Wearables in the Dutch health insurance industry : opportunities, barriers and business model changes

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Wearables in the Dutch health insurance industry

Opportunities, Barriers and Business Model Changes

Lisa van Ginkel

Universiteit van Amsterdam – 11094125

Master thesis – Final

MSc. in Business Administration – Digital Business track

Supervisor UvA: dhr. Dr. Nick van der Meulen

Second examiner: Prof. P. van Baalen

Supervisor Internship KPMG: Stijn de Groen

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Statement of Originality

This document is written by student Lisa van Ginkel, who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Preface

Before you lay the thesis “Wearables in the health insurance industry. Opportunities, Barriers and Business Model Changes”, written based on information collected by means of 12 in-depth interviews conducted among 12 different organizations, most of them being Dutch health insurers. This thesis is written as a last assignment to fulfill graduation requirements of the master program Business Administration at the University of Amsterdam, with a specialization in Digital Business.

This project started in January 2017 and finished in July 2017. During this time Nick van der Meulen was my supervisor, and I would like to thank for his continuous guidance during this process. I am grateful for his patience and insightful, helpful remarks about this thesis.

Second, I would like to thank my friends and family for supporting me throughout my years of education. I am grateful that you helped me along the way and for your wise, supporting words which made me believe in success. In particular, I would like to thank my father and mother who have always been there for me and support me. I know they are extremely happy and proud of me to hand in my master thesis.

Further, I would like to thank all my colleagues at KPMG who made the time I spent here during my internship pleasant. Especially, my internship supervisor Stijn de Groen for helping me bring focus and providing contacts to approach for interviews and gather data for my thesis.

Lastly, I would like to thank the respondents for cooperating to this research and making time for the interviews. Without their cooperation and time, this thesis would not been possible.

I hope you enjoy reading.

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Netherlands. The results show that every element of a health insurer’s business model in the Netherlands is most likely to change. The biggest opportunities were found in the field of finance, prevention and the increase of customer relationship, whereas the largest barriers were also found regarding finance and also law, regulations and privacy. With respect to the implementation strategy, several aspects were

distinguished and found to be crucial in order to implement successfully. Offering extra services, providing a platform, finding partnerships and creating incentives for users were found particularly important for the implementation of wearables. However, the barriers form complications to

implementation, especially the law, regulations and privacy aspects. Health insurers should primarily cope with these barriers before implementation is possible and they can profit from the opportunities.

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1. Introduction

‘Given the amount of turmoil digital disruption is causing, it’s time for companies to evaluate the threats and opportunities – and start creating new business options for the future’ - Weill & Woerner (2015). Since the rise of the Internet in the late 90’s, society has changed and digitization became a concept. The term digitization is used for the concept of companies shifting from an analog approach to customers, services and products, to a digital marketplace. This digital marketplace can be accessed through the Internet, thus the Internet plays a key role in digitization.

According to Weill and Woerner (2015), the process of digital disruption is characterized by breaking down industry barriers and creating new opportunities while destroying long-successful models with the help of digitization. Gartner publishes a technology hype cycle every year, wherein different technologies are plotted in a graph including the Internet of Things (IoT) platforms, Smart Robots and Connected Home. These technologies are predicted to likely impact companies in different sectors, especially the way they do business and therefore indirectly also influence consumers (Forni & van der Meulen, 2016).

One technology is the Internet of Things (IoT), and many studies show the impact on products, services and consumers ((Enér & Knutsbo, 2015; Rieck, 2016; Marcus et. al., 2015; Muhammed et. al., 2017 & Becher, S. 2016). IoT can be described as connecting ‘things’ to the internet with the help of sensors and connection providers. These case studies provide reasons for businesses to anticipate to the IoT trend and show opportunities and barriers for implementation in different fields. Sundmaeker et. al. (2010) indicate that numerous IoT technologies are widely used in industries, but the path to broader development of IoT has many challenges ahead – and economic factors might be the biggest stones on the road.

“Technology by itself has no single objective value. The economic value of a technology remains latent until it is commercialized in some way via a business model” - Chesbrough (2010). The concept of IoT could be possibly beneficial for companies, however should be ‘commercialized’ in a business model. So for companies to create value with the use of a technology it must innovate their business model. Fairzekering is a Dutch insurance company that constructed their business model around the use of IoT. Fairzekering offers car insurance based on a car driver’s behavior by means of a Chipin; a plug to be put in the car. This plug registers drivers’ behavior, saves that data and the data is sent to the insurance company, determining the premium discount. Hence, a different model than traditional business model.

Wearables are another application of IoT. Wearables are part of a movement often referred to as the “quantified self” (Patel et. al., 2015). Wearable technology can provide insights into the lifestyles of customers. Wearable technology can relay accurate, real-time information from insured or claims investigators to assist in claims processing (Bracken, 2016). Within the insurance industry a lot of

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research is being done to different elements or possibilities of wearables and changes of wearable implementation hereof (e.g. Giddens et. al., 2017, Park & Jayaraman, 2003, Becher, 2016). The

healthcare insurance is an industry where several applications and opportunities of IoT are present. The emerging field of connected digital healthcare is rapidly becoming a reality and has the potential to wedge itself into a staid system that has been averse to change (Roman & Conlee, 2015). Additionally, the health sector must transform because of rising costs and increasing demand for new innovative healthcare, meaning great potential for new technologies. Tas (2017) indicates that the Internet of Things in the healthcare industry has the potential for consumers to have the power to take control of their own health in a highly personalized manner. Not just consumers are interested in monitoring or improving their health; insurances play a key role herein too. Monitoring consumers’ health with IoT devices or objects offers opportunities for insurers and their business model. Companies that have never exerted influence before are swiftly becoming healthcare industry’s major power brokers (Tas, 2017).

Business models need to be redesigned to adapt to the growing influence of data-fueled customers (Tas, 2017). Predicted is that by 2025 the amount of devices connected to the Internet will be between around 75,4 million (Statista, 2017), and predicted is that IoT will be pervasive with data explosion by 2025. This will not only impact the core of an insurer’s business model but also bring opportunities in the form of a shift from restitution to prevention (Manral, 2015). The health insurance industry in the Netherlands is an interesting market for research since it is strongly regulated. Everyone who lives or works in the

Netherlands is legally required to have a basic health insurance. An insurer may not refuse someone, but there is competition within the market. This must lead to affordable and high quality care (Rijksoverheid Nederland, 2016).

