$1 Trillion Potential Seen For Self-Directed Health Plans

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A new study predicts that if defined-contribution health care plans grow as expected, up to $1 trillion a year in funds could flow into individually held health care accounts by the end of the decade, presenting a potential bounty for financial planners and investment advisors.

Fast-growing health benefits costs, the rise of health care consumerism and improvements in e-commerce will increase the number of employers considering defined-contribution models, Booz Allen & Hamilton, the McLean, Va., consulting firm, predicts.

Defined-contribution health plans, also known as self-directed plans, are similar to 401(k) retirement plans in that they establish accounts that are managed by the consumer. Employees are given a specific amount of pretax employer dollars each year, then shop online from a choice of health care plans offering a range of prices and benefits.

Several major employers, including Medtronic and Motorola, already offer defined-contribution plans as a health benefit option, although sometimes just to managers, Booz Allen notes.

Cost savings from managed care appear to have run their course, leaving defined-contribution plans to emerge as the next stage in health care benefits, the firm says.

From 50 million to 100 million self-directed health care accounts could be created over the next 10 years, Booz Allen estimates. Based on Health Care Financing Administration figures, Booz Allen calculates that the annual privately paid portion of the nations health care total could be more than $1 trillion a year by that time.

Shifting that kind of money from corporate checking accounts and institutional insurance pools to individual accounts would represent a tidal wave of change, the consulting firm says.

The sheer volume of the funds in these accounts would provide an unusual opportunity for U.S. financial services providers to help consumers manage their benefit dollars for maximum value and security. Health care accounts could be viewed as akin to investment portfolios.

“Those funds could potentially be invested in interest-earning accounts,” observes Gary Ahlquist, a senior vice president and managing partner of Booz Allens insurance group in Chicago.

Such a scenario could ultimately forge a union of health care benefits and traditional banking-investment services.

And that could be just the beginning of big changes in employee benefits.

Web-based retailers could ultimately arise to pool the health risks of several employers, enabling them to solicit bids from insurers. The resulting savings would make this type of coverage feasible for small employers and individuals.

Booz Allen foresees the typical defined-contribution plan as one built around a Web site where employees choose their plan using a voucher or specific amount of pretax employer dollars. They would pay for any added options out of their own funds, also pretax.

“Down the road, wouldnt it be interesting if individuals pooled these funds with other benefit funds, and individuals expended them as they saw fit?” Ahlquist asks.

For instance, a healthy woman in her early 30s with $1,500 in benefits to spend might want to apply $500 toward a pension and put the other $1,000 to other benefits.

“Thats a much more empowered consumer world,” says Ahlquist.

This could lead to a convergence of health care benefits and traditional financial services as financial advisors cross-sell products and services to individuals and help them aggregate different benefit accounts.

Jeff Peters, an equity analyst at Dain Rauscher Wessels in Minneapolis, says that the unwillingness of employers to continue being intermediaries for employees health care is one reason they will move away from defined-benefit health care plans.

But he is not ready to predict fast growth for self-directed plans. In an analysis on the trend, he wrote recently that the complexity of health care and the perceived risks of a self-directed system could slow its growth.

Interviewed recently, Peters says that employers have shown a lot of interest in self-directed health care accounts. Still, he hesitates to predict how quickly the trend is going to move.

Ahlquist sees self-directed health plans growing in stages, as employees become more sophisticated about health care.

Consumers are very capable of learning how to manage their own health care funds, he insists.

“People buy mortgages every day,” he points out. “Health care is a little more complicated, so it may take a little longer to learn.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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