Today, most Americans get their health insurance through their employer, limiting choice and hindering innovation. This employer-based system is reminiscent of pensions fifty years ago, where a few institutions controlled retirement savings. The introduction of the 401(k) shifted retirement savings into the hands of individuals, enabling choice and flexibility while spurring investment innovation.

What if a similar model could be applied to healthcare? A “401(h)” could empower individuals to select their health insurance, just as they choose their investments with a 401(k). This shift could drive consumer-driven innovation, improve value-based care, and encourage people to take greater control of their health. By removing employers as intermediaries, healthcare could become more personalized, portable, and ultimately, more effective.

The Problem with Employer-Controlled Healthcare

Today, most people in the U.S. receive health, dental, and vision insurance through their employer; 49% of all Americans and 58% of Americans with health insurance (Reference: Kaiser Family Foundation (KFF) – 2023 Employer Health Benefits Survey).

Employers generally rely on insurance brokers to select and manage the health insurance plans offered to employees. This reliance on a small number of brokers concentrates decision-making power over health coverage in the hands of a few industry players. As a result, the diversity of options available to employees is limited, with brokers often favoring established insurance providers over newer, potentially more innovative alternatives. This system inherently stifles competition and limits consumer choice, making it challenging for innovative healthcare solutions to gain traction.

Research suggests that approximately 75% of employers use insurance brokers or consultants to select and manage their health plans, effectively funneling employees into pre-selected options determined by these intermediaries, rather than allowing for a truly open marketplace of insurance products (Reference: Kaiser Family Foundation (KFF) – Employer Health Benefits Survey).

Furthermore, brokers are often incentivized through commissions or bonuses from established insurers, which can lead to a bias towards traditional plans instead of promoting more diverse or disruptive health insurance solutions. This misalignment of incentives often limits the availability of innovative plans that might offer better coverage or lower costs (Reference: Health Affairs – Broker Incentives and Insurance Choice).

By centralizing the decision-making power with brokers, the current system restricts employees to a narrow selection of health plans, which is frequently dictated by the relationships between brokers and large insurance companies. This limited competition reduces the pressure on insurers to innovate or improve their offerings, effectively maintaining the status quo. (Reference: National Bureau of Economic Research (NBER) – Market Concentration in Health Insurance).

Ultimately, this broker-dominated approach can hinder the adoption of value-based care models and new insurance technologies, preventing the healthcare system from evolving towards more consumer-driven and personalized solutions that better meet the needs of today’s workforce.

Parallels with Retirement Plans

Fifty years ago, many workers, 80% in the public sector and 40% in the private sector, also received pensions from their employers, which were managed by a few large financial institutions (Reference: Pension Research Council – Evolution of Pension Management in the United States).

In 1978, the Revenue Act introduced the 401(k), enabling people to take control of their retirement investments.  While the percentage of public sector workers with pension is about the same, the percentage of private sector workers with pensions has dropped to 15% (Reference: U.S. Bureau of Labor Statistics (BLS) – National Compensation Survey).

401(k) accounts are managed individually, allowing employees to choose their preferred brokerage, make personal contributions, and decide how their money is invested. Employers can incentivize participation by matching contributions up to a limit, and the government provides tax advantages. Unlike pensions, 401(k) accounts belong to the employee, allowing portability and flexibility when changing jobs.

401(k) plans have been hugely popular. Today, 52% of private sector employees have access to a 401(k) account and around 43% actively contribute to a 401(k) (Reference: U.S. Bureau of Labor Statistics (BLS) – National Compensation Survey, March 2023).

The introduction of 401(k) plans led to an explosion of investment options (Reference: Investment Company Institute (ICI) – The Evolution of 401(k) Plans). Today, individuals can invest in stocks, mutual funds, index funds, gold, cryptocurrencies, and much more—choices that wouldn’t exist if pensions still dominated retirement savings.

Introducing a 401(h) for Healthcare

What if a similar model could be applied to healthcare?

Let’s call it the “401(h),” where “h” stands for “healthcare.”

How a 401(h) Could Work

Under a 401(h) plan, employers would no longer make health insurance choices for employees. Instead, they would contribute the same amount they currently pay in health insurance premiums into an individual 401(h) account for each employee. Employees could also contribute more, with tax advantages similar to those of a 401(k).

Employees would then be free to select any health insurance plan available in the market. They could choose an HMO plan from Kaiser Permanente, a PPO from Aetna, or a plan from a startup or a non-insurance company like Amazon One Medical. This freedom would remove the employer (and their chosen insurance broker) as the primary decision-maker and place control in the hands of individuals.

Just as 401(k) accounts allow people to shape their retirement, a 401(h) would empower them to make better choices for their healthcare. It could also motivate healthier behavior: for instance, continuing to smoke might mean higher premiums, while maintaining regular wellness visits could lower costs.

Improving Value-Based Care (VBC)

Value-based care, where providers are rewarded for keeping patients healthy rather than providing more services, is challenging under the current system. Health insurers hesitate to invest heavily in preventive care because the average member only stays with an insurer for 18-24 months (Reference: National Bureau of Economic Research (NBER) – Switching Costs in Health Insurance).

Preventive services provide long-term cost benefits, but insurers currently lack the incentive to invest in health improvements that might only pay off years down the line, especially if members change insurers (Reference: American Journal of Managed Care (AJMC) – Challenges and Opportunities in Value-Based Care).

Value-based care shifts some of the financial risks onto providers. Under VBC models, providers are rewarded based on patient health outcomes rather than the volume of services. This means they could lose income if they fail to meet certain metrics or if their patient population requires more costly care than anticipated. Many providers feel unprepared or under-resourced to manage these financial risks effectively (Reference: American Medical Association (AMA) – Risk and Reward in Value-Based Payment). This has resulted in slower than expected growth of VBC.

A 401(h) would give patients, instead of insurance companies or employers, the control to choose providers that offer VBC.  VBC providers could appeal directly to patients which can spur faster growth of VBC.  Existing providers could also offer these VBC plans to a subset of their patient population for trial.  Since patients are choosing to be in VBC plans and can potentially share the risk, they are likely to be more incentivized to do the right behaviors.

Frequent Plan Switching

The primary reason people switch insurance plans is job changes (Reference: Health Affairs – Job-Based Health Insurance in the United States: Evolution and Outlook). Either they switch employers, or their employer changes the insurance offering, forcing them to find a new plan.

As a result, people often switch healthcare providers as well, since providers may only accept certain insurance networks (Reference: American Journal of Managed Care (AJMC) – Network Limitations and Provider Switching).

This fragmentation in health insurance coverage often forces individuals to switch healthcare providers, disrupting continuity of care. Frequent changes in insurance plans mean that patients may lose access to their established healthcare providers, requiring them to find new doctors who may not be familiar with their medical history. This lack of continuity negatively impacts health outcomes, as patients miss out on the benefits of a long-term relationship with a provider who understands their medical needs in depth.

Consistent care, especially for chronic conditions, relies heavily on trust, familiarity, and accumulated knowledge between a provider and patient. Without continuity, critical medical information may be lost, coordination of care becomes more difficult, and preventive care can be delayed or neglected—all contributing to poorer health outcomes (Reference: Journal of General Internal Medicine – Impact of Insurance Instability on Continuity of Care).

Incentives and Continuity of Care

Insurance companies currently have limited data on members and often make premium calculations based on generalized risk categories, such as age and smoking status (Reference: National Association of Insurance Commissioners (NAIC) – Health Insurance Risk Assessment). This results in inaccurate cost predictions and as a result the insurance companies tend to overestimate costs and calculate higher premiums than they would if they could predict costs more accurately (Reference: American Academy of Actuaries – Health Underwriting and Risk Classification).

With people frequently changing insurance plans, often every two years, insurers face a lack of incentive to invest in long-term health initiatives. This phenomenon, known as insurance churn, means that the insurer providing preventive care today may not be the one benefiting from reduced healthcare costs in the future when the patient changes plans. As a result, insurers are hesitant to make substantial investments in preventive care, chronic disease management, or wellness programs, which may only yield cost savings over a longer period. Instead, they focus on short-term cost control, since they have little assurance that the member will remain with them long enough for these investments to pay off. This short-term perspective undermines efforts to enhance patient outcomes through preventive and comprehensive care, ultimately contributing to a reactive rather than proactive healthcare model (Reference: Robert Wood Johnson Foundation – The Impact of Insurance Churn on Health Data).

Providers also face significant challenges in building lasting relationships with patients due to frequent changes in health insurance plans. When patients are forced to switch insurance plans, often due to job changes or employer-driven shifts in benefits, they may also need to change their healthcare providers. This fragmentation prevents providers from establishing strong, continuous relationships with their patients. The lack of continuity reduces a provider’s ability to fully understand a patient’s medical history, preferences, and social factors—all of which are crucial for delivering effective, personalized care.