Many scholars noted that a single theoretical explanation for the adoption and diffusion of innovations is unlikely to be developed (Lee & Shim, 2007, Zhu et. al., 2004). However, existing theory must be refined to match the specific innovation and the characteristics of that innovation (Gu, et. al., 2012). This research will formulate an IoT enabled insurance ecosystem for the Netherlands and focus on the adoption and implementation of wearables. Hence the following research question is formulated:

How does the implementation of wearables influence a health insurance companies’ business model, and what are opportunities and barriers?

In the following sections elaborated will be on the different concepts and their importance in the

theoretical background section. Following, the data collection and analysis will be described by means of a research design and results will be shown and discussed. To conclude this research, discussion and limitations and a conclusion will be provided.

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2. Literature Review

Literature regarding IoT – Wearables, Business Models, and the application thereof in the health insurance industry is discussed in this section.

2.1 Problem Formulation

Since the rise of new technologies, many large companies have felt strong pressures for change (Baden-Fuller & Volberda 1997). Emerging technologies include IoT platforms, block chain, smart robots and smart data discovery (Forni & van der Meulen, 2016). Previous research showed how companies could shape different strategies to act in the increasingly changing ecosystem (Weill & Woerner, 2015; Amit & Zott, 2010; Henderson & Venkatraman, 1993; Chesbrough, 2010 and Allmendinger & Lombreglia, 2005).

Different aspects and influences of these emerging technologies have been a research topic. Weill and Woerner (2015) researched how companies could thrive in a digital ecosystem, Bauer et. al. (2011) developed a modeling approach for different components in an IoT framework and Porter & Heppelman (2014) researched how IoT is influencing competition and companies.

In the following paragraphs the concepts and models used for this research will be explained. This literature review starts off with an explanation of the Internet of Things technology. Followed by an illustration of the business model and what impact the Internet of Things could have on a companies’ business. Throughout this part, the application and importance of these concepts in the Dutch health insurance industry will be shown. Every concept in this research is discussed from a digital viewpoint.

2.2 Internet of Things

In 2016, around 40% of the world population had an Internet connection, compared to 1% in 1995. People use the Internet for different purposes such as browsing the web; access media content, check social media or send messages. The amount of Internet users is growing every day and has increased in tenfold from 1999 to 2013 (Internet live stats, 2016). The IoT technology is a way of using the Internet for a different purpose, connecting physical objects to the Internet by means of sensors. IoT can be used as an umbrella word for covering various aspects related to the extension of the Internet and the web into the physical realm, by means of the widespread deployment of spatially distributed devices with embedded identification (Miorandi et. al., 2012). By 2025, the amount predicted of devices connected to the Internet is around 75 billion (Statista, 2017).

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The history of Internet of Things is not very old and for the sake of this research it is interesting to know something about the line of events. The founders of the original MIT Auto-ID center by Kevin Ashton developed the concept of Internet of Things in 1999. Later, a lab was developed with the goal to develop network-connecting computers to objects, not just hardware or software but everything that is needed to create Internet of Things. Since 2003 the Auto-ID technology on the main stage has been RFID (Radio Frequency Identification Devices). The Internet of Things is considered to be the mere extension of RFID (Sundmaeker et. al., 2009). Sundmaeker et. al.(2009, p.p. 12), write that: “the phase Internet of Things points out a vision of the machines of the future: in the nineteenth century, machines learned to do; in the twentieth century, they learned to think; and in the twenty-first century, they are learning to perceive – they actually sense and respond”.

All smart, connected products share three core elements: physical components (mechanical and electrical parts), smart components (sensors, data storage, controls, microprocessors, software, an embedded operating. system and a digital user interface) and connectivity components (antennae, protocols and networks that enable communication between the product and product cloud, which runs on remote servers and contains the products external operating system). These three elements ensure IoT in a product and thus make a product: ‘smart and connected’ (Porter & Heppelman, 2014).

2.3 Wearables

Different ‘things’ can be connected to the Internet (Porter & Heppelman, 2014). A wearable device is part of the Internet of Things technology. With the use of wearable computing, sensors and transmission chips are embedded into ordinary objects that are then put on the body, for example smart glasses, smart clothing or smart watches (Mann, 1996). Wearable devices are part of the connected self, monitoring what consumers do. Wearable computers are miniature electronic devices that are worn by the bearer under, with or on top of clothing (Becher, 2016). With for example the smartwatch, consumers’

movement, exercise, and heartbeat can be measured. This could gain insight into the health condition of a user. Hence, it might be an interesting feature for health insurance companies. Health insurers reimburse most costs made regarding medical advice, medicine, treatments, and the use of devices or other services, as a result of medical necessity. Thus, when health insurers could gain more insight in a person’s daily activities with the emphasis on its health condition, opportunities could be presented. Consequently, health insurance companies would have to implement a new technology in their business model.

The term wearables is a collection name for different products like smart glasses, smart clothing, activity trackers or smart watches. Case studies in the United States show that health insurers already use

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models (Teece, 2010; Sun et. al., 2012; Hui, 2014 and Jaehyeon et. al., 2016) and on insurance industry (Manral, 2015; Gubbi et. al., 2013 and Vanany & Bin Mohamed Shaharoun, 2008; Becher, 2016; Verma et. al. 2015; Powe et. al., 2016 and Maulik, 2015), however research in the Dutch health insurance industry is little. The Dutch health insurance industry might be very interesting since it is one of the best health insurance systems in the world, scoring in the top three of any European Index the Health

Consumer Powerhouse has published since 2005 (Bjornberg, 2016).

Regarding the meaning of wearables and focus of this research, there is a difference in the essential meaning of use between smartwatches and fitness trackers, which comes down to whether the device is designed to help the consumer to communicate and deliver notifications, or a device that keeps track of exercise and health. Fitness trackers provide insight into health and activity by measuring steps taken, calories burned and heart rate (Stables, 2017). The function a fitness tracker tends to have in mind is the health of the customer. For this research wearables include smartwatches and fitness trackers with the ability to accurately monitor heartrate and activity.

