The Individual as the Customer? A Novel Concept, Right?

How to “Fix” American Healthcare: First of Three Steps: Make the Individual the Customer

This newsletter is the first of a three-part series that describes my thinking about “fixing” US healthcare.

The three parts:

1. Demand: Make the individual the customer (this issue, November 1st, 2023)
2. Supply: Create claim-free care delivery systems (November 16th, 2023)
3. Regulation: Eliminate laws and regulations that enable rent-seeking (December 1st, 2023)

The impressive power of our economy is the power of the consumer in every purchase, from bread to luxury yachts.

Except in health benefits. Employers choose the vast percent of private health benefits. And government agencies define and choose government benefits—Medicaid, Medicare, VA, and Tricare/Champus.

Problems with ESI (Employer-Sponsored Insurance)

1. Complexity: ESI introduces hundreds of thousands of “middlemen” in the industry. These people do not deliver care. All self-insured plan designs are bespoke. This layer creates nightmarish complexity for care delivery and payment. And, of course, it makes it easy to hide costs.
2. Cost: The administrative costs of our industry are high. The two additional layers—employers and employer benefit consultants/brokers—are a major (not the only) reason. The big additional costs, of course, are in care. It is rational for a clinician to price a service 50% more for a group insurance product than it is for cash pay. I did this when I owned and ran AzulCare.
3. Near-complete elimination of consumer choice: Our system does not treat individuals as customers because—ta-da!—they are not customers. They do not choose the benefit company and have severely limited decision rights in picking the products. Imagine how much more cars would cost if you could only buy them through employers! Of course, you would never have innovative cars like Tesla.
4. Reduced labor force mobility: A major impediment in labor force mobility is the connection of health benefits to employment. Millions of people stay at their job only for this reason. This also reduces entrepreneurship and innovative career paths such as part-time consulting or teaching.

Why ESI Exists

Why do employers provide employee health benefits when they (rightly) do not buy cars, homes, or clothes for us? There are two main perceived reasons:

1. “To attract talent”/protect employees from predatory benefit providers
2. Tax inequity between individual benefit purchase (post-tax) and employer benefit purchase—a deduction to the employer, tax-free income to the employee

Recent Environmental Changes

There was truth to both reasons above. But things have changed:

1. Individual protection: The Affordable Care Act (ACA), passed in 2010, included several protections for individuals. (It is worth noting that the full name of the Act is Patient Protection and Affordable Care Act.) Notable among those are community ratings, elimination of annual and lifetime limits, elimination of pre-existing condition exclusion,  and a list of “essential benefits.” While we can debate the list endlessly, the main point is that ACA-compliant health benefits have strong guardrails for benefits, network adequacy, and prices.
2. Tax inequity: Starting in January 2020, there has been a way for employers to fund premiums and out-of-pocket costs for individual health benefits for their employees. That instrument is the ICHRA (individual coverage health reimbursement account). It addresses the blockers employers have mentioned over decades. Employers get a tax deduction and can budget their exact spend (a major relief, especially for small employers). Employees get to choose their portable health benefits with a tax-free stipend from their employer. It took a couple of years for the market to notice these options. ICHRAs grew by 50+% in 2022 (per Avalare Health). Today, approximately 500,000 Americans have ICHRA coverage, and industry analysts project that ICHRA will increase its share of commercial benefits significantly.

Almost-but-Not-True Objections

1. “There are no good ACA-compliant individual plans.” This is not true today. In years past, some sub-regions had coverage issues. However, recent announcements from United, Oscar Health, and others show that managed care organizations are rapidly increasing their presence in the individual market.
2. “Defining an ICHRA strategy is complicated.” If an employer believes that creating a stipend (ICHRA) is beyond their reach, then they are not qualified to design health benefits! Health benefits are an order of magnitude more complex.
3. “Employees will leave if there is no tie to the employer.” If an employer keeps its employees because of the “tie” to health benefits, they have a fundamental problem. They need to focus on true talent attractors like a healthy culture, growth opportunities, exciting and meaningful work, and competitive and transparent compensation.

Impact of Moving to Employee Stipends

1. Happier, healthier employees: Every person’s health situation is different. People are happy when they control their own destiny.
2. Less HR busywork: The work of defining benefits, paying brokers, and choosing one or more benefits provider (sometimes across the US) simply goes away.
3. Predictable, budget-able spend: Many brokers push self-insured plans, where employers bear the risk of claim costs (even with stop-loss insurance). There are small companies that have gone under because of a single medical episode. With ICHRA, an employer chooses its budget, creates a simple stipend algorithm that spends that budget, and that is their exact spend. The entire population in the premium rating area  bears the “insurance risk” of care. This is the original notion of risk pooling.
4. Enablement of healthcare consumerism: Admittedly, this is not important to most employers (despite their lip service), which is why I have listed this last. But it is an important benefit to society at large. Over time, this will lead to better care options.

This one move from employer-sponsored insurance to employee stipends will correct several wrongs on the demand side of our system.

Will this “fix” healthcare? Not even close. We must also fix supply, and eliminate the rules and regulations that enable rent-seeking behavior. I will address those two areas in the November 16th and December 1st issues of First Principles.

As a final data point: In a small-sample LinkedIn survey (n = 75), 54% of respondents said that they would take a benefits stipend over ESI. 17% said that the decision “depends on other factors.” Only 29% said that they would take ESI.

I welcome your thoughts and suggestions.