A new generation of care: The growth of consumer-directed health plans may be the answer to picking up managed care's unfinished agenda. (Life/Health: Selling Insight).

Consumer-directed health plans have come onto the national scene against the backdrop of managed care's mixed results. While managed care has had limited success containing costs, consumers disliked its intrusiveness and limited choice. Consumer-directed plans will be promoted based primarily on enhanced choices for consumers, but are really the product of incomplete structural change left behind by 20 years of managed care experimentation. There's a litany of reasons to support the sale of consumer-directed plans:

* For most consumers, the system is still overwhelmingly paternalistic, with employers, not employees, selecting the plans to be offered.

* Tax deductibility is confined to employer-sponsored plans. Self-employed persons and those without work-based plans are out of luck.

* Two-income households get little benefit from two benefit streams, as they are forced to choose the better of two plans.

* Consumers remain blind to the fact that the majority of their health-care benefit dollars comprise a subsidy for current, routine consumption, not catastrophic insurance against unforeseen events.

* Providers' lack of success with managed care is testimony to the absurdity of one of managed care's basic tenets: that the supply side can or will control the demand side of health care.

* With no provisions for carry-over or portability, health benefits are viewed by consumers as an annually evaporating asset. Throw into the mix that it's someone else's money--the employer, the insurer--and you have the recipe for unfettered utilization.

* Consumers have no incentive to choose economically rational care and treatment options. The consumer sees little benefit from any money that is saved.

* Without tax deductibility for those lacking an employer-sponsored health plan, even good risks with means opt out of the system, depending on luck and good genes rather than insurance.

The struggling economy in 2002 opened the door to experimenting with how health care is delivered. The Bush administration has already signaled its support of consumer-directed plans with its recent IRS ruling that allows the tax-free rollovers of employer contributions and, with Republican majorities in both Houses of Congress, we expect the issue of employee-contribution rollovers and portability to be addressed soon. Numerous states are already looking at their insurance regulations to find new ways of pooling risk--especially for the self-employed and the employees of small business. Timing is uncertain, but the momentum is building for these key enablers.

Consumer-directed health plans are already growing at rates that mirror the rollout of managed care in the late-1980s and 1990s. But also like managed care, we believe that consumer-directed plans will dominate the national discussion far beyond their raw market share. By year's end, we believe the paradigm drift to consumer-directed plans will achieve "inevitability" status. Defined-contribution consumer-directed health plans will not be the final form of American health care, but they will be the next dominant form.

We expect to see the first inklings of the commoditization (and even eventual securitization) of catastrophic risk coverage. However, the potential commoditization of catastrophic risk coverage combined with the need for consumer friendly functions and services represents a squeeze play on the traditional space of insurers and health plans.

That squeeze play on traditional players will be complicated by the emerging roles for financial-services firms in consumer-directed health plans: first, as cooperators and allies offering debit cards (and other tools) for defined-contribution accounts (as MasterCard already does); but second, as potential competitors seeking more of the space.

Also, we think consolidation among health plans will accelerate, driven by further privatization of the Blues and regional/national players seeking acquisitions to fill in geographies, capability gaps, and product lines. Subscale players will need to find defensible niches or, more likely, white knights.

Even core health-care plan business is headed for tougher times. As they seek new value propositions, we expect to see major players experimenting with moves away from risk-based models to fee-based services.

One ironic consequence of the shift to consumer-directed health plans will be the likely increase in popularity of strong-form managed care plans--traditional closed-panel, limited-choice HMOs--as consumers examine the value propositions and price trade-offs in the absence of perceived employer "coercion."

Whatever the specific developments of the year ahead, we believe 2003 will be viewed as the year that a new wave of major structural change in health care began in earnest.

Gary Ahlquist is a senior vice president in the Chicago office of Booz Allen Hamilton. Gil Irwin and David Knott are vice presidents in Booz Allen Hamilton's New York office. They can be reached at [e-mail].