The economic rewards for rationalizing these distribution, channel, and complexity costs clearly will be enormous for those who own pieces of the answer. Some $200 billion to $400 billion in implied market capitalization may be in play. With so much at stake, senior executives at health plans, health-care providers, and other key players must ask and answer the following questions: When will the shift happen? How? And what can I do — now — to win?
For most Americans, health-care coverage and employment are inextricably linked — so much so that the system seems integral to, and eternal within, the workplace. In fact, the connection between health care and employment is a post-World War II phenomenon that has evolved in three stages:
1. The Post-War Supply-Side Surge (1945 to 1967) was based on government initiatives to expand, modernize, and urbanize health care. Massive programs to build hospitals and increase the supply of doctors started in the late 1940s and continued through the 1950s and 1960s. Pre-tax funding of employee health benefits led to widespread insurance coverage.
2. The Great Society Era (1967 to Mid-1980s) worked hard at improving financial access to the system via Medicare (for the elderly) and Medicaid (for the poor). It worked — sparking over a decade and a half of expansion of the supply side as well. However, expensive medical advances combined with Vietnam- and OPEC-driven inflation created a cost crisis.
3. The Transition to Managed Care (1980s to 1990s). Health maintenance organizations (HMOs) arose in response to the cost crisis. The idea was that HMOs would actively manage health-care delivery and associated costs. Although managed care was somewhat successful in slowing the rate of increase in health-care costs, consumers resented having less flexibility in choosing their doctors. Choice became the dominant theme in the national dialogue.
It is this growing demand for choice that is sowing the seeds for the coming health-care revolution, the period we call "Consumers Rule." Frustration with restrictions on choice, continued fragmentation of service providers, and confusion over options, costs, and quality will stimulate consumer demand for all manner of information services. The Internet and e-commerce capabilities will provide that information, and then the sales and fulfillment mechanisms will create a more open market in health-care benefits and services.
This year's presidential election has refocused the public's attention on health-care reform. Although the candidates' proposals differ, all seem motivated by three related concerns: rising costs; coverage for the uninsured; and consumer frustration with complexity and perceived limits on choice. No one expects government to mandate a defined-contribution approach as a solution, but candidates are clearly intent on raising the stakes of a nascent public dialogue, and the features, structure, and incentives under discussion are consistent with, and friendly to, defined-contribution mechanisms.
One of President Clinton's recent proposals would retain and enhance the tax deductibility of health benefits and encourage the development of benefits purchasing groups for small businesses (even offering tax credits). Other proposals suggest expanded medical savings accounts, and allowing the uninsured (or the unhappily insured) to buy into the FEHB or Medicare. Translated into the new paradigm, these suggestions hold the promise of decoupling health benefits from a specific employer/employee relationship (i.e., allowing the portability of health benefits); creating risk pools that minimize the specter of draconian, individual underwriting; and retaining or extending the tax incentives that enhance affordability for all parties.
Although the right political climate can enable this change, it will be the employers who catalyze the shift to defined contribution. Social and political pressure to curb rising health-care costs notwithstanding, the structural inefficiencies in health-plan design, sales, and administration are themselves enough to fuel a massive change in funding and distribution models. We anticipate the transformation taking place in the following sequence: