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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 final segment of a three-part interview, Bessler and Smetters describe what some health–wealth products might look like, the regulatory changes that would be required to create these products, and the pros and cons for consumers and players.
Click here to listen to PART ONE of the interview.
Click here to listen to PART TWO of the interview.
T R A N S C R I P T :
s+b: We talked a moment ago about consumer segmentation and the reconception of how that market looks. Let’s talk now a little about the health–wealth products that might serve that newly segmented market. Can you talk about that, Joni?
Bessler: I’m not sure we introduced the framework, so perhaps let’s start by just summarizing [that]. It’s not the only framework, but it’s a way to think about it. And if you think about the financial-services framework, which we’re using now, applied to this new converged industry, there are really four phases.
The first phase we call “transact,” which is really just enabling purchases, especially if funds are low. The second phase is “borrowing” — being able to borrow money to finance your purchases. The “accumulation” phase is making sure that you’ve accumulated the money for long-term security. And then the “protect” phase, so you’re making expenditures now to avoid a big hit later.
If you think about those four phases, which correspond to the life cycle of your typical individual, then you can begin to envision products at those various stages of the life cycle. And the products vary depending on where you are.
Just some examples: In the “transact” [phase], you could imagine a debit card. That’s a stored-value card that has your electronic medical records coded on it, plus all the information around what is covered under your plan. When you go into the doctor’s office, the card gets swiped and your information automatically gets entered, so you don’t have to fill out all the paperwork that we all fill out over and over and over again.
And, by the way, the claims get paid directly and they get pulled right out of your debit card. So, it eliminates all the paperwork. It eliminates all the people who check the paperwork. It eliminates some level of the bad debt because bad debt in health care is a huge issue, and a growing concern of doctors. So, that would be one idea.
If you go to the other end of the spectrum under “protect,” you could envision a policy whereby you buy the policy and, at the front end of the policy, in your earlier years, it covers your medical benefits. And at the back end it covers your nursing-home costs. So today you can buy nursing-home insurance, you can buy health insurance. What about some sort of a policy that you buy and it covers you throughout your entire financial life cycle?
So those would be two examples. And there are a million in between.
Knowledge@Wharton: Is data security a hurdle to these kinds of products? If you’re talking about a debit card that contains your medical history, I know within the insurance industry, for instance, and the medical industry in general, data-sharing is an issue. Do you see that as a hurdle for some of these kinds of products?
Smetters: I think there are two issues. First is certainly data security. People are always worried about privacy and things like that, information getting into the wrong hands. I think that concern is probably overblown, with 256 encryption techniques and [other safeguards]. In fact, it’s safer to transact over the Internet than it is to transact in person now, in terms of just normal retail.
Just last week I had my credit card stolen from me. And it was not from doing something over the Internet. It was somebody who took an in-store-type impression and just made their own card out of it and bought a bunch of things I obviously did not buy. And so Internet-type [transactions are] fine.
I think the really big hurdle, and it’s not purely perception, is database issues. And that is, we don’t have a standard system in the U.S. that allows for common comparison across health-care plans. If someone comes off the streets, your database system may be radically different from anything that they’ve transacted with in the past. And so having a national standard for databases, being able to convert all these legacy systems to a national standard, I think is the bigger issue.
Bessler: I would agree with that, although I would probably have taken a somewhat stronger point of view on just information security — not so much because of health care specifically, but just [based on] the work that we’re doing in the information assurance space in financial services broadly. The hackers are getting smarter and smarter.
And the need to ensure that all the checks are in place to protect the consumer and to protect the consumer’s information is escalating. So I would say yes, it is an issue. But it’s not an issue specific to what we’re talking about in health care. It’s just an issue right now.
Smetters: How are the hackers getting sophisticated? I’m not as familiar with this data. Is it the phishing? Or is it the actual cracking into a stored database system?
Bessler: Both. They’ve gotten very clever with phishing. But they’re also able to crack into databases in ways that probably were not envisioned even 12 to 18 months ago. It’s very interesting. It’s actually very scary.
s+b: In this convergence in the health–wealth space, Joni, do you expect to see the health industry or the financial-services industry taking the lead?