As a result, providers may be less motivated to invest time and resources in preventive care or relationship-based approaches, which require ongoing engagement and a deeper understanding of individual patient needs. Instead, providers often end up focusing on episodic, acute care because they cannot count on maintaining a long-term relationship with their patients. This short-term interaction limits the opportunity for providers to encourage preventive measures, such as regular screenings, chronic disease management, and lifestyle interventions, which are essential for improving long-term health outcomes. The constant need to onboard new patients and adapt to their health needs also adds administrative burdens, leaving less time for proactive and preventive care (Reference: Journal of General Internal Medicine – The Impact of Health Insurance Changes on Continuity of Care).

A 401(h) could promote continuity, leading to stronger patient-provider relationships, better health outcomes and lower insurance premiums.

A New Era of Consumer-Driven Healthcare

A 401(h) could drive innovation in healthcare, much like the 401(k) transformed retirement savings. Removing employers as intermediaries would put purchasing power in the hands of consumers (Reference: The Commonwealth Fund – Rethinking Employer-Based Health Insurance). As a result, insurance companies and healthcare providers would be forced to offer products and services people genuinely want.

Employers would also benefit, as they would no longer need to allocate significant resources to selecting and managing health plans. It has been estimated that for larger employers, administrative expenses, including management fees and broker services, constitute about 2-3% of total premiums, while for smaller employers, this percentage can be as high as 10-15% (Reference: Kaiser Family Foundation – 2023 Employer Health Benefits Survey).

Consumers would gain control over their healthcare spending and be held accountable for their health decisions.

For Those Who Prefer Simplicity

Not everyone wants to manage their healthcare actively. Just as employers often auto-enroll employees in 401(k) accounts with default investment options, a 401(h) plan could also default to a preselected insurance plan for those who don’t want to make an active choice.

Potential Challenges With 401(h)

While a 401(k) offers individuals more control over their retirement savings, it is not without its challenges, and similar concerns could arise with a 401(h). Understanding these common issues can help anticipate potential pitfalls and design better safeguards:

1. Early Withdrawals and Misuse of Funds:

• In 401(k) plans, individuals can make early withdrawals, but they incur significant penalties and taxes if withdrawn before the age of 59½. Similar challenges could arise with a 401(h), where people might be tempted to access healthcare funds for non-health-related expenses, potentially jeopardizing their future healthcare needs. To mitigate this risk, the government could impose penalties for non-healthcare withdrawals and apply restrictions similar to those of a 401(k) to discourage misuse.

2. Lack of Financial Literacy:

• Many people lack the financial literacy needed to make optimal investment decisions in their 401(k) accounts, leading to underperformance or risky choices. With a 401(h), similar problems could arise, as individuals may struggle to select the right insurance plans or allocate their healthcare funds effectively. To address this, education programs would be crucial in helping people make informed decisions.

3. Fees and Administrative Costs:

• One of the most significant drawbacks of 401(k) plans is the impact of administrative and management fees, which can reduce long-term growth. A similar concern might apply to a 401(h), with fees potentially reducing the funds available for healthcare. Transparency in fee structures and competition among 401(h) providers would be essential to keep costs manageable.

4. Limited Options and Choice Overload:

• While 401(k) plans are intended to provide flexibility, they often have a limited selection of investment options, and navigating these options can be overwhelming for many individuals. A 401(h) could face a similar issue if participants are given too many health plan choices without proper guidance, which could lead to decision fatigue and suboptimal plan selection.

5. Market Risk and Uncertainty:

• The value of a 401(k) is subject to market volatility, making retirement savings vulnerable during economic downturns. A similar risk may emerge in a 401(h) if participants are allowed to invest in healthcare-linked financial products, such as health savings bonds or other healthcare investment vehicles. There needs to be a balance between growth potential and ensuring security for healthcare spending.

6. Contribution Limits and Accessibility:

• In 401(k) plans, contribution limits are set by the IRS, which may hinder high earners from contributing as much as they’d like. For a 401(h), similar limits might restrict participants’ ability to save enough for comprehensive healthcare needs, especially as healthcare costs continue to rise. Policies should consider increasing contribution limits or creating catch-up contributions for individuals with significant healthcare needs.

