatment. “Our employees were convinced we were heading down the same road toward disaster,” he recalls.
The first challenge: receivership
Harvard Pilgrim went into receivership in 2000. Trombly says Perot Systems knew the grim statistics: few insurers ever emerge from receivership. Despite the odds, he says, “Perot Systems was with us shoulder to shoulder.”
Harvard Pilgrim knew it was in good hands when two days after the state placed it in receivership, Ross Perot, Sr. flew to Boston to show his support. “It was a symbolic first step,” says Trombly. He says Perot met with the staff of both organizations and said, “This is a tough time. But we’re all going to get through it. We’re going to stand by you. You will be the No. 1 health plan in America.” Then he pledged to return to throw a Texas-style barbecue when Harvard Pilgrim emerged from receivership (and did).
Trombly says those were “very brave words” in early 2000. Many were worried that their checks wouldn’t clear at the end of the month in those days.
In retrospect, that meeting “was the beginning of a remarkable turnaround,” according to Trombly. Perot Systems employees rolled up their sleeves and continued to work on the IT processes. Eventually, the state Division of Insurance “became convinced we were pulling ourselves out of our hole.” It removed Harvard Pilgrim from receivership.
Trombly says Perot Systems brought “process and discipline,” which straightened out Harvard Pilgrim’s claims processing organization. “None of us in our wildest dreams thought it would come together as quickly as it did,” he notes.
The second challenge: a claims system meltdown
An application malfunction corrupted Harvard Pilgrim’s claims database, creating a claims processing meltdown. “We were down and out for days at a time,” reports Trombly; the machine would work for a few hours and crash again.
Perot Systems marshaled forces. It imported experts from all over America. Everyone worked 24/7 for 10 days. The supplier “parachuted legions of folks into the combat zone and took care of business. It was an extraordinary effort,” says Trombly. The most surprising thing: Perot Systems never sent the insurer a bill for the extra work.
The third challenge: National Business Partnerships
Harvard Pilgrim was growing, thanks in part to Perot Systems. Now it was time for the healthy regional company to compete for national business; Harvard Pilgrim needed to do this because the climate of mergers and acquisitions meant there were fewer regionally-based customers.
To do that Harvard Pilgrim needed a national partner, so they forged a partnership with United HealthCare. However, once it consummated the national business arrangement, the plan was to migrate the legacy business to United’s BPO systems, canceling its contract with Perot Systems.
Trombly says the leadership teams of both companies met to discuss the business dynamics. “Perot Systems’s team understood our national business problem and pledged to support us,” Trombly says.
The stock market was unhappy with the news. The day Harvard Pilgrim announced its partnership with United HealthCare, Perot Systems stock took a big hit, dropping $2.77 a share.
“We had to stand in front of our 600 employees and tell them everyone would lose their jobs within the next 18 months,” recalls Hill. The team “maintained its integrity and dedication” and met the demand of Harvard Pilgrim’s national program, boasts the Perot Systems executive.
“A lesser partner might have turned its back on us or looked for ways to derail our choice,” says Trombly. Perot Systems did neither. He was happily surprised that the service provider didn’t pull out its best people. “Perot Systems stood with us through that test; it remained a loyal strategic partner supporting the critical elements of building our relationship with United,” Trombly reports.
As it turned out, Harvard Pilgrim had it both ways. It decided to work with United on national business but carved its relationship with Perot Systems out of the deal; Perot Systems still handles the regional business in Massachusetts, New Hampshire, and Maine. Harvard Pilgrim is working with Perot Systems to develop an IT strategy to migrate its legacy platforms to new platforms. In the end, job loss was minimal.
Why this relationship works
Trombly says “the key to this relationship is it’s not about the contract. It’s about the relationship.” He says the contract “doesn’t sit on people’s desks like the Ark of the Covenant. This isn’t an account where everyone knows the citations by section and subsection and can recite them chapter and verse.” Instead, he says the best thing about their contract is “we hardly ever have to look at it.”
He appreciates the fact that Perot Systems didn’t take advantage of its position of strength during the negotiations. “When you walk into a deal with your pants on fire, you don’t have a lot of leverage,” he admits.
Perot Systems’s flexibility has been a welcome staple, especially as the insurer’s business goals changed over time. Trombly says both parties have adjusted the contract to changes in the marketplace. “Perot Systems has been willing to renegotiate if it’s in the best interest of both companies,” says Trombly. “The us-versus-them mentality doesn’t dominate this outsourcing relationship.”
No one at HPHC “sits with a cleaver waiting to lop things off because of a single missed service level,” says Trombly. He says Harvard Pilgrim works every day to make this relationship strong. “This is the only way to have a successful deal in the long run,” Trombly believes.
Trombly says the business goals of both parties are aligned. Everyone has the same goals. He says that clearly showed up when the insurer had a hardware crisis and the external vendors “couldn’t tell the Harvard Pilgrim people from the Perot Systems people. I think that’s the ultimate compliment to the relationship.” (They work in the same building on the same floor.)