Bessler: I think they’re neck and neck right now. You see very strong players in both the health-care and the financial-services sectors. On the health-care side, UnitedHealth Group has really led the way. They’ve got quite a suite of capabilities now that enables them to play in the health–wealth space, including a bank by the name of Exante.
WellPoint is following very quickly. They also now have chartered a bank. And actually the Blues Association has done the same. So there are some very aggressive players in the health space.
But in the financial-services sector there is a similar list. JPMorgan Chase was an early entrant, and they established relationships with many, if not most, of the health plans. Fidelity has been pursuing this strategy for a long time because they are trying to serve their individual consumer base across the full suite of planning products.
You see B of A [Bank of America] now beginning to talk about it from a consumer standpoint. Wells [Fargo] is in the HSA [health savings accounts] space. And we know from the number of phone calls we’re getting from other financial-institution players that they are also thinking about entering the space.
So there are myriad players right now in both sectors. And the race is probably on.
s+b: So, who’s going to win the race?
Bessler: We didn’t mention the niche players.
s+b: Who might they be?
Bessler: Well, you’ve got Microsoft in it, or it could be a Wal-Mart. There are a whole bunch of players, or combinations of players, that would result in a fundamentally new type of industry. So, as opposed to thinking about it as just the health players or the financial-services players, there may be a new type of player altogether as people are combining their capabilities.
s+b: Do you care to handicap this race?
Bessler: No.
s+b: Kent?
Smetters: I do know some HSA plans already have a credit card that doesn’t store your information or anything like that. It’s actually a credit card, not a debit card, that you can essentially use to fund your deductible on credit. But I don’t have a lot of industry knowledge about that.
Bessler: Let me talk about who might win the race. The honest answer is I don’t know and we, Booz Allen, don’t know. But what you can do is think about what you need to win the race, and the sorts of capabilities you’re going to need. Real understanding of consumer segmentation; banks are pretty good at that. The ability to design health-care products and take risk; health plans are very good at that.
The ability to do all the underlying information transactions that Kent was talking about and the systems to do so. And frankly, nobody’s doing a particularly good job today. I think the real issue is it’s going to take some deep pockets. So, we can debate who’s better positioned there.
You can go through the various criteria, and where that leads you is that the health players or the banking players as we know them today are not, in and of themselves, positioned against all the criteria. It’s going to be a question of how they pull the various capabilities together — what they choose to build, what they choose to buy, who they choose to partner with — that is going to answer your question about who is best positioned to win the race.
Knowledge@Wharton: Kent, maybe this is a question that you’d like to answer first, and, Joni, by all means jump in, as well. What regulatory changes are needed for this kind of convergence, for these kinds of products to go to the next level?
Smetters: Actually, Joni may be better positioned to answer this question. I don’t think a lot of regulatory changes are needed to make a lot of progress in at least some of this convergence between health and wealth management. We already see HSAs. You can already do a fair amount of wealth building inside an HSA plan if you are pretty healthy. By the time you hit retirement, a young worker today can accumulate several hundred thousand dollars in their HSA account.
I think what is going to be necessary would be things like simplification of the interface that workers have with tax-deferred saving. There are all these different accounts out there; it would be great to have one big account. Maybe some people have talked about an account that you can tap into pre-retirement, another account that is purely for retirement. But I would just probably have one big account, and that would be a very important regulatory change.
The second thing is in the area of liability. If we really expect consumers to make these choices, they have to have good information. If we want to encourage hospitals and providers to provide that information, we can’t then turn around and use that information against them.
We should be saying, “They’re being good citizens. Not everybody’s perfect. There are going to be mistakes. Let’s work on those things. But let’s not then expose them all to this liability risk at the same time.” So we need some shielding in that direction.
Knowledge@Wharton: What about on the level of pricing?
Smetters: If you allow for lots of competition, you are going to see lots of competitive pricing. That’s going to be the best for the consumer. I would be very nervous about having price controls, price caps, things like that.
Knowledge@Wharton: Why?
