KEY TAKEAWAY:
--My vision is that employer-sponsored health insurance will disappear, giving employers a blank slate upon which to reimagine their approach to benefits. Defined contributions will become the default position, leading to lifestyle accounts and intense personalization of insurance at every level.
-----------
The insurance landscape is on the brink of a transformation that will redefine the industry over the next two decades. At the heart of this seismic shift lies the impending collision between soaring employer-sponsored health insurance premiums and ever-tightening budgetary constraints. The result? Employers may decide – or be forced – to abandon sponsoring health insurance altogether.
Such a scenario would change every employer’s approach to employee benefits. Gone will be the days when health insurance consumed the majority of the benefits budget and organizational attention. In its place, employers will have more freedom to focus on non-health insurance benefits. I predict a profound reimagining of how businesses provide these alternative benefits, which will have huge implications for employers and insurers alike.
The evolution of workplace health coverage
If you talk to any employer today, they’ll tell you that health insurance is the core of their employee benefits, where it absorbs as much as 80% of their budget and attention. Again, I don’t believe that will be the case 20 years from now. If the surge in health premiums over the past decade continues, it simply won’t be possible. Consider the stark fact that the average premium for family coverage has risen from $15,745 in 2012 to $22,463 in 2022. That’s a 43% increase, over twice the inflation rate during that time.
Health costs could even surpass employee salaries, and there’s just no way any business will stand for that.
At a minimum, more employers will switch to individual coverage health reimbursement arrangements (HRAs), enabling employees to buy individual marketplace health insurance, with reimbursement from employers. But if health premiums continue to grow at the current rate, even HRA models will eventually become unworkable as employees are forced to pay ever higher premiums on the individual marketplace.
At the most, employers will abandon health insurance entirely, leading to a potential federal intervention of extending Medicare coverage to all. That scenario isn’t as extreme as it might sound. Medicare already exists as a proven system, and the only reason we haven’t yet expanded it to everyone is politics. This could be the tipping factor that forces legislative action to extend Medicare, which is honestly the only way to bring spiraling health costs under control.
Moreover, an extension of Medicare would benefit everyone. The consumer would gain access to guaranteed coverage and could have their out-of-pocket expenses covered by a private supplement plan that can be purchased on the individual marketplace. The health insurer would benefit from lower risk exposure and simpler regulatory requirements because they would now be in the supplement business rather than the primary insurance business. And employers would be free from having to devote most of their time and budget to health insurance, giving them a fresh start to reimagine employee benefits.
See also: Insurance in 2030: What Does the Future Hold?
Employee benefits in a new era
How would employee benefits look in a world where employers no longer have to concern themselves with health insurance? For a start, employers would be able to switch from a defined benefit model to a defined contribution model. Currently, we live in a defined benefit world in which the employer chooses the benefits and then works out what they need to contribute. It's an inflexible system that has led to spiraling costs and robs employees of the chance to choose their own benefits.
But with a defined contribution model, the employer can give each employee a lump sum that they can spend on whichever benefits they wish. It doesn’t take a lot of convincing to help an employer see the advantages in that. I know that from my own experience of working with companies on their benefits plans. Starting with the contribution means the employer can confidently and concretely decide what the annual benefits budget will be. It also means that employees can choose the benefits that align with their specific needs, whether it’s life, dental, vision or pet insurance or wellness perks.
The burden of health insurance is the only reason more employers aren’t already on a defined contribution model. Businesses haven’t made the change for fear of shifting the burden of future health insurance cost increases onto employees, a move that wouldn’t look good in the marketplace for talent.
But if we take health insurance out of the picture, leaving us with just the ancillary benefits like life, dental, and vision insurance, the issue disappears. These ancillary insurance products would become the core of an organization's benefits system, and because the premiums on these products tend to increase along with inflation, sometimes less, employees needn’t worry about future costs becoming unsustainable.
As for how companies can adopt a defined contribution model, lifestyle accounts may be the best available option. Each employee gets a lifestyle account that the employer can pay into. A huge benefit here is that any individual insurance products that people choose will stay with them from one employer to another, providing full portability and personalization. This kind of customized setup is already happening in the benefits industry, and given the societal trend toward increased personalization, lifestyle accounts may only be the start of even greater change.
What lies ahead for insurance carriers?
If we assume that all this change comes to pass, there will be at least two ramifications for carriers.
First, hyper-personalization of every facet of an insurance product will become the base expectation for consumers. This means that insurers will need to tailor their offerings to individual preferences, needs and circumstances, as customers will increasingly demand highly customized coverage.
However, to bring this level of personalization to their offerings, carriers will need to lean more heavily on the use of AI and big data for underwriting. This is unavoidable in a world where everyone is on a lifestyle account. Big data allows carriers to easily segment their customers by risk and market, leading to greater personalization in premium rates and product recommendations.
So far, most carriers are still only using AI and big data on an individual basis when they could be using these tools for all of their underwriting. The only thing that’s holding them up is their small data pool, which remains a hindrance to market analysis and to accurately assessing risk. But as more employers embrace defined contributions through lifestyle accounts, carriers will have more direct contact with end users from whom they could collect data. Eventually, the law of large numbers takes over, making risk predictions more reliable.
Second, widespread use of lifestyle accounts will lead to more customers choosing individual insurance products over group products. Individual products are far superior to group products in almost every way. The only reason more people don’t choose individual products is because the underwriting can require a lot of time, documentation and medical tests. But once more carriers start using AI and big data for underwriting, those difficulties disappear
The inevitable conclusion here is that traditional group insurance could lose its raison d'etre. If individual policies can now be underwritten with the same ease as a group policy, why, an insurer might ask, should we keep offering group policies? As a result, more carriers may shift to offering individual insurance.
With that in mind, I foresee a shift in group carriers offering individual products on a group chassis. What I mean by that is, to the employee, they're getting individual products with all the benefits that come with that, such as portability and fixed rates. But because these products are on a group basis, the carrier will be underwriting and administering to these people as a group. The efficient scaling of this process, however, relies on the use of AI and big data, emphasizing the need for carriers to embrace these tools.
See also: AI: The Future of Group Insurance
Final thoughts
My vision for the next 20 years is that employer-sponsored health insurance will disappear from the market. This will result in employers receiving a blank slate upon which to reimagine their approach to benefits. Defined contributions will become the default position, leading to lifestyle accounts and intense personalization of insurance at every level.
For carriers of all types, the future of their business hinges on their ability to adapt to these imminent shifts. That means getting on board with AI and big data and using them in a more systematic way. Those that can successfully navigate this transformative landscape stand to thrive in a rapidly changing industry.