2.3.1 Opportunities of wearables

The Fitbit is one of the most used wearable devices for quantifying self-movement bio signals on the smartphone (Becher, 2016). With information that is collected by the Fitbit, the insurance industry will be able to accelerate the underwriting. Becher (2016) also discusses the fact that currently the underwriting process relies on experience of professional judgment based on a solid statistical basis in connection with subjective decisions, a very useful procedure if there is a lack of data. A key contemporary trend

emerging in big data is the quantified self (QS) – individuals engaged in the self-tracking of any kind of biological physical, behavioral or environmental information (Swan, 2013). This tracking is done with the use of wearable devices. Wearable technologies generate a lot of data (big data), which can be analyzed and used for business processes. This creates opportunities for different underwriting processes. Allianz recognizes the opportunities of improving risk assessment, the claims process and customer experience. IoT offers consumers more transparency (Reifel et. al., 2014). The wearable application of IoT is directly aimed at consumers, quantified self, and so creating more transparency. Bracken (2016) states that wearable technology transforms the insurance industry and can provide a wealth of insight into customers’ lifestyle and behavior, and claims information, substituting hard data for guesswork.

In the smart car and smart home environment an opportunity is visible regarding the provision of real time risk information which then can be used by insures and insurers to adopt necessary risk management techniques and thus mitigate losses (Manral, 2015). IoT also provides the opportunity for real-time and constant monitoring, which can help in a claim process. Insurers will have a better chance to identify the

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loss cause and even settle clams before being notified by insured, when auto transmission data from IoT devices is realized (Manral, 2015). Also, experts state that wearable technology offers insurers an opportunity to create value-added services by giving then the capability to engage customers on a more frequent basis. Hence, the customer segment in the business model will be influenced.

Research about whether current wearable devices for activity tracking and heart rate monitoring were accurate, precise and medically beneficial is present. Results show that the devices that were used for the research (e.g. The Apple Watch, Samsung Gear Fit, Samsung Gear 1, Garmin Vivofit, Mi Band, MisFit Shine, Nike+ Fuelband SE, and FitBit Flex), all showed reasonable accuracy and precision, and can indicate the average level of activity and thus average energy expenditure (Pharm et. al., 2015).

2.3.2 Barriers of wearables

The possibilities of IoT devices are endless, but the implementation is tricky (Manral, 2015). Mills et. al. (2016) describe the concept of wearables being the most personal and intimate IT devices of all kinds for individuals and organizations alike. A device offering physical assessment, being personal and intimate is therefore suitable to be applied in the insurance industry. However, the use of wearables comes very close to the individual and privacy issues are present. Any reliance on technology can cause disruption big or small, insurers must acknowledge these risks (Manral, 2015). The main challenge is to enable the use of these technologies by changing the model of care and sharing information (Lewy, 2014).

Data privacy and security are acknowledged as large challenges in research (Manral; 2015; Gubbi et. al., 2013; Meingast et. al., 2006; Bandyopadhyay & Sen, 2011 and Mani & Chouk, 2017). These challenges relate to data protection, lack of human control and enslavement of devices (Slettemeas, 2009).

Data management, data mining and the chaos challenge are distinguished barriers (Manral, 2015). The how and support by existing processes in these challenges is especially important. Manral (2015) argues that once a product is not designed carefully, multi-purpose devices and collaborative applications can turn our lives into chaos. In an unconnected world, a small error or mistake does not bring down a system; however, in a hyper-connected world, an error in one part of a system could cause disorder throughout. Gubbi et. al. (2013) argue that one of the most important outcomes of the emerging IoT field is the creation of an unprecedented amount of data, leading to possible privacy issues. The concepts around data storage, ownership and expiry of the data become critical issues (Gubbi et. al., 2013). Being challenges that organizations face on how to manage the data, users feel the threat of loss of privacy, security and trust. Moreover, the Accenture Digital 2016 Consumer Survey for communications, media and

technology companies shows that price, security and ease of use are perceived barriers to the adoption of IoT devices and services.

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2.4 IT adoption and implementation

With different types of innovations to study, a variety of approaches are necessary to more fully understand their adoption (Gu et. al., 2012). Many researchers indicate that it is implausible that one theoretical explanation for the organization adoption of innovations can be developed (Lee & Shim, 2007 and Zhu et. al., 2004). Research has been focusing on the adoption of IT for a long time. One of the most used models for IT adoption is the Technology Acceptance Model (TAM) by Davis et. al. (1989). Which describes the influence of perceived usefulness and the perceived ease of use on the intention to use and the influence thereof on usage behavior. TAM has been researched and expanded in the TAM2 model (Venkatesh & Davis, 2000) and Unified Theory of Acceptance and Use of Technology (UTAUT) (Venkatesh et. al., 2003). These models are developed to use in general on different cases. Models that are specifically developed for the healthcare industry are more relevant to be used in this research context. A model focusing on healthcare is the USE IT-adoption-model, developed by Schuring et. al. (2006). The USE IT-adoption-model integrates theories about adoption and diffusion of innovations focused on the user. This model presents two dimensions: the innovation-dimension and the domain-dimension. The innovation dimension has two constructs; product and process. Product refers to the product itself and process to process of development or implementation. The domain-dimension refers to the social aspects in the user domain and the technical aspects in the information technology domain.

USE IT-adoption-model – Schuring et. al. (2006)

This model can be helpful to understand the adoption of wearables for users, hence interesting for insurers to take a look at when and how to implement wearables, keeping the best interest of the user in mind. Different strategies are possible to make use of a new technology and different scientific models show the possibilities. Hartman and Sifonis (2000) define three levels of implementation strategies and Schuring et.

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al. (2006) developed an IT adoption matrix with four dimensions and macro and micro determinants per dimension. Leonard 2004 developed critical success factors relating to healthcare’s adoption of new technology based on several earlier developed models of adoption and diffusion of innovation.

Value Transformation Matrix

Hartman and Sifonis (2000) wrote a book about different strategies for companies to be successful in the E-conomy. The E-Business Value Transformation Matrix is part of a book that was written in order to set a roadmap for profiting through e-business innovation, strategies for success in the E-conomy. With the concept of E-conomy is meant the virtual arena in which business actually is conducted, value is created and exchanged, transactions occur, and one-to-one relationships mature. The concept E-business is defined as any Internet initiative – tactical or strategic – that transforms business relationships, whether those relationships be business-to-consumer, business-to-business, intra-business, or even consumer-to-consumer. The model has been used to design and evaluate E-business models (Gordijn & Akkermans, 2001) and to research the e-commerce and the adoption thereof (Gordijn & Akkermans, 2003; Molla & Licker, 2005 and Tan et. al., 2007). The adoption of wearables is related to E-business and therefor the model is found to provide a solid base for this research.

