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Published: 5/05/03
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Consumers Take Charge: Defined-Contribution Health Plans

After twenty rocky years, employers, physicians, patients, and politicians are growing more and more frustrated with managed care, and are supporting a new consumer-driven system. The goal is to temper rising costs and improve service quality by giving consumers better information and greater control over how they spend their health-care dollars. Defined-contribution plans won’t replace managed care plans, but they will be the next dominant form.

Complaints about America’s health-care system are legion and familiar to employees and employers alike. After twenty rocky years, more and more people — employers, physicians, patients, politicians — are showing their frustration with the managed care system. Medical costs and insurance premiums keep rising. The doctor-patient relationship seems to have become as impersonal as an ATM transaction. And no one seems to have solutions.

“Consumers will be able to choose from a broad array of products, all of which and can be customized for the individual.”
Despite its slow pace, change in the healthcare and insurance services system has been building for several years. The paradigm shift is especially evident in a new kind of health plan, which seeks to address rising costs and service quality shortcomings by giving consumers better information to make decisions and giving them greater control over how they spend their health-care dollars.

The new plan has different names, known variously as defined-contribution, consumer-directed, self-directed, or consumer-driven but it’s a singular idea — power to the consumer — whose time has arrived. Indeed, 2003 may be the year that defined-contribution plans begin to make their mark as the most influential new form of health insurance coverage since managed care, according to health-care researchers at the University of Pennsylvania’s Wharton School and consultants at Booz Allen Hamilton. “By the end of 2003, we believe consumer-directed plans will come to be seen as an inevitable paