The great sucking sound: the consumer vortex hits health care

Physician Executive, Sept-Oct, 2005 by Joe Flower

Over the next few years, the voice of the consumer will rapidly become what the Japanese call "The Voice of the Crane," a clarion that rings across the landscape and forces all to attend.

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Like many health care innovations, consumer-focused health care will sweep first and most powerfully through the United States' fractious and chaotic system, but it will not be neatly contained there. It will influence other national systems--especially if it lives up to its promise.

The promise is itself not simple. It is an attempt to enlist American's determination to get good value for their money--and their frustration at both the ever-larger scoops that health care is taking out of their pockets, and their sense that they have no control or even influence on the process--in the effort to control health care costs.

Consumer-directed health plans (CDHPs) come in several varieties, but the essence is a combination of a high-deductible insurance plan to take care of serious problems, with a pot of money (provided by the employer, or both the employee and the employer) for everyday needs.

In some plans, there is a gap between the health reimbursement arrangement (HRA) or health savings account (HSA) and the deductible--a gap in which the consumer is completely responsible for health care costs. But in all cases two things are true: the money is pre-tax money, and the consumer decides how to spend it on health care.

All these details encourage the consumer to get involved in the process, to get educated, to decide what is really important. It helps change the consumer's attitude from the mind of entitlement to the mind of a savvy shopper.

Is this happening?

Big time.

All indicators show the phenomenon is real. Already, last year, 2.4 million American employees signed up for the plans, even before the Internal Revenue Service finalized the rules (who owns the assets in the plans, can any excess be "converted" to other uses, and so forth).

Now the rules are in place, and the rush is on. Booz Allen Hamilton (BAH) polled the 100 employers on Forbes magazine's list of "the best places to work" and 74 percent said that they would offer the plans within the next three to five years. KPMG polled employees of Fortune 1000 companies and found that 73 percent were interested in signing on for the plans.

Forrester Research is forecasting aggressive growth of CDHPs, but BAH is asking the most interesting question: How many people have to sign up before the whole market starts to act like a consumer market?

Looking at our recent experiences with various types of managed care, which have never controlled a majority of the market yet shifted the center of gravity of the whole industry, the BAH health care group estimates that the "tipping point" will arrive when as little as 15-20 percent of the market is in some kind of CDHP--and that tipping point could arrive in three to five years, or possibly as early as next year.

What does this mean for the people who run health care?

It portends a number of strange and sudden changes. Let me mention seven. In the phrase "Wake up and smell the coffee," here's the coffee:

1. The first thing you may notice is a sudden rise in your bad debt, as employers discover the wonders of high-deductible catastrophic insurance and decide to leave out the HSA/HRA part of a CDHP, and neglect to fully educate their employees about their new insurance policies. The employees think that they are insured for hospital care until the bill shows up. Some areas have already seen their bad debt double in the past year alone.

2. Suddenly the personal finance industry is developing a profound interest in health care. These HSAs, after all, are pots of money. Someone has to manage them, turn them into accounts with specialized debit cards attached to them, and coordinate the movement of payments between providers, pharmaceutical benefit managers, and banks, and do all the scutwork of transaction processing. Already JPMorgan, Chase, WellsFargo, Mellon and others, along with a chain of small specialty debit transaction houses, have stepped up to the plate. Another set of big outside players involved in health care might not seem welcome, but debit cards tied to health care accounts might significantly speed transactions and cut health care's shockingly high 10 to 20 percent transaction costs to something closer to retail's 3 to 4 percent. This trend may eventually run counter to the first trend and actually reduce accounts receivable.

3. The demands of the consumer will push health care even faster in the direction of digitization and automation as methods of streamlining operations, reducing costs and increasing quality. When you're suddenly thrust into a real consumer marketplace, you have to improve the product and drop its cost. You don't get to opt out, plead special circumstances or throw yourself on the mercy of the court.

4. The same forces will push every health care organization into dedicated process improvement. "Lean production" as a program--not a buzz phrase--will take hold as a discipline, as a habit, as a way of life, and will become normal in health care as it has in many other industries under pressure in recent decades.