February 6, 2008
Health-Wealth Convergence, Part 2:
Accessing the Market
As health care costs skyrocket, employers are finding it increasingly difficult to offer comprehensive health benefits, and the burden of health care financing is gradually shifting to the consumer. According to experts at Booz Allen Hamilton, consumers will need to meet this challenge by planning for their health care costs as they do for their other financial expenditures, by tapping into products aligned with the financial services life planning cycle. strategy+business and Knowledge@Wharton recently spoke with Joni Bessler, vice president at Booz Allen Hamilton, and Kent Smetters, professor of insurance and risk management at Wharton, about what this “health-wealth” convergence could look like. In this second part of a three-part interview, Bessler and Smetters discuss the potential impact of a health-wealth convergence on employers and employees, and how providers might structure plans that could address both individual and group markets.
Click here to listen to PART ONE of the interview.
Click here to listen to PART THREE of the interview.
T R A N S C R I P T :
Knowledge@Wharton: Taking a look maybe a little farther out, if this health-care and financial-planning convergence does indeed take hold and there are radical changes, what will that look like for employers -- in terms of benefits, or the kinds of plans that are offered? Would they be strictly HSA/HRA?
Bessler: I think the first thing is to be careful that we don’t talk about employers as onesizefitsall, because employers segment as well in how they think about health benefits. You’ve got employers that see it as a recruitment and retention strategy because their industries demand it, or because philosophically they’re still in a more paternalistic mode. You’ve got other employers that want to continue to offer health care but would like to see it move toward a defined contribution as opposed to a defined benefit model. And then you’ve got other employers that, frankly, if they had their druthers, would get out of the business of health care altogether.
So, when you talk about what this looks like, it’s probably a somewhat tailored answer depending on the segment. That said, if you play it out to its extreme from the employers’ standpoint, they would stop thinking about health care as a separate benefit; all the benefits [would] integrate, so it’s not dissimilar to what Kent was talking about earlier. As an employer, most of us have some sort of pension program; many of us have the options of other benefits. We’ve heard [the term] “cafeteriastyle benefits” kicked around over the years. You’ve got your health care, which sometimes is in and sometimes is out. And the idea is that all those benefits could be integrated so that as the employer is offering a benefits package, it’s an integrated package of a full suite of benefits.
Smetters: I think that’s exactly right. I think you’re going to see HSAs certainly become more popular. How employers can differentiate themselves a bit is really how much they contribute toward that deductible. If you really want to replicate kind of an old, firstdollar-type coverage, the employer could contribute a lot toward that deductible.
Knowledge@Wharton: And would that become an incentive for employees?
Smetters: Yes, it would.
Knowledge@Wharton: Or for recruitment for instance?
Smetters: It would, in the sense that the employee would still, at the margin, recognize that if I go to the doctor, this is still my money that I’m spending. Even though the employer contributed to that deductible, it’s still his money, or her money, because that’s consumption they’re giving up at the point of retirement -- that’s consumption that they could have converted to nonhealth consumption at retirement.
The analogy here would be the way employers used to pay for employees when they traveled. They would say, submit your receipts and we’ll just reimburse you. So what did employees do? They go for the nice hotel. They don’t go for the little economy car, they go for the nice car, and so forth. Then employers got smart and they said, “You know, maybe we should just do a per diem. We’ll take an average hotel cost, an average car cost, we’ll give you a per diem.”
And now what they see is that employees go for the cheaper hotel, they go for the cheap economy car, because it’s now their money. And from the employee’s perspective, they’re better off. They value the extra cash. The employer is better off because they get to save some money on the reimbursements, because they’re not paying for that four- or fivestar hotel anymore. They’re paying for a three- or threeandahalfstar hotel. Both parties are better off just because the incentives are more aligned.
Bessler: The other piece of this puzzle is what employers are going to have to offer that they don’t have to offer today. If you play this model out until we’ve put more responsibility into the hands of the consumer, there is a set of services that the consumer is going to need in order to be able to make informed health-care decisions, or we’re going to have exactly the issues that you alluded to earlier around 401(k). Things like advisory services to understand what this really is -- you know, “What does it mean for me and what choices am I making?” Planning tools, so that employees actually know how much money they need to fund at various points of their life cycle.
Smetters: That point is absolutely crucial, because we saw an analogy of this in retiree saving as opposed to retiree health. With the shift over to 401(k)s, what we’ve seen is multiple errors on the point of employees that we never had to worry about in the old defined pension benefit world, where the employer kind of took care of everything. What we see in 401(k)s is that sometimes employees don’t even participate. Or they’ll participate up to the match of the employer and they won’t do anything more than that.
Or their asset allocation is really bizarre. They think they diversify by taking the five different funds that the employer or the defined contribution plan offers and dividing their money, what we call the “one over n” rule. They’ll put 20% into five different funds, and they say, “Well, I’m diversifying,” not recognizing that four of the five funds are equity funds invested in the exact same thing. And so there are all these types of errors that are being made that wouldn’t have been made in the old defined-benefit model, where employees didn’t have to be the experts.
Now, as we shift retiree health into this defined contribution world, there’s going to have to be a lot of education. The alternative to that, or the complement to that, is to come up with automatic rules, or what we call “default options” that we’re now talking about with retiree health. Now, what we’re saying with retiree health is that we don’t really expect employees to know how to sign up for this thing. We’re going to sign them up automatically.
We’re also going to put them in a life-cycle-type fund automatically, and then we’ll tell them, “By the way, if you don’t like this, you can opt out. But we’re going to force you to do a little paperwork.” So, you change the complete default from putting the burden on the employee to try to figure it out, to putting it on the employer that automatically enrolls them. That requires some legislative changes, and those changes, in fact, did happen a little bit with some recent laws. It requires probably a little more to do it right.
One of the concerns employers used to have in the old days was, “If I put my employees in a stock fund, and the fund underperforms, could they sue me because I just exposed them to risk?” Now, with the new pension act, some of that is being resolved. So we need automatic rules for health care, as well.
strategy+business: Joni, how can payers structure plans that address both the individualized market and group markets?
Bessler: I wouldn’t start with the segmentation of individual versus group. I know that’s been the segmentation of the past, and it’s largely a segmentation that evolved because of the way health care was purchased. But segmentation is unfolding much more now around the characteristics of the consumer.
I mentioned earlier that the young, healthy population looks very different than the mature adult that looks very different than the young families, or the early retirees versus the late retirees. As we think about segmentation now, we’re thinking about it more from the standpoint of the life cycle of the individual, and the unique health-care needs of that individual.
To add to your question, as we think about plan design, we would increasingly counsel our clients to think about plan design against the various life-cycle segments.
strategy+business: Which is actually taking a leaf from the financial-services industry, correct?
Bessler: Yes, although to be fair to the health industry, the concept of segmentation and segmenting around the characteristics of the ultimate consumer, as opposed to the employer, who was the buyer, also emerged about a decade ago. I would say those segments are converging as the industries are converging.
Knowledge@Wharton: Just on the level of providers—doctors, hospitals—how would this kind of change affect them?
Bessler: I was waiting for that question, because we’ve talked a lot about the demand side. We’ve talked a lot about the restructuring of the demand side, the shift from a wholesale to a retail [model], and that’s progressing. The piece where we feel major reform is still needed is on the supply side.
For all the right reasons, the doctors in particular have been very slow to come to the table around this shift. If you put yourself in their shoes, you can understand it. They did not join medicine so they could be worrying about the alphabet soup of HSAs and HRAs and deductibles, etc.