The model identifies three different techniques for companies to create sustainable E-conomy value, these different techniques define four actions in order to create E-conomy opportunities.

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Implementation strategy

In order to implement wearables in a viable way, the several success factors should be kept in mind. Hartman and Sifonis (2000) show different aspects of a successful strategy in the E-conomy, for different phases of a company using technology. The aspects explained define actions for companies to pursue in order to complete the transformation in that phase. A challenge for wearable technologies is to develop supporting systems that will enhance adoption, consider constraints of standardization, privacy and security and the existing models of care (Lewy, 2014). A strategy is different than a business model, a business model is more generic. However, coupling experts in the field of strategy analysis and business model analysis is necessary to protect the competitive advantage results from design and implementation of new business models (Teece, 2010).

2.5 Business Models

“If an organization has a viable way to create, deliver, and capture value it has a business model” – Kaplan (2011, p.p. 1). It does not matter if an organization is in the public or private sector, or non-profit or profit enterprise; all organizations have a business model. Research shows that a business model is important for competitiveness and may be a source of above normal returns (Amit & Zott, 2010; George & Bock, 2011 and Massa et. al., 2017). In the Netherlands, the government regulates the health insurance industry and therefore companies are not freely in the way they do business. Everyone who lives or works in the Netherlands is legally required to have a basic health insurance. An insurer may not refuse an insurance to a person however there is competition between health insurance companies. According to the government, this must lead to affordable and high quality care (Rijksoverheid Nederland, 2016).

Currently, health insurers negotiate with caregivers about the price of provided care. In the Netherlands, health insurers’ revenue comes from premiums and an income-related contribution. Healthcare costs are collectively organized and financed. For this reason, the average family in the Netherlands pays almost a quarter of its income to healthcare premiums (van der Horst et al., 2011). This could increase to 30 to 40 percent of the total income in 2040 (van der Horst et. al., 2011). Health insurance companies determine their own premiums for different insurance packages based on the coverage of these packages and risk (Rijksoverheid Nederland, 2016).

The academic research around business models is fragmented and various views on the term business model are present (Massa et. al., 2017). Amit and Zott (2010) define a business model as a system of activities that depicts the way a company “does business” with its customers, partner and vendors. More precisely, “a business model is a bundle of activities that are conducted to satisfy the perceived needs of

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the maker, including the specification of the parties that conduct these activities and how these activities are linked to each other” – Amit and Zott (2010). With this definition, Amit and Zott try to capture the essence of what they believe that is at heart of the business model concept namely: the focus on the how of doing business, a holistic perspective on how business is conducted, emphasis on value creation and a recognition that partners can help the focal firm conduct essential activities within a business model. Thomas (2001) states that a business model is to run a profitable business involving the overall structures of process, customers, suppliers, channels, resources and capabilities. The business model is associated with industry application, where customer demands are the main driving force and value is the main offering (Royon & Frenot, 2007).

Business Model Canvas

In order to clarify processes that underlie a business model, one approach is to build maps of the business model. This map then allows the business model to become a source of experiments considering alternate combinations of these processes (Chesbrough, 2010). One tool that can be used to construct business models is the business model canvas, developed by Osterwalder and Pigneur (2010).

“A business model describes the rationale of how an organizations creates, delivers and captures value” – Osterwalder & Pigneur (2010, p.p. 15). Osterwalder and Pigneur visualize the business model with different building blocks. The business model canvas from Osterwalder and Pigneur shows a clear overview of different aspects of a business, in order to provide a simple, relevant, and intuitively understandable concept, while not oversimplifying the complexities of how enterprises function. This model is a mapping tool which can be used to explicate business models so that everybody can

understand. Hereafter elaborated will be on the business model canvas and different components thereof in relation with the functions defined by Chesbrough and Rosenbloom (2002). For this research the business model functions from Chesbrough and Rosenbloom (2002) in relation to the business model canvas (Osterwalder and Pigneur, 2010) will be used.

The business model canvas contains nine building blocks: - Key partnerships - Key activities - Key resources - Value proposition - Customer segments - Channels - Customer relationships

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- Cost structure - Revenue streams

Business Model Functions

“A mediocre technology pursued within a great business model may be more valuable than a great technology exploited via a mediocre business model” – Henry Chesbrough (2010, p. 354). Chesbrough (2010) explored opportunities and barriers of business model innovation after creating his own definition of a business model. Chesbrough and Rosenbloom (2002) view the business model as a model of

functions. The functions a business model fulfils are:

Articulates the value proposition (i.e., the value created for users by an offering based on technology); à Value proposition (Osterwalder & Pigneur, 2010)

Identifies a market segment and specify the revenue generation mechanism (i.e., users to whom technology is useful and for what purpose); à Customer segment and customer relationships (Osterwalder & Pigneur, 2010)

Defines the structure of the value chain required to create and distribute the offering and complementary assets needed to support position in the chain; à Key resources and channels (Osterwalder & Pigneur, 2010)

Details the revenue mechanism(s) by which the firm will be paid for the offering; à Revenue streams (Osterwalder & Pigneur, 2010)

Estimates the cost structure and profit potential (given value proposition and value chain structure); à Cost structure (Osterwalder & Pigneur, 2010)

Describes the position of the firm within the value network linking suppliers and customers (incl. identifying potential complementors and competitors); à Key partnerships (Osterwalder & Pigneur, 2010)

Formulates the competitive strategy by which the innovating firm will gain and hold advantage over rivals.

The functions of Chesbrough and Rosenbloom (2002) will be used to analyze the business model and changes due to the implementation of wearables.

Previous research states that business model innovation, as opposed to product innovation, is proven to be a source of competitive advantage (Amit & Zott, 2012, Massa et. al., 2017). Amit and Zott state that a company should not only focus on value creation, capturing value is equally important. Value creation involves performing activities that increase the value of a company’s offering and encourage customer willingness to pay, it is the heart of any business model. Capturing value is about monetizing customer

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value (Hui, 2014). Business models create value for all the parties involved (focal firm, its partners, suppliers and customers), and in order to capture that value, focal firms need to adopt an appropriate business model. Previous research has shown that business models can be defined in various ways.