7. Income Disparities in Contributions:

• Lower-income individuals often struggle to contribute to their 401(k), and this disparity may extend to a 401(h). If healthcare contributions are largely self-funded, lower-income workers may not be able to save enough to meet their healthcare needs, exacerbating existing inequalities. Employer and Government matching programs or subsidies could help mitigate these disparities.

8. Employer Match Variability:

• In 401(k) plans, employer matches are not guaranteed and vary significantly. This variability could also occur in a 401(h), depending on employer willingness to contribute towards healthcare accounts. Employers might need incentives to contribute consistently, such as tax deductions or credits.

Despite these challenges, the benefits of empowering individuals to control their healthcare funds could drive innovation, enhance market competition, and promote personal accountability. Implementing safeguards—such as penalties for improper withdrawals, educational initiatives to guide healthcare decisions, and government incentives—can help address these issues while ensuring that consumers have the freedom and resources to make the best choices for their healthcare.

Integrating HSAs and High-Deductible Plans

High-deductible health plans (HDHPs) and Health Savings Accounts (HSAs) are still controlled by employers, limiting choices. The HSA component of healthcare, which allows pre-tax contributions for medical expenses, could be integrated into the 401(h). This would give individuals complete control over both their premium and out-of-pocket spending, enhancing their ability to manage all healthcare dollars.

1. High-Deductible Health Plans (HDHPs) and Employer Control:

• HDHPs are often offered by employers as part of their health insurance options. The employer’s choice in selecting an HDHP limits the flexibility of employees to explore other high-deductible plans that might better suit their needs (Reference: Kaiser Family Foundation (KFF) – Employer Health Benefits Survey).

2. HSAs Tied to Employer-Controlled Plans:

• HSAs are usually linked to employer-selected HDHPs, which restricts the ability of employees to choose the best combination of coverage and savings that meets their individual healthcare needs. This linkage limits autonomy in how employees manage their healthcare dollars (Reference: Health Affairs – Health Savings Accounts and Consumer Empowerment).

3. Potential for Greater Flexibility by Integrating HSAs into a 401(h):

• HSAs allow pre-tax contributions for out-of-pocket healthcare expenses, but expanding these accounts into a broader “401(h)” model could provide more comprehensive control, including over premium payments. This would empower individuals to manage both their savings and spending without employer intervention (Reference: National Bureau of Economic Research (NBER) – HSAs and Consumer-Directed Health Care).

4. Enhancing Individual Control Over Healthcare Dollars:

• A report from the Employee Benefit Research Institute (EBRI) argues that giving individuals control over all healthcare dollars, including premiums, via an HSA-like mechanism can enhance consumer autonomy. Integrating HSAs with a 401(h) approach would help align spending decisions with individual preferences rather than employer-dictated plans (Reference: Employee Benefit Research Institute (EBRI) – HSAs and Employee Control).

5. Linking HSA Contributions and Autonomy:

• According to the Brookings Institution, expanding HSA contributions to cover broader health-related expenses, including premiums, could empower individuals by providing more flexibility and choice. This would mirror the intent of a “401(h)” and help individuals plan comprehensively for healthcare costs (Reference: Brookings Institution – Enhancing Health Savings Accounts for Greater Consumer Choice).

Conclusion

The introduction of the 401(k) transformed retirement planning by shifting control from employers to individuals, spurring innovation and dramatically expanding consumer choice. Similarly, a 401(h) could be the catalyst for a new era in healthcare—one that puts decision-making power directly into the hands of consumers. By removing employers as intermediaries, a 401(h) would give individuals the freedom to tailor their health coverage to fit their unique needs and preferences, fostering a competitive environment where insurance companies must innovate to attract and retain customers.

Empowering individuals with both financial responsibility and choice could lead to more cost-effective healthcare utilization, incentivize preventive care, and promote healthier behaviors. As individuals become active participants in their healthcare journey, they would gain not only better options but also greater accountability for their own health outcomes. Ultimately, a 401(h) could help create a more efficient, responsive, and person-centered healthcare system—one where innovation thrives and healthcare solutions evolve to meet the true needs of those they serve.

The future of healthcare should be one where every person has the tools, resources, and flexibility to make informed choices. Just as 401(k) plans changed how we think about retirement, a 401(h) could fundamentally redefine how we think about, pay for, and experience healthcare.

What Do You Think?  Is it time for us to have a 401(h), a 401(k) for Healthcare?