Smetters: Because you are going to create scarcity of the supply. That is, you are not going to have as much supply and choice that you have out there. It’s similar to when Carter put price controls on gasoline. What happened? You had these really long gas lines during the late 1970s. I, as a kid, even remember those, and Ronald Reagan did away with those, and, yes, prices went up in the short run, but then lots of players got into the business of providing gas and prices then came down. So price controls, even for something like health care.... People take this very seriously, and it is serious, but you don’t want to stifle innovation. You don’t want to stifle choice. You don’t want to stifle the supply.
s+b: Joni, how does a player in either industry, or a player not even from those two industries, decide how to get into this and win?
Bessler: I think it is very much a function of the player’s risk appetite. We believe the potential is huge, if you at look at some of the upside — [for example,] the percentage of overall expenditures that consumers use their credit card for, close to 40 percent, as compared to their use of their credit card specifically for health-care expenditures, which is closer to 20 percent.
We talked about the level of bad debt. We’ve talked about just the transaction flow. So there is a huge upside to playing in this. That said, the market is evolving slowly. It’s not like people need to jump in tomorrow. There is a question of whether you want to be a leader, whether you want to be a fast follower, whether you want to see how the marketplace is going to evolve. That is very much an individual decision for the company. What we would counsel companies, though, is to at least begin the dialogue of thinking about that. Do they want to be in this space at all? Is it important for them?
How important is it to lock in the customer for life? Because one of the things moving into the health–wealth convergence and playing along the entire life cycle does is enable you to capture, or potentially capture, the customer for life.
The other thing it does is enable you to play defensively. If you are a health plan, and you are worried about losing your attractive, more profitable segments to someone else, and you are going to be left with your more expensive indemnity-type patients, there may be a defensive play. You need to decide for yourself how important it is that you play, and then weigh the question of how quickly and what facet or multiple facets of it make sense for you, against your capabilities.
s+b: And will the players have to play the full life cycle? Will it be possible to break off segments?
Bessler: We believe there will be a lot of niche players, breaking off segments of the life cycle, breaking off segments of the population, breaking off segments of capability. Not dissimilar, by the way, to what we saw in health care, although it is now starting to consolidate again. We went through a period in health care of many, many years where there were lots of niche players carving off very profitable niches along the health-care value chain. We expect to see the same thing in the converged model.
s+b: How does this strike you?
Smetters: Well, one point that is really important is the selection problem that can happen when you offer a lot of choices. If you try to mix the newer programs like HRAs, HSAs, with the older indemnity programs, then what’s going to potentially happen over time is that you are going to see the low-risk, healthier people — with proper incentives — taking HSAs, partly because they can accumulate for retirement their money, their savings, and so forth, and indemnity plans getting stuck with the high-risk people, because they don’t face the same deductibles in those type of plans.
Employers, in particular, are going to have to be thinking somewhat hard about the type of choices they offer, but then the insurers themselves, the indemnity plans, are going to have to rethink their whole pricing strategy, because they are going to get higher-risk people in indemnity plans over time.
Bessler: Which then, to link back to your question, if you are a major health plan, there is a defensive play because others are going to enter into this space. And they will most likely start to see a shift from their younger, healthier population and be left with, perhaps, their older, sicker population. The other thing we know, having looked at the economics, is whether you are a financial-services institution or whether you’re a health plan, there is real economic value to having customers for life, not customers for a piece of time.
s+b: Joni, it sounds as if you are saying that if you expect to continue to be a major player from either industry, you are really going to have to get into this. It’s not a choice, it’s a necessity.
Bessler: Yes, we do believe that. But how you choose to play and where you choose to play and when you choose to play is going to vary based on the underlying characteristics of who you are. It will look different if you are a Fidelity versus a Bank of America versus a WellPoint.
Knowledge@Wharton: What, for those who are going to get into this, are the big pitfalls? What might stand in the way?
Bessler: Well, Kent mentioned quite a few of them, and we’ve talked a lot about them over the course of this dialogue. There are clearly issues, in no particular order, around ensuring that the individual or the consumer, the employee, understands what this is about, and is able to make choices. There clearly are some regulatory things that are going to need to change, depending on how “out there” we are with respect to products. There are clearly issues around the availability of comparable information and the collection and the dissemination of that information, so that consumers can make the informed choices that underlie the whole concept, just to mention three.