In an estimate, by 2025 IoT will have a significant impact on the business models of insurers – Manral (2015). In traditional business models, creating value meant identifying enduring customer needs and manufacturing well-engineered solutions. Capturing value has been as simple as setting the right price to maximize profits from discrete product sales. Concerning value creation and value capture, the Internet of Things requires a shift in thinking. Albert Shum notes (Hui, 2014): “Business models are about creating experiences of value. With IoT, you can really look at how the customer looks at an experience and give it new life”. Hui (2014) states that the Internet of Things requires a mindset shift and created a model that that visualizes the difference between the traditional product mindset and the Internet of Things mindset.

Advantages for companies to develop business models in the Internet of Things era include:

- Enabling companies to gain first-mover advantage during the development of the Internet of Things.

- Speeding up the pace of transformation or strategic realignment to meet the challenges of the Internet of Things.

- Better seizing the opportunities in the Internet of Things.

“Around the world there is an acceptance that health services are at least a decade behind other industries in the use of information technology to increase productivity and quality” – KPMG report, 2016. In the Netherlands, healthcare costs have continuously been rising since 1972 from 8 percent to 13 percent of the GDP (van der Horst et. al., 2011). The CPB (Centraal Planbureau) predicted that the costs in healthcare keep rising and will be between 6 and 18 percent of the GDP higher than in 2011. This has a positive influence on the quality of care and on the general health of Dutch people. Consequently this can put pressure on the solidarity in healthcare between young and old and rich and poor. Part of the reason that healthcare costs are rising is because of the aging of the population, people age and elderly need more care. However, in every stage of life the care consumption increases due to better and more expensive care. No solution is present for the increasing healthcare costs. This research will try and focus on business model innovation in the Dutch healthcare industry and what specific opportunities and barriers are thereof. Researching whether the advantages apply to this industry as well, or form others.

Sun et. al. (2012) applied the Internet of Things on business model innovation using the nine building blocks as formulated by Osterwalder and Pigneur (2010). Argued is that the following building blocks possibly are affected:

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- Customers: Who are our core customers? Where are they? Are they changed? - Markets: Are our markets changed? Should we change our market positioning? - Channel: What’s the channel to offer product/service?

- Infrastructure: Who are our key partners? What are our key activities? Where are our available key resources?

- Value: What’s the value offer to customers?

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3. Data and Method

Research question

The formulation of the research question is exploratory and therefore an exploratory study is used. Literature search is conducted to discover the most important concepts for this research and to find a research gap. The Internet of Things, wearables and business models concepts were found particularly important. This literature will provide more information about these concepts.

In order to examine the following research question: “How does the implementation of wearables influence a health insurance companies’ business model, and what are opportunities and barriers?” qualitative research was conducted. This research question suggests using an exploratory study, as the intent is to explore and deliver insight into the influence of implementing wearables in the business model of health insurers. Previous research on activity tracking wearables focused on the adoption of wearables for consumers and medical wearables in the healthcare industry, as shown in the literature review (Teece, 2010; Sun et. al., 2012; Hui, 2014, Jaehyeon et. al., 2016, Manral, 2015; Gubbi et. al., 2013 and Vanany & Bin Mohamed Shaharoun, 2008; Becher, 2016; Verma et. al. 2015; Powe et. al., 2016 and Maulik, 2015). However since the rise of using IoT in insurance industries (i.e. automotive) the influence on the healthcare industry is a subject of interest. Articles focusing on the influence of activity tracking

wearables exist, however scientific research articles are absent. Eisenhardt (1989), provides a step-by-step approach for qualitative research that will be followed to form the base of this research.

Qualitative research

The aim of this research is to create categories from the data and then to analyze relationships between the categories, while attending the lived experience of research participants can be understood, hence

qualitative research is suitable (Charmaz, 1990). This research aims to build theories and therefore the inductive approach is used, earlier stated is that scientific research focused on activity tracking wearables in health insurance is little. Researchers in the inductive tradition are more likely to work with qualitative data and use a variety of methods to collect this data in order to establish different views of phenomena (Easterby-Smith et. al., 2008), thus qualitative research is conducted. Qualitative data can refer to non-numerical data or data that has not been quantified (Saunders et. al., 2009). Meaning that in order to conduct qualitative research pictures, videos and interviews suffice.

Exploratory research builds or refines theory, as opposed to explanatory research that tests theory. This research will use one case study within multiple units of analyses (Yin, 2009). Limitations of this type of research may be that with embedded cases it might be difficult returning to the large unit of analysis.

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Interviews

To draw conclusions, semi-structured interviews will be conducted. Semi-structured interviews are non-standardized and therefore referred to as qualitative research interviews (King, 2004). In order to ensure external validity, only interviewing health insurance companies will not suffice. Replication logic will be used to ensure external validity. According to Porter & Heppelman (2014), smart and connected products not only transform existing products but often broaden industry boundaries, products become part of an optimized systems of related products or components of system of systems. Moreover, the inclusion of multiple stakeholder interviews, including the four largest health insurers, will increase validity and reliability. Before the interview starts, asked was whether the interviewee is comfortable with the public disclosure of his/her name. The purpose of the interview was explained and the terms of confidentiality were discussed. The interviews lasted approximately 40-45 minutes. The interviews were recorded with the use of a voice recorder, as approved by interviewees.

Unit of analysis

In order to select interviewees, convenience sampling was used. Advantages of this method include: simplicity of sampling, ease of research, data collection can be facilitated in short duration of time and it is helpful for pilot studies and for hypothesis generation. Disadvantages may be: high level of sampling error, vulnerable to selection bias and influences beyond the control of the researcher (Dudovskiy, 2016). The unit of analysis consists of Dutch health insurers (8), a wearable distributor, a care institution, a health care provider, and an employee within a knowledge company operating in the health industry. With these different cases, believed is that opportunities, barriers and possible successful implementation strategies can be formulated and a conclusion can be drawn about the influence of wearables on the health insurers’ business model. Within these units of analysis people working in innovation or who are

involved with the use of wearables will be interviewed. This leads to a broad scope of expertise of different people, during the interview will be asked what their exact role within the organization is. The interviews will be conducted in the Netherlands; therefore the interviews will be conducted in Dutch. According to research from the possibility of discrepancies in the data gathering is low when the interviewer and interviewee speak the same language (van Nes et. al., 2010).

