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Medium Profitability Cost Reduction

Garthwaite Healthcare

#Healthcare #Insurance
ProHub Comment

This case tests the candidate's ability to structure a cost-reduction problem systematically, breaking it into medical costs and administrative costs, and then drilling into specific drivers using frameworks like cost per unit economics. The case emphasizes analytical thinking combined with creative problem-solving around incentive design (commission structures) and market segmentation strategy.

Estimated Time 15 minutes
Difficulty Medium
Source Kellogg
50 / 100
Our client is Garthwaite Healthcare Co (GHC), a health insurance firm located in the Midwest. Customers pay GHC a fixed monthly premium per person covered under the plan. In exchange, GHC pays for all health services that each member requires (eg. physician care, prescription medications, hospitalization). In recent years, GHC’s financial and competitive position has begun to decline, and the CEO has retained our firm to help them determine what is causing the problem and how to fix it.

Clarifying Information

  1. GHC is a mutual insurance company, meaning profits are returned to members in the form of lower premiums the following year. As such, GHC does not seek to maximize profit – it seeks to minimize cost, but does expect to earn a 5% profit margin.
  2. GHC’s prices reflect underwriting of risk and the underlying cost to serve a customer
  3. Market share is steady, despite presence of major national health insurance company UHC (which has 30% share)
  4. National medical cost inflation is 10% over the past 5 years. GHC’s cost increase in this period is 12% and UHC’s is 10.