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A Trillion-Dollar Opportunity

(originally published by Booz & Company)

A revolution in the way companies provide health-care benefits is poised to trigger a convergence of health-care and financial services, and crack open a $1 trillion opportunity for U.S. financial-services providers by 2010. In the process, millions of new individual investment accounts will be created.

As we wrote last year in strategy+business (see “Health Care’s New Electronic Marketplace,” Second Quarter 2000), the forces that redrew the retirement-savings scene in the 1980s are at work again. Just as corporate pension plans were supplanted by 401(k) plans directed by individual consumers and managed by financial-services providers, so could consumer-directed health-care accounts soon become the norm.

E-commerce innovation and new players in the health insurance arena will lead the way. We envision a defined-contribution model built around Web sites where employees make choices using a voucher or specified amount of pretax employer dollars, with options to increase coverage or plan features with their own pretax funds. Firms like Definity Health and SimplyHealth already have retail portals where employees can select coverage, networks, and critical health-plan features.

Now contemplate the bulk of the nation’s total health-care expenditures in 2001 (estimated by the Health Care Financing Administration at $1.4 trillion and expected to grow to $2.4 trillion by 2010) flowing into individually held retail investment accounts. Who is going to aggregate and manage the staggering floats involved, let alone the accumulated and invested rollover balances?

Because health-care benefit dollars historically have been managed by employers, they are separated from the consumer banking and investment system. Defined-contribution health-care programs will change that by putting these sums into individual self-managed accounts serving short- and long-term health-care financing needs.

Defined-contribution health-care plans have the potential to create 50 to 100 million new individual accounts, giving financial-services firms the opportunity to pursue lucrative aggregation and cross-selling strategies. No new money will be created per se, but an enormous shift will occur that moves $1 trillion a year from corporate checking accounts and institutional insurance pools into personal banking and investment accounts. Smart financial-services providers already are building strategies to integrate lifelong funding for health-care risk with retirement funding, then linking them with routine retail banking services.

Imagine a single online enterprise offering total money and benefit management for consumers. A consumer’s paycheck might go directly to this enterprise, which would buy or administer retirement and health-care benefits. The same service could provide online checking, credit cards, mortgages, and other types of insurance, too. The revenue potential for such service providers is huge, and the customer’s experience would be better and simpler.

Already thinking along these lines, Halifax PLC, one of Britain’s well-known retail financial-services brands, is marketing Intelligent Finance (IF), a Web- and telephone-based money-management service. The IF plan finds daily the best net interest position for a customer’s mix of debt (e.g., credit card, mortgage) and assets (e.g., savings, checking), allowing consumers to either maximize the interest on their savings or minimize the interest on their borrowings.

Potential leaders and players are most likely to come from the banking and investment world rather than the health-insurance industry or the e-commerce infrastructure field. That’s because a retail focus will be key — and the investment community’s experience over the past decade with individual retirement vehicles has created some of the infrastructure and customer-service orientation that will be needed. Whoever steps in to lead the convergence, it’s clear that businesses will not let America’s $1 trillion float go unmanaged.

Gary Ahlquist,
Gary Ahlquist is a senior vice president with Booz Allen Hamilton’s Chicago office. He specializes in the strategy-driven transformation of insurance companies, health plans, and health-care providers.

David G. Knott,
David G. Knott is a vice president with Booz Allen Hamilton in New York. Dr. Knott leads the firm’s strategy work in the health services sector.

J. Philip Lathrop,
J. Philip Lathrop is an advisor on managed care to Booz Allen Hamilton.
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