In order to reach maximum information saturation, twelve interviews were conducted. The target interviewees were approached through the network of colleagues reached by phone and e-mail and by contacting relevant people found by using the social media site LinkedIn.

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3.1 Current Business Model

To look at what changes the implementation of wearables bring to a health insurers’ business model in the Netherlands, the current business model was modeled to represent a good overview.

The extensive overview of this model per insurance company and general comments can be found in appendix 2. Every insurer in the Netherlands fulfills a social task and they work under strict government regulation.

Value proposition

Every health insurance company in the Netherlands is obliged to offer a basic insurance to people and the content of the basic insurance is set. Insurers may also offer additional insurances, these are often aimed at a special group of people or sickness condition. Overall, insurers try to assist and support customers.

Market segment

As stated before, with different additional insurances, insurers can target different groups and do so. For example the provision of online policies are more focused on younger people. However, insurance companies may not refuse anyone to be insured with them, everyone in the Netherlands is obliged to have a basic insurance.

Value chain structure

The current value chain structure of a health insurer is simple. They are an intermediary between the insured population and healthcare providers.

Revenue mechanism

Insurers are not really allowed to make a profit, they had criticism before because believed was that they had too much money in their reserves. Hence, the past couple of years insurers have been paying back money by means of keeping the premiums low. The price of the premium is based on the expected healthcare costs for the next year.

However, the premiums for the additional insurances can be altered. For additional services offered an insurer could ask higher premiums and receive a higher owner’s fee on the premium.

Cost structure and profit potential

The main cost incurred for health insurers are care costs, paid to healthcare providers. Insurers aim to purchase a broad spectrum of care for the best quality and price. As stated before, insurers are currently making a loss because they ask for premiums beneath cost price. They are solving this by returning from

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their reserves.

Moreover, healthcare costs are rising due to an ageing population and simply because care is becoming more expensive. Insurers are trying hard to find a solution to this.

Besides care procurement, insurers also have overhead costs.

Position firm value network

At this moment in time (2017), not many insurers have partnerships with other parties outside of the value chain, referring to healthcare providers, care parties and contracting partners.

Competitive strategy

The main strategy which insurers focus on is competing on price. Besides that insurers aim at providing extra services to customers and adding value to their products, sometimes by means of innovation. There is a focus shift from paying care costs to prevention.

Data analysis

Gray (2004) distinguished two main approaches for data analysis; content analysis and grounded theory. For this research, grounded theory will be used. Meaning that no criteria of selection are prepared in advance, all measures and themes come out of the data collection and analysis. Analysis of data in grounded theory involves three stages: open coding, where the data is categorized in units, Axial coding, where relationships between categories are categorized, and lastly selective coding, where core categories are integrated to produce a theory (Strauss & Corbin, 1998).

With respect to this research, the data obtained was analyzed using the constant comparative method that yields from the grounded theory approach. Data analysis will be done by transcribing, coding and categorizing data into different sets and comparing them. The similarities and differences were analyzed to explore the real meaning of the data. The topics will include: opportunities and barriers of the use of wearables, implementation strategy and the different components of a business model. The interviewees wished to stay anonymous and therefor their name and the name of the company were left out.

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Coding scheme 1 – Business Model

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Coding scheme 2.2 – Use of wearables

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4. Results

The results start with an overview of which opportunities and barriers were found regarding the

implementation of wearables for health insurers in the Netherlands. Following, the changes in each aspect of the business model will be discussed; the extensive overview of the business model changes can be found in appendix 2. At last aspects for a successful implementation, as mentioned by the interviewees, will be explained.

4.1 Opportunities

Looking at the implementation of a new technology implies possible perceived advantages of the technology. Since the advantages have not yet been proven, in this research they will be named

opportunities. In general, many opportunities were present and all interviewees recognized one or more. For the sake of clarity, the opportunities of implementing wearables for health insurance companies were categorized into seven sub categories; Financial, Prevention, Monitoring, Motivation, Data, Extra Services and Customer Relationship opportunities. Believed is that this will provide a clear overview of the opportunities found. In the following paragraphs elaborated will be on the findings regarding the

different categories.

4.1.1 Financial

Financial opportunity was one of the largest categories recognized and named in the interviews, named by ten interviewees. For one reason that healthcare costs are rising in the Netherland and a solution must be found. People are becoming older and in general people use the most healthcare in the last 20% of their lives (Respondent 8). Hence, once people see the health care providers less, this will save the insurance companies costs. Respondent 5: “At one moment a patient needs to benefit from the technology, so he should not need to see the doctor every 2 weeks with everything that needs to be done”. Respondent 3: “Yes, but we could help them to move 50% of the health care treatments home so that you can monitor

Opportunities Interviewees Number Amount of references Customer relationship Respondent 1, 2, 3, 4, 5, and 12 6 8

Data sharing Respondent 4, 5, 6, 8, 9, 11 and 12 7 12

Extra services Respondent 1, 2, 3, 4, 5, 7, 9, 10 and 11 9 18

Financial Respondent 1, 2, 3, 4, 5, 6, 7, 8, 11 and 12 10 14

Monitoring Respondent 3, 6, 10 and 12 5 8

Motivation Respondent 1, 2, 3, 4, 6 and 9 6 14

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people and guard them, for the reason that people could live healthier”. Meaning that people who visit the doctor regularly now, could possibly be aided with a wearable that monitors their situation at home. Consequently, health costs will be lower when people do not have to see the doctor that often anymore.

Interviewees mention that when people use a wearable, they become more aware of their own behavior. People might know what they do, however not be aware of the consequences. Hence respondent 12 states: “Because we provide people with a wearable and we offer them the suitable platforms and technology and with that we are connected and people show conscious behavior, this probably means that they remain healthy, thus lower healthcare costs for us”. Interviewees believe that when people live healthier and are aware of their actions this will be seen in little insurance claims. Also mentioned is that with the help of a wearable, a lot of care can be done at home and people do not have to see the doctor that often anymore, hence lower costs for the insurer.

The financial opportunities are closely related to the monitoring opportunities.

4.1.2 Monitoring

Five out of twelve interviewees mention monitoring behavior from a distance as a perceived advantage of wearables. Monitoring behavior can be of great benefit for example once patients go home or wait for a surgery and they have a special task they need to perform. For example Interviewee 7 mentioned that if people want to become eligible for a stomach band, there are three demands: eating healthy, good BMI and a healthy life style. This healthy lifestyle can be measured for example by how many kilometers a person has been walking, hence monitoring ones behavior.

