Health insurance is becoming a consumer product. Wait - health insurance, you might be thinking? Most of us don’t actually shop for health insurance - we have a plan offered through work, and at most we make a selection from a few limited choices.
However, as more and more people and companies switch to individual health insurance, it is quickly becoming the new consumer product. And I’d argue that’s a good thing.
But before we get into that, let’s talk about where we’ve been with health insurance and why we are shifting to a more consumer-driven product.
As we've talked about previously, in the 1940s we saw the birth of employer-sponsored health insurance. After WWII, the federal government was wary of post-war inflation and implemented wage controls. As a concession to labor groups, the government exempted employer-paid health benefits from wage controls and income tax.
This created a tax advantage that drove enormous demand for employer-provided health insurance plans over the previously more common individual health insurance. Employers received a 100% tax deduction while the benefits employees received were exempt from federal, state, and city taxation.
By the 1960s this type of employer-sponsored health insurance was nearly universal and since then, health insurance has largely been an employer product - shopped for and purchased by the employer.
This system of health insurance worked well when employees stayed with companies for a whole career, and when there were not costly medical procedures driving up the cost of healthcare. That's not the case anymore.
Group health insurance costs have increased 174% since 1999 (single coverage), and companies have either dropped coverage or reduced benefits to mitigate costs. As such, many employers are saying goodbye to group insurance and shifting to a more consumer-driven product - individual health insurance.
In our recent book, Pilzer and Lindquist predict that over the next 10 years, 100 million Americans will move from employer-provided to individually purchased health insurance.
This is a huge change. Why? On average, individual health insurance costs less than employer-provided health insurance and, while individual health insurance plans are not new, there are new advantages that level the playing field. These new advantages of individual health insurance include: coverage for a pre-existing condition, coverage of essential health benefits and the premium tax credits.
So, what does all this have to do with health insurance as a consumer product?
Well, the definition of a consumer product is “Merchandise or other item of common or daily use, ordinarily bought by individuals or households for private consumption.”
As you can see from where we’ve been with health insurance, it has not been a consumer product. It’s been an employer product.
But the change to individual health insurance puts the consumers back in the driver’s seat with selecting and purchasing health insurance. For the first time in a long time, it is becoming a consumer product.
From an economic standpoint, this is a good thing.
With employer-provided health insurance, consumers are separated from the purchasing and decision making process. This means the majority of people who get insurance through their job are disconnected from making true consumer decisions about the cost of their care or their coverage. When employees are not direct consumers, there is no incentive for feedback or for cost controls. In fact, this is one of a few reasons that the costs of healthcare continue to rise.
So, as hundreds of thousands of new consumers sign up for health insurance this open enrollment period, and more people than ever before purchase individual health insurance, health insurance is not only becoming a new consumer product, it’s quite possibly becoming the consumer product for 2015.