Health Care and Employee Benefits and Health Care Costs and Health Care Reform and Health Care & Life Sciences and Health Care & Insurance

VCs: Health benefits will be defined contribution

May 16, 2011

Increasing government involvement in the health insurance market will have the counter-intuitive effect of making the industry more consumer-driven, concludes a new report from a health care venture-capital firm.

Psilos Group, based in New York and Silicon Valley, predicts that ever-increasing cost pressures and new features in the 2010 health reform law will lead many employers to shift their approach to health insurance from a defined benefit for their workers, to a defined contribution—similar to the shift from pensions to 401(k)s.

That means millions more Americans will be buying health insurance on their own—using money given by their employer or government-provided subsidies in the state insurance exchanges the law will create.

New York-based research firm McKinsey & Co. has predicted that the percentage of Americans buying health insurance individually—as opposed to joining an employer-purchased plan—could spike to as high as 40 percent, from just 10 percent now.

In turn, health insurers will have to significantly change how they interact with customers, Psilos predicts. They’ll have to shift from a business-to-business model to a business-to-consumer model.

“A lot of times today when consumers think about their health plans, they assume their phone call won’t get answered, they’re going to get materials they don’t understand and they’re going to have providers in the network they don’t want,” Lisa Suennen, a Psilos managing member, told Healthcare Finance News. “But if you are an employee and you now are being given a chunk of change to go buy a plan on your own, you’re going to look for the kinds of things you look for when you buy a car: friendly salesperson, quality service, ‘I understand what’s happening’—the paperwork and all that.”

Psilos even predicts that some private companies—such as Wal-Mart, Amazon or Google—might create health insurance exchanges. Already, employers who were buying Medicare supplement insurance for their over-65 workers have begun sending them to a private exchange operated by California-based Extend Health Inc.

And health insurers can forget passing on 8- to 10-percent premium increases every year, as they do now with employers, Suennen said. She expects employers to link their annual health insurance contributions to wage increases, which have been rising 2 percent to 3 percent per year.

“The realities of defined contribution will drive consumers to shop for the best value,” Suennen said. She added, “Consumers are going to be forced to become educated and highly efficient buyers, just as they are with other kinds of insurance.”

Read the full report here.

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