Healthcare and Retirement Back-scratching
Healthcare is probably not something that that average person thinks about until they get a little older (or have a health problem). But a friend of mine is having to look at this right now and it got me thinking.
When you pay each monthly/bi-weekly premium into your employer’s health insurance plan (or an independent plan), you are paying to “be covered”. This means that the insurance company will pay out if you need it (up to a certain amount). In theory, the cost will be borne by all of the other participants, thus being a small sum for any one person to have to pay.
It is important to distinguish this from other types of plans which accrue cumulative value over time. For example, social security is a system where you pay into it for decades and then when you are ready you get the money back. If you switch jobs during your lifetime, you still keep all of the social security deposits you made with the old company.
Alas, insurance doesn’t work that way. You can pay thousands of dollars into your insurance plan for years, then become unemployed (thus without insurance) and you don’t get diddly from all the money you previously paid. This is in-line with the concept of insurance, so there’s no subterfuge here, but here’s where I see a problem: If you are unemployed, you can opt to have insurance (via an independent provider) or you can elect not to have a provider and take your chances. When you are employed, however, you cannot elect to forgo health insurance. You can’t tell your employer, “No thanks, I’m covered through an independent provider”. [There are exceptions, but it’s generally true.] Why is this?
It’s simple: Your employer gets a discounted group rate from the insurer provided that they supply a certain number of participants. I suspect that there are also kickbacks to HR people (from the insurer) to keep the account.... Anyway, your company wants the number of employees participating to be as high as possible in order to secure the largest discount. Thus you as an employee benefit from the pricing but in return you lose any ability to choose your provider.
Hmmmm, we see the same thing with retirement plans, don’t we? When you look at your 401K (contributions to which are sometimes matched by your company), there’s one or two providers (Fidelity and Vanguard, for example). What if you want to invest in a fund from some other mutual fund company? Go get an IRA I guess, because you are out of luck with your employer. Oh yeah, and your contributions to that external IRA will not be matched by your employer.
When we look at the brokerage business and start to think about debundling (which is a great idea, IMHO), I think that we should investigate all types of bundling. The examples above show that there would be a clear benefit (of increased choice) to all citizens if they are allowed to choose their own healthcare plan (and retirement plans) independent of who their employer chooses.
“Wait!” cry the plan administrators across the country. “If individuals are allowed to choose their own healthcare/retirement plans, they will not get the same discounts that we can get on their behalf!”. This is only partially true, and it’s changing rapidly.
The reason we as individuals get lower rates when working at a company is because the company goes to the insurance provider and says, “Hey buddy, I’ve got 100K employees here so you’d better give me a good rate or I’ll shop elsewhere”. That, my friends, is collective bargaining power. If we as individuals go to State Farm and say “What’s your best rate?”, then I guarantee that rate will be crappy compared to what you got through your employer. Why? Because you are only negotiating for yourself. You have no bargaining power compared to the HR director who is armed with the voting power of those 100K employees.
There are two solutions:
1. Have third party organizations (which are independent of your company) negotiate on your behalf. The difference between using their services and those provided by your company is that there is much more efficiency (those lower rates) and probably also more transparency (which means less kickbacks and corruption). Why is there more efficiency? Well, the largest companies in the world only have a few tens of thousands of employees. A third-party organization would not be limited by any number of employees -- it could grow as large as it was able.
2. We could develop some kind of service that allows you to cheaply and easily compare healthcare rates (economists would call this a “near-zero search-cost environment”). Right now this function is performed by your HR department, but there’s no reason it can’t be put on a website. Look at car insurance (Geico and Progressive are duking it out right now, for example).
#2 is the ultimate endgame. It will happen, and when it does it’s only a matter of time before individual companies realize that there’s no value in having an HR department to negotiate healthcare and retirement plans. I can’t wait.
The same thing will happen in the retirement account space, you wait and see. This will only make things more competitive, and so it’s good news for all of us.
My Blog
Saturday, October 28, 2006