The Harvard Pilgrim executive says the relationship managers at both companies “have always understood that our success was inextricably bound to the success of our partner. There is only one goal: to achieve Harvard Pilgrim’s objectives.”
Trombly calls this a “very cooperative relationship.” He says when something goes wrong, “one of us will say, ‘This got screwed up. It was my fault. So let’s fix it, learn from it, and work it out.'” He says he can always sit down with Hill and work out a solution. Hill says, “Our disagreements turn into business conversations, not contract conversations. We know we can rectify any problem.”
“We earn each other’s trust every day,” Hill continues.
Hill says Perot Systems’s books are open to the management of Harvard Pilgrim. “They know our mark-ups and everything about our operations. We couldn’t have our operations in a black box while they were trying to fix themselves,” he reports.
Trombly and Hill talk daily. “He knows more about my kids than most of my neighbors,” says Trombly. Hill comments, “We have an outsourcing relationship people don’t believe until they come here and see it.”
Hill adds that Perot’s account managers have been there “for a long time.” He says they have “become family.”
This relationship includes some offshoring components. Trombly explains that healthcare insurance is a low-margin business; “a one percent annual fluctuation can make or break us. There is constant pressure from employers and regulators to reduce administrative costs. In our recent contract renegotiation, we challenged Perot Systems to help us aggressively reduce costs. One of the things they brought to the table was a proposal to reduce administrative costs by sending some of the work offshore.”
While he says cost was a major reason to look at offshoring, quality of operations was a key factor, too. “Reducing cost is always important. But improving the quality of our operations is more important still. The big reason we’re No. 1 is about quality; we’ve approached this carefully and cautiously,” says Trombly.
Trombly is the first to admit he had “fears and misgivings” at the outset. But his view changed when he visited Perot Systems’s facilities in India. When he came home, he told his oldest son, who is heading to college this fall, “You better get off your butt because the rest of the world is ready to compete. It’s one thing to read The World is Flat; it’s another to see it in real time.”
He says “the staff in India is very well trained, doing great work, and eager to take on more. I think that’s a sobering lesson to everyone about the global marketplace.”
The two companies did have to bridge some cultural and language issues.
Then there was the issue of certification. Perot Systems’s Indian application development unit is CMMI level 5 certified, but HPHC is not. “We joke that if we don’t specify our business requirements carefully, we may get an airplane instead of a bicycle,” he laughs. “But the serious point is that a level-5 development organization is a tremendously powerful resource. Unless we communicate effectively onshore to offshore, we won’t be efficient. We need to be able to articulate our business requirements clearly, and that’s going to mean raising the bar from where we are today onshore. We’re going to have to grow and change too.”
The first and most important benefit was restoring Harvard Pilgrim’s credibility in the marketplace.
By outsourcing IT operations to a true IT company, Perot Systems helped Harvard Pilgrim retain crucial IT employees during the darkest days after the receivership. 1999, Trombly reminds us, was the height of the dotcom boom in Boston. “Every day someone would come into my office and report, ‘Some little dotcom is going to double my salary.’ Trying to keep people in that kind of marketplace was tough,” he recalls.
The cost savings are there. The new contract that the two companies just signed will save Harvard Pilgrim over $150 million during the next 13 years, according to Hill.
Harvard Pilgrim invites Perot Systems’s account managers to join its senior leadership committee. “We want them at the table when we’re discussing corporate strategy because we want the benefit of their experience,” says the deputy CIO. Adds Hill, “We can walk into each other’s offices at any level of our organizations.”
If there is an architecture problem, Perot Systems brings in subject matter experts to study the situation. In addition to straightening out its back-room operations, Trombly says Perot Systems developed systems and portals “to enable us to supply accurate and timely information to our customers.”
Trombly says both parties are “always trying to innovate and reinvent the relationship as we face new competitive issues. There’s been a lot of creativity and collaboration in this relationship. That characterizes this relationship in good times and bad.”
What does the future hold? Trombly says in New England “there will be a continued pressure to reduce administrative expenses.” Harvard Pilgrim will look to Perot Systems “to help us continually reduce those costs in a variety of ways on and offshore,” he predicts.
As for today, HPHC is happy. “There was a time when our providers said, ‘These people can’t find my claim, let alone pay it.’ Now we are best in class. Our members have made us No. 1 three years in a row. How can you argue with the results?” asks Trombly.
Lessons from the Outsourcing Journal:
- When two outsourcing partners are intent on making a relationship work, they can literally work through any problem no matter how nightmarish (like receivership).
- Doing the right things always pays even if it doesn’t look like it in the short run. Perot Systems employees believed they would lose their jobs but still did a top-notch job. In the end, things changed and the customer turned to Perot Systems for help and they kept their jobs after all.
- Personal relationships at the top are a key to success.
- Flexibility is crucial as business needs change.