Booz Allen did some work which I guess now is about a year and a half old, where we talked to doctors about how they viewed the shift toward the retail environment, and in particular CDHPs, consumer directed health plans, and HSAs. What was interesting is that they saw it as the most significant shift for them over the next three to five years—more important than pay-for-performance, more important than the docs in the boxes that we see in Walgreens. They really do see it as a fundamental shift to how health care is going to be delivered.
When you talk to them about the data requirements that are going to be needed so that the consumer can make the decisions they need to make -- so the cost of the service, the outcome, which drugs have the desired clinical outcome, some of that sort of data -- the expectation that they will be providing that data over the next set of years is actually quite low. The percentages are very low. They do not see themselves as providing that data to the public, at least in the near term.
Smetters: That’s a very important point. If the consumers are now facing the marginal cost of their health care, they’re going to want to know “What’s the cost? What’s the benefit?” In the old days, they didn’t have to worry about the cost. They were just told, “You pick a doctor from this group,” and you were pretty much fine with the outcome. But now that they face the cost, they’re going to have to think about cost-benefit analysis, so they actually need good quality information to make this choice.
The problem is [that] doctors don’t want to provide this information. One reason why is concerns about liability. You provide information, maybe you don’t look so good compared to your peers. Now, if you’re sued for an operation gone bad, they can establish a case. You’re a bad doctor. Look at the time series of the information. It could be there is pure sample-selection bias that’s going on. That doctor happens to get the worst patients, because he or she is actually the best doctor in that area, and they happen to get the sicker patient loads. So the concern about liability is very important.
This has always been a trade-off, and I would call it a perversity of U.S. law. By being a good citizen and providing information, that information can now be used against you. We need a Fifth Amendment equivalent in the business world, where if I’m being a good citizen and I’m providing information about outcomes, about efficacy and things like that, that information should not then be used against me.
Bessler: And then to exacerbate even that, we don’t necessarily have the standards against which to collect comparable data. Today, the collection of data and how that data is portrayed is very much left to the individual institution, or even the individual doctor. The need is to be able to compare across providers for similar needs.
Take a very simple example. If I want to go have a baby, and it’s a planned normal delivery, what is it going to cost from hospital to hospital, and is there any reason to believe there’s going to be any clinical difference, and therefore, what am I prepared to trade off? Am I prepared to share a room versus being in a private room if it’s going to cost me X versus Y? Am I prepared to have this sort of doctor versus that sort of doctor, etc.?
Knowledge@Wharton: And when you have people who won’t even opt into a plan because they think they’ll never get sick, or never retire, or get old, how do you even begin to address the need that employees, for instance, will have to educate themselves about these things? How can that be tackled? Would that be done through employers, or would there be centralized sources of information that people can turn to for that kind of clinical data? How would those sources be vetted?
Bessler: There are niche players already who see this as a huge opportunity and are being very aggressive in the collection and assimilation of that data. It’s not that the need hasn’t been recognized, and it’s not that there aren’t players who are now trying very hard to collect that data.
I think the second part of your question, though, is how do you get the employee or the consumer to internalize the need for that data, and to act on it? It is very much going to be an education process, and, frankly, as we put more responsibility on them, and they are taking more risk, they’re not going to have much choice.
Smetters: One slight difference between health and retiree saving is if I, as an employee, put away money today for retirement saving, that’s consumption I’m giving up today -- whereas if we’re talking about health care, even if it’s preretiree health, if I get that health-care plan, then I get that health-care plan even if it’s a large deductible.
If I don’t have that plan, I’m still facing a large deductible perse; it’s all the cost. So that plan is not costing me anything more. It’s not like I’m forgoing consumption, because I would have to pay that deductible either way, whether I had a plan or no plan. So there should be incentives for people to still sign up for the health-care plan with a large deductible.
Hopefully, that is nothing more than just reminding them to sign up for this plan, or just automatically enrolling them, not even giving them the option -- not even forcing them to make any type of intertemporal trade-off.
Click here to listen to PART ONE of the interview.
Click here to listen to PART THREE of the interview. | 