Moreover, monitoring behavior could be beneficial to the health insurer and user when the wearable is connected to a platform. Respondent 8 mentions that it is more of a wellness or fitness platform where data is connected and where health and wellness can be monitored. This provides insights into certain behavior of people and patterns can be drawn. People can draw conclusions about for example whether or not they move enough, or their heart rate might be too high. Respondent 12: “It is not just about living more healthy, but you also help them monitor whether or not they are doing a good job or not”.

4.1.3 Prevention

Prevention is stated as another large opportunity by nine interviewees. The healthcare industry is moving from paying healthcare costs to preventing them from occurring. Health insurers are moving from paying curing costs to preventing people getting sick. Respondent 2: “Keeping in mind the rising health costs, wearables could possibly assure that people produce less healthcare costs, because we are moving more towards the prevention side”. Hence, the prevention part and the cost reduction part are intertwined. A relationship is visible that when people pay attention to prevention of sickness, the costs will be reduced

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as well. Respondent 5 even states that when focusing on prevention, the wearable is a great tool to use, which possibly reduces costs.

Insurers are focusing on how to make people aware that they need to stay healthy, both mentally and physically. Desired is to increase customers’ health and the wearable could play a role in this transition. Respondent 7 mentions that they are making a transition with the ‘healthy’ platform.

Nonetheless, not every health insurer is moving towards the prevention direction. Respondent 6 states to have an entirely different focus for the reason that they argue that it is a very tough concept is to see the consequences. Respondent 6: “We already established that prevention is not our main focus point.” Respondent 6 argues that there are many barriers to prevention, which result in them not focusing on it.

4.1.4 Motivation

Six out of twelve interviewees mention motivating customers as an advantage When people are motivated to move, and do so, they possibly reduce healthcare costs, as mentioned by interviewees. For example respondent 9 mentions a specific customer segment that has a chronicle illness such as Diabetes or COPD. These people know that certain activities are good for their health. Once you can motivate this group, it might give them a push to start doing something. A wearable motivates people by sending incentives to users, for example the tools in the Fitbit contribute to being interactive or actively busy with the user, these are reminders to step every hour, or the image shown when one has reached its’ step goals.

Also something that is mentioned by different interviewees is the fact that once someone in their surrounding has and uses a wearable, this causes others’ interest as well. : “A colleague of mine at the same department was at first very much against the whole counting steps thing. But everyone in our department had one of these. However, now she has another iPhone that measures her steps as well. Now she is convinced and even starts walking during lunchbreaks” – Respondent 1. Respondent 4 mentions the motivational factor behind the wearable as well, as in that the Fitbit is not just a simple watch but especially lifestyle is very important. This potentially influences someone’s health insurance because if people change to a healthier lifestyle, less healthcare is possibly needed.

4.1.5 Use of wearable generated data

The use of data part about the wearable is on the one hand mentioned as an opportunity and on the other a great barrier. The opportunity side will be discussed here.

Among the six interviews who mention the concept of using wearable generated data, it is seen as something with great potential. Once users want to share the data, insurance companies can combine this with data they already possess like declaration data and personal data. Once this data is analyzed, it could

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provide customer insight about their lifestyle, hence customers can be monitored. Respondent 9: “Insight in customers, at an aggregated and anonymized level, could provide more insight into usage or lifestyle of customers”. Respondent 4 even indicates that in the future the wearable could judge a user’s run based on age, length and weight. The use of shared data can be used for monitoring but also prediction and providing better services based on customers’ needs.

Data sharing is linked to introducing the wearable with the help of a platform. Through this platform data can be gathered, analyzed and shared among peers or others. Interviewees do refer to data sharing as something that is particularly useful to healthcare providers. It could give them insight into someone’s behavior and lifestyle, and might make it easier to diagnose.

4.1.6 Customer relationship

Using the wearable could positively increase the relationship between insurance companies and

customers, according to six interviewees. Common knowledge is that health insurance companies do not have an excellent reputation in the Netherlands, also reflected to in the interviews by respondent 3 and 6. Consequentially, people do not have faith in their health insurer. Hence, they want to improve this reputation and can do this in many ways. An example of this is providing quality advantages with the use of a wearable, health insurers could improve a customers’ perception of the company. Respondent 5 says: “At a given moment, a patient could benefit when he does not have to go to the doctor every two weeks anymore”. Moreover, respondent 10 states that healthcare providers could advise safely with the help of a wearable, and the data generated. Both, improving customers’ convenience.

Furthermore, interviewees acknowledge the fact that clients switch health insurance companies easily. Wearables can possibly provide the foundation to build extra services on, hence retaining customers. Respondent 2: “We could, with the help of those wearables, provide an extra service to our customers and retain a positive customer relationship.

As stated before, customer relationship building is in line with adding extra services. When extra services are added to a health insurance company’s business model, customer could perceive this as beneficial.

4.1.7 Extra Services

Previously mentioned is that the reputation of health insurance companies in the Netherlands is not very good. Interviewees do not always think this is fair, however it would be good to improve the reputation. Among other things mentioned, adding extra services is seen as a solution to this problem. The possibility of adding extra services is seen as an opportunity by nine interviewees.

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providers and insured people to actually becoming a company that adds value for customers. Respondent 2: “The most important thing is adding something for our customers, so offering extra services than only insurances”. The implementation of wearables could contribute to this. By providing an option to use the wearable by insured people they can see the opportunities themselves. Insurers state that when using the wearable a platform should be complementary to this service. Respondent 8: “the platform thought is becoming stronger. Data can be coupled to your own health and wellness”. This platform could contain anything, however stated is that when people start using a wearable, a community should be part of the platform. In this community customers could talk, relate to each other and compare data gathered.

“Seen is that formal and informal care is moving towards each other. Healthcare going home, is really a movement” – Respondent 10. People do not have to go to the doctor for every small thing anymore, once they do not feel good. This is beneficial for them and could imply higher satisfaction. Facilitated by the the health insurer, services are added to the business model of a health insurance company by means of the wearable.

Respondent 7 even reflects on the fact that a health insurance company will probably provide completely different services what people possibly find very interesting. The wearable is much more than just a tool or technology. The thought behind it is also focused on a specific lifestyle. Mentioned is that companies could also for example provide discount on a gym subscription, or provide the possibility for insured to perform a health check once in a while.

