Why employer-sponsored health insurance could disappear in the next 20 years

By Bob Gaydos

Change is an inevitable part of life; and for the insurance industry, the next 20 years may prove to be a time of intensive and systemic change. The central cause of this shift is the imminent collision between escalating employer-sponsored health insurance premiums and budgetary constraints. Employers may eventually decide that they can no longer afford to provide health insurance benefits to their employees.

What this means is that employer-sponsored health insurance, long considered an indispensable facet of employee benefits, could recede from the insurance landscape. Such a scenario would shift the focus from health insurance to other benefits, leading to a vast rethink in how employee benefits should be structured.

For insurance carriers, the next few years will likely present a critical juncture. They can either take a business-as-usual approach or accept these coming changes and adapt accordingly. Personally, I know exactly where I stand.

The future of health insurance

Looking 20 years ahead, I genuinely can’t imagine that employer-sponsored health insurance will still exist, at least not in its current form. There’s just no way that the existing model of devoting the majority of the benefits budget to health insurance can remain sustainable for employers. It’s already verging on unsustainable; most employers I talk to admit to spending 80% of their benefits budget on health insurance alone.

Moreover, the cost curve continues to spiral upwards with each passing year. Between 2012 and 2022, premiums for family coverage rose by 43%, more than double the rate of inflation for the same period. Current projections suggest that health premiums will increase by more than 6% in 2023, with most carriers expecting even higher annual rate increases in the coming years.

Taking that figure of 6% as a yardstick for estimating future health costs, we can apply the rule of 72 to estimate how long it will take for current health costs to double. So if we take 72 and divide it by the numerical value of the percent increase – in this case, 6 – we get 12, meaning costs will double in 12 years. That means if an employer is currently paying $20,000 for an employee’s health plan, they could be paying $40,000 in 12 years and $80,000 in 24 years.

No employer on earth will ever contribute that much to a health plan. At the very least, employers will bail on sponsored health insurance and switch to the individual coverage health reimbursement arrangement. At the very most, employers will balk entirely, and the federal government will be forced to step in and extend Medicare to all. The latter option would represent the swiftest tactical – if not political – action. And, who knows, it may even end up being a swift political action once the government is faced with what could be a mass exit of employers from the health insurance market.

A new landscape for insurance benefits

Assuming that employer-sponsored health plans disappear from the market – and I feel confident in saying they will – how will this affect the insurance benefits landscape? For a start, employers would be able to turn their focus toward other insurance products, such as life, disability, vision and dental. For years, employers have treated these products almost as an afterthought. But if health insurance leaves the picture, or at the very least diminishes, employers could finally focus their resources on making their non-health insurance products the core of their benefits packages.

Such a shift toward non-health insurance products would have at least two ramifications. First, these products cost only a fraction of what is required to fund a health plan. As such, employers might choose to dramatically scale down their annual benefits budget, perhaps even by as much as three-quarters. With that extra money, employers could increase wages, which would be a huge boon for everyone.

The second ramification is that employers could switch from a defined benefit system to a defined contribution system. The latter arrangement is significantly more advantageous for all parties involved, as it allows employers to set their annual benefits contributions, which employees can then spend on whichever benefits they desire. This would open the doors to massive personalization of insurance, personalization of the benefits within the insurance, and personalization of whether an employee wants insurance at all or would rather opt for a wellness perk.

As for how this defined contribution model can be set up, lifestyle accounts would seem to be the best available option. With lifestyle accounts, all an employer needs to do is create an account for each employee, define an annual contribution of, say, $2,000 to 4,000, and let employees pick the benefits they want on the individual marketplace. This kind of setup is already finding its way into the benefits landscape and may only be scratching the surface of what’s possible.

What does this mean for insurance carriers?

If we assume that all I've said so far comes to pass, the next question is how carriers can take a leadership role in steering toward this path. To my mind, there's no way to bring hyper-personalization to insurance without accepting the need to heavily rely on big data and artificial intelligence for underwriting. Most people in the insurance industry already know this, yet I don’t think enough of them have fully grasped that big data can allow for predictive rather than reactive risk assessments.

What I mean by that is, right now, underwriting is based on the past. It assumes that past actions equal future outcomes, which isn’t necessarily true. AI allows underwriters to focus on the present as an indication of the future. Take the example of two people who appear to be exactly the same. They’re both aged 50, and they have the same job, biometrics, income and education. Under traditional underwriting standards, both these people would be placed in the same risk class.

But when big data is used, behavioral patterns start to emerge that show these are two very different people. The first applicant has a very low credit rating and is erratic in their shopping habits. Meanwhile, the second applicant appears very structured and disciplined in how they run their life. Now imagine that both people have been diagnosed with diabetes. Which one will be better able to manage their diagnosis? Clearly the second applicant, as they are far better at managing risk and the big data shows this based on their current behaviors.

This ability to identify behavioral patterns that show how an applicant manages risk is a game changer for underwriting. It means carriers can underwrite applicants with far more accuracy in their risk evaluations. Moreover, big data can allow carriers to segment applicants into market personas based on a person's specific life situation and needs. This effectively eliminates any risk of adverse selection, while also leading to easier product recommendations.

All insurance is about risk and about spreading the cost of that risk. Accepting that employer-sponsored health insurance will diminish or even disappear will change the way employers look at the benefits market. That could lead to defined contributions through lifestyle accounts, which would make personalization the most important factor in an insurance product. But there’s no way to properly underwrite a personalized insurance plan without AI and big data.

With that in mind, my advice to every carrier would be to get on the big data train now. This paradigm shift will guide them toward a future in which insurance benefits are finely tuned to individual behaviors and needs, ensuring greater customer satisfaction and improved risk management.

Bob Gaydos is the founder and CEO of Pendella. He may be contacted at [email protected].