Brave New Paradigm.

What defined contribution means for healthcare technology.

It's on everyone's lips--consultants, employers, the American Medical Association, even the Harvard B-School. It's defined contribution and if it's not on your lips now, it will be soon. Defined contribution will change forever the way health plans are selected and the way healthcare is delivered. If consumer is king isn't your motto now, it will be soon.

A defined contribution health plan is an application of the same practice employers use with retirement benefits. Instead of funding a health benefit plan, employers would give employees money and let employees purchase their own health benefit plans.

With defined contribution, popularly known as defcon, an employer might give each employee (for example) $5,000 per year and let the employee purchase the health plan that best suits him. He can select from a menu of plans ranging from a no-frills HMO to a plan with copious, customized benefits. Married, working employees can combine employer contributions to buy fuller family coverage instead of settling for one or two unwanted options. Young healthy employees might purchase low-cost plans and pocket the unspent dollars into medical spending accounts (MSAs) or even their paychecks. Older employees who want more generous benefits can pay out-of-pocket for additional coverage beyond their $5,000 purchase.

Controlling Costs

The main reasons for defcon are to control costs and to provide greater choice for employees. No surprise there. Although health plans started as insurance plans, called "major medical" and intended to protect employees against the devastation of major medical expenses, they soon blossomed with richer features including first-dollar coverage, and outpatient and prescription benefits. In fact, it was during the 1970s that health insurance plans became popularly known as health benefit plans, signaling a change in consumer focus from insurance protection to reimbursement for conspicuous consumption. By the 1980s, utilization and costs had skyrocketed, and employers felt the double-digit pinch in premium increases.

Insurers responded with managed care plans that did control costs through limited networks, utilization management and prior authorizations--until employees kicked and screamed about pre-authorizations, exclusions, denials and having to change doctors. Plan providers responded with new and improved managed care plans including opts-outs, point-of-service, automatic waivers for some specialty care and installation of the more lenient "any willing provider" plans. In the late-1990s, weighty cost increases returned. No surprise there either.

But the cost of healthcare and health benefit plans far exceeds just the cost of providing care for patients. Booz-Allen & Hamilton, Inc. estimates an additional $18 billion is in play each year with health plans incurring about $5 billion in selling costs; benefit consultants being paid $3 billion to design, construct and select plan services; and employers forking out $10 billion a year to administer employer-sponsored plans.

Now the question arises--why should employers sponsor plans at all? Why not just give employees the money, escape administration and let the consumer be king?

Unanswered Questions

How defcon works is gray territory; it depends on whom you ask. How is risk mitigated? Are plans underwritten or community-rated? How is adverse selection contained? What about the tax advantage used by corporate employers in paying for health benefit premiums? Are employees turned loose upon the health plan sector as individuals, or will they purchase plans with vouchers or in group-based coalitions framed by employers or independent brokers? What kinds of transitional steps are needed to move employees from the current arrangement to a world of full-empowerment, free choice and increased financial responsibility?

And here's a question not many ask: What about employees who make the wrong choice because they weren't fully educated by their employers, plan brokers or payors before they chose plans that failed to provide the coverage they expected?

Defcon represents a dramatic shift in our approach to controlling costs from influencing the supply side of healthcare to influencing the demand side of healthcare.

Opportunities Abound

What about healthcare technology--will defcon jolt it or challenge it? Challenge it, says Gary Ahlquist, senior vice president and managing partner of Booz-Allen & Hamilton. A co-author of Booz-Allen's white paper, "The Real Consumer Revolution in Healthcare: Defined-Contribution Health Plans," Ahlquist says the opportunities for technology will be huge and that "stake-holders in healthcare, the providers and consumers, are on the verge of enjoying a renaissance because it [defcon] disintermediates." The roles we play now will change, he says, and technology will drive that.

"Consumers will need much more information than they have today, and in different formats than they can access it today. In essence, they'll need Consumer Reports for healthcare" to make the right judgments.

Despite the white paper's title, Ahlquist predicts evolution, not revolution, for the immediate future. "We're working toward the day when the person who will be the medical manager is the consumer. Today we have health plans to manage for us. That will change as we evolve to a consumer-driven market." Consumer education through technology, he says, will be the foundation.