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4.2 Barriers

Opposite to opportunities, are several barriers present when implementing wearables. Results show that multiple barriers exist, many of which named by all the interviewees. The named barriers are categorized and explained hereunder.

Every interviewee has mentioned one barrier or more, respondent 6 even states that their focus is not with implementing wearables and in general only experience barriers.

4.2.1 Healthcare system

The government organizes the healthcare system in the Netherlands and there are many rules that participating companies (healthcare providers and insurers) need to obey when doing business. Consequentially, this could lead to barriers (i.e. bureaucracy) when implementing a new technology. Seven interviewees mention this barrier. Respondent 11 mentions that once you ask the question to insurers: do you have a vision about wearables? If the answer is no, it will take ages to continue the discussion. Moreover, the system in which health insurers operate is highly dependent on solidarity; everyone pays more or less the same premium independent from age, gender or health condition. Thus, health insurers may not set different insurance premiums for different target groups.

The system also does not consent for health insurers to individually benefit from a technology; “If then only customers from one company could use this, we will be in Radar next week and we receive the reputation of being an asocial health insurer” – Respondent 6. Health insurance companies do not have the best reputation in the Netherlands and are afraid to let their reputation damage more.

Barriers Interviewees Number of

interviewees

Amount of references Healthcare System Respondent 3, 6, 7, 8, 9, 11 and 12 7 9

Law and Regulations Respondent 1, 2, 3, 4, 5, 6, 8, 10, 11 and 12

10 21

Privacy Respondent 1, 2, 3, 4, 5, 6, 9 and 10 9 19

Reliability Respondent 1, 4, 6, 9 and 10 5 7

Outcomes Unknown Respondent 2, 4, 5, 6, 8, 9, 10 and 12 8 16

Trend Respondent 3, 8 and 6 3 9

Inability to Use Respondent 1, 5 and 10 3 5

Resistance Respondent 3, 4, 5, 6 and 10 5 20

Finance Respondent 1, 3, 6, 8, 9, 10, 11 and 12 8 18

Reputation Respondent 2, 4, 6, 7 and 11 5 7

Business Model Respondent 1, 5, 8 and 10 4 5

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In the United States and in Australia there are different systems, characterized for example by the health insurer also being the healthcare provider, different financing system and different law and regulations. This is why the wearable already serves its purpose in these countries and data driven health insurances are present.

4.2.1.1 Law and regulations

Law and regulation in the Netherlands was one of the main concepts that returned in ten interviews. Respondent 10 states: “In the field of innovation it takes a while to collect evidence, which is inherent to new things. Projects involving law and regulations are present within Nederlandse Zorgauthoriteit”. Reports show that law and regulation seems to fall behind the development of new technologies (FD, 2016). The Dutch regulation system is very strict and responds slow to developments through IT, which obstructs innovation (Hilz, 2015 and Alcoran, 2016).

Furthermore, health insurers are bounded to different laws and regulation wherein is stated that they cannot do risk selection; they may not base health insurance on data retrieved from any source. Hence, the model applied in the United States or Australia is not applicable in the Netherlands, also because they have a different system. Respondent 8: “There you have health insurer and provider in one. It is a different market. Here we have a division between health providers and insurers, or financers”. There is also high supervision from the government in the Netherlands (IGZ), also mentioned by respondent 1. The system that health insurers operate in is highly regulated; consequentially they are inclined to follow the rules instead of writing them, which withholds insurers of trying something new.

Implementing the type of wearable used for this research is accompanied with the problem that law and regulation do not see this as care. Law and regulation categorize this wearable type to the prevention side, meaning that insurance companies may not spend premium money on wearables. Respondent 12: “It is more in the prevention area. Meaning that we cannot and may not spend our money on this, it is not care”.

A large law and regulations barrier is that health insurers may not perform risk selection as mentioned by Respondents 1, 4 and 6. Risk selection means selecting customers based on their risk of getting ill or not. In the past actions like this were introduced, for example specific marketing campaigns for highly educated people. However once again, health insurers ended up in the consumer program Radar and ethical discussions are evoked.

4.2.1.2 Privacy

Data management is another issue, which is in line with the privacy section as perceived by nine interviewees. There are strict rules about obtaining data generated by others, the users. Insurers could

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highly benefit from the data generated by the wearable. However, people are not willing to share because they feel this is an invasion to their privacy. Respondent 5: “The whole part about data, compliance and risk, is a challenge”. Respondent 6 said: “Do you want you data to be with the health insurer? There are many people who do not trust this”. Different interviewees indicate that distrust in health insurers is serious; “The fear of data leaks and sharing privacy sensitive data. If we receive a lot of customers and all this data is leaked, is a large risk” - Respondent 9. Interviewees indicate that they would very much like to receive certain data, even if it is just on a level where you can thee that a customer is active or not. Yet, respondent 8 says that this still is a negative connotation and people are most likely still not open in sharing this. Interviewees believe that customers are reserved about sharing information and perceive it scary since they see the dark side of it as well.

Respondent 10 also recognizes the fact that people do not want to know everything: “You have to be a bit neurotic if you want to measure everything about how far you have walked, whether you kissed, what you ate or if you went to the movies. Come on, what is the fun in that”.

4.2.2 Wearable usage

Respondent 10 mentions that they support the use of new technology once the content and outcome of the care remains the same. However, indicated is also that the content of the care changes when using new technology. When consults shift from offline to online, this does change the content of the care naturally. The reliability, fact that outcomes are still uncertain or unknown, the thought that the wearable is a trend and the inability to use the wearable by people are barriers related to the usage and explained hereunder.

4.2.2.1 Reliability

The reliability of the wearables examined for this research is perceived as unknown and therefore a barrier, five interviewees mention this concept. Respondent 6: “If it true that diagnostics are 100%, or close to, precise, about you are going to die or you will not get sick. Then it is interesting”. The wearable examined for this research is described as a ‘commercial wearable’ in the interviews. Hence, respondent 12 indicates that maybe not health insurers should do something with the wearables but let people who are already interested in their health purchase one.

There is also the possibility that customers cannot be trusted with the wearable. They might give it to others who are going to exercise and receive the advantages themselves. People can also manually add exercise in for example the Fitbit application, causing a distorted image when the exercise is not actually done (respondent 1 & 4).

Wearables in the Dutch health insurance industry : opportunities, barriers and business model changes