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Medium Profitability Cost Reduction

Garthwaite Healthcare

#Healthcare #Financial Services
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 28 minutes
Difficulty Medium
Source Kellogg
10 / 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.
Mock Interview
Interviewer

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.

You

Thanks. Before analyzing, I'd like to clarify a few key questions...

Interviewer

Good question. Let me provide some background information...

You

Based on this, I suggest analyzing from these dimensions...

AI Score
Structure Analysis Communication Business Sense Quantitative
Practicing...
Score coming soon
Practice this case with AI Mock Interview

GHC, a Midwest health insurance mutual, faces declining financial performance with costs growing faster than industry average (12% vs. 10% national inflation). The candidate must diagnose cost drivers in medical claims and administrative expenses, then recommend initiatives to reduce total cost per member while maintaining competitive positioning and agent incentives.

Key Insights:

  1. Structure the problem into variable costs (medical/claims) and fixed costs (administrative) to isolate root causes
  2. Medical cost drivers break into three components: frequency of claims, percentage of members claiming, and cost per claim—each addressable through different tactics
  3. Commission expense ($150M annually at 10% of premiums) is a significant administrative cost lever, but reducing it risks agent defection—requiring creative restructuring (flat fee per member) to maintain incentives
  4. Attracting younger, healthier members through marketing directly improves the risk pool and claims per member
  5. Benchmarking against UHC’s superior cost inflation trajectory reveals operational inefficiency opportunities
  6. Maximum willingness to pay for General Agencies’ support services should be calculated based on internal cost of those functions ($5 per member per month in this case)