Picture this. Ahlquist describes a future where annual health plan dollars roll over long-term in interest-bearing MSAs that consumers can spend for healthcare needs. A consumer with a damaged knee might question: Should he opt for surgery, which will surely mean out-of-pocket, or should he pursue more conservative treatment while letting his healthcare dollars collect interest and grow? What data will that consumer want on his screen? "Everything," says Ahlquist, "Hospital per diems, surgical costs, physician costs, drug prices, PT expenses." When consumers manage their own care, he says, they will demand and will get a depth and breadth of information and healthcare data previously unknown.

Tech Effects

Joseph Casper, a First Consulting Group (FCG) senior vice president and managing director, says the healthcare sector hasn't seen a paradigm shift like the one defcon will create. It will produce a completely customer-centric industry that collects and proactively distributes customized information for individual consumers.

Right now, says Casper, "organizations are moving as rapidly as they can to gather all the information they can, working toward implementing effective customer relationship management (CRM) systems. They need to centralize information repositories on customers so that all information from payors, providers, patient encounters and preferences is comprehensively captured and accessible. They must work toward a holistic view of the patient as a consumer and educate proactively."

While the majority of patient education will take place on the Internet, Casper cautions that the healthcare industry must learn to meet customers where they are, as other successful business sectors have done. Call centers will be integrated CRM centers, he says, armed with acute skill-based routing, able to answer any customer question and subsequently to initiate and deliver customized Webcasts for specific callers. Once a consumer becomes a patient, says Casper, the plan will automatically and periodically customize preventive and educational Webcasts for that person. Personalized health plan information via the Internet will be routine, he says.

Brave New Market

Steve O'Dell, Casper's colleague and executive vice president of the FCG Doghouse (e-service subsidiary of FCG), paints an even more dramatic picture. In addition to call centers and CRM, O'Dell says data warehousing will play a significant role. "The state of information management--data warehousing--is pretty poor," he says. "Information is locked within health plans and is virtually unusable. Data warehousing will be liberated through mining and personalization techniques," and will play a pivotal role in servicing consumers.

"There's only one thing any healthcare organization should do," says O'Dell. "It must be consumer-dominated, consumer-concerned and consumer-possessed. Hospitals, physician practices, health plans--the smart ones will aggressively use technology to personalize every service they provide to every individual. They will get on the Internet and track what the consumer wants, looks at, is involved in. They will be aggressive about collecting, managing and using their data. Amazon.com would have killed for the consumer information that health plans routinely collect and squander." No more, he says. In a world where consumers make the healthcare purchase decisions, survival depends on it.

Consider community, says O'Dell. "One of the huge implications of the Internet is the creation of communities. For conditions where the medical community is not responding or is not effective, communities of patients do their own research and share information. Providers who are procedural advocates rather than patient advocates will be left behind."

Some predict employees really don't want empowerment; in fact, a recent Employee Benefits Research Institute study indicated that more than 60 percent of employees prefer the current system. Will defcon fail for lack of interest?

Don't believe it, says Booz-Allen's Ahlquist. He cites focus groups the company has participated in where "average Joes" became tremendously enthusiastic about defcon once they understood the concept. How long did that take? "About five to 10 minutes," says Ahlquist.

O'Dell agrees. "Look at stock-brokering," he says. Once people were taught that only a licensed broker could handle the buy-and-sell decisions. "Look what consumers do today," he says. "It takes them about a week to learn how. People who are Internet-adept will learn anything they want to know about."

Coming Soon

How it unfolds remains to be seen. That it will unfold is a certainty, with many large corporations waiting for one among them to be first. Experts predict two to five years before Defcon World reigns.

Regardless of the structure through which employees purchase their benefit plans, this much is sure: consumers will be kings. Employers will no longer be plan sponsors. Providers and health plans will be customer-driven and extremely personalized in their marketing. Technology will be the vehicle to educate, market, enroll, schedule--the change agent of tomorrow. It's all coming soon to an employer and patients near you.

The Long and Winding Road 

KPMG recently surveyed t03 senior executives from Fortune 500 and Fortune 1000 companies; 46 percent were receptive to defcon. Of those, 80 percent indicated they would readily switch to defined contribution were it not for the possibility of employee backlash. What other factors hold employers back?

Tax advantage. It would take an act of Congress, you say? You're right. Employers can deduct the cost of health benefits. Right now, employees cannot. Pending legislative proposals may change that with recommendations of tax credits or tax deductibility, leveling the playing field to include the self-employed and the unemployed. Or perhaps employers will transfer funds into individual, tax-deductible trust funds from which employees can spend monies only for health insurance products.

Insurance markets. The market for individual health insurance coverage remains flat, as always; risk is the reason. Individual plans attract sicker people with greater needs who are higher users; young healthy people, needed to balance the risk pool, either don't subscribe to these plans or may forgo coverage altogether. Traditionally, the best way to spread risk has been through group purchasing. Options being explored include purchasing coalitions for individual consumers and voucher systems managed by external agents.

Employment. With full employment, employers compete heartily for the best talent, and good benefits are an accepted recruiting tool. The jury is still out on whether employees will view defcom as a takeaway that shifts to them the burden of decision-making, higher costs for plan options and, most importantly, the responsibility for controlling utilization. It's not a risk many employers will take in a tight labor market.

Economic changes. A strong economy discourages defcom. Even double-digit cost increases are insufficient to drive change while the economy thrives and talent is scarce. Let the bottom weaken. Let the hiring freezes, lay-offs and cost-cutting begin, and employers will cast a desirous eye toward defcon.

Liability and lawsuits. Legal liability counts too. Changes in federal legislation that allow managed care members to sue their health plans--and possibly the employers who selected them--for healthcare decisions that produced undesired outcomes could send employers racing into the arms of change.

Defcon in Action Today

Are we there yet? Pretty close. Carlson Companies of Minneapolis, MN, a global leader in the travel, hospitality and marketing sectors whose branches employ about 188,000 employees worldwide, has successfully initiated a precursor to defcon in the Twin Cities area that may be the next model for national change.

Like many large Twin Cities companies, Carlson belongs to the Buyers Health Care Action Group (BHCAG), a coalition whose goal is to provide employees with cost-effective quality care from providers who compete for their business.

In 1997, the BHCAG implemented a new purchasing model focused on delivering consumer choice and healthcare quality through care systems. Care systems are self-contained provider units, including a hospital, clinics, primary care physicians and specialists--with no provider overlap among systems--from which a patient receives healthcare. Each care system develops its own budget, estimates the annual cost to provide healthcare for local employees and submits a bid to the BHCAG. Accepted bids are divided into three cost categories--high, medium and low--and each BHCAG corporate member can decide how much money to contribute toward the cost of the health plan for its employees.

Senior Director of Employee Benefits Charles Montreuil says Carlson contributes about 80 percent of the low-cost group coverage category. Each year, that amount is available to 4,100 eligible Carlson employees in Minneapolis--who can spend it, along with their own contribution, on any of the nearly 30 care systems available.

Up front, Carlson Companies committed substantial resources to consumer education. "We made a concerted effort to educate our employees about what constitutes quality healthcare and about what quality costs," says Montreuil. "We have empowered them to make their own choices." Montreuil says Carlson maintains a "fabulous website," through which employees can view provider directories, order prescription refills and educate themselves about their benefits and specific health topics that affect their choice of health plan.

"Now, Carlson employees vote with their feet," he says. "They move to care systems that provide the best quality of care for the best price. If quality declines or cost rises in a particular care system, people leave."

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For More Information

Visit Myhealthbank at www.my healthbank.com, a repository for employers' future defined contributions into employees' MSAs. After employees purchase a health plan, they can spend leftover funds on nonplan services such as alternative care or medical devices.

Visit Lumenos (www.lumenos. com) where consumers can learn about selecting doctors, cost-effective healthcare, locating new providers and how to manage their future MSAs.

Sageo (www.sageo.com) is the newest launch from healthcare consultant Hewitt Associates Sageo is tomorrow's e-business site serving employers and poised for helping consumers negotiate defcon, including plan selection, enrollment and claims

Managed Care Online offers a defcon site (www.definedcare.com) with a library full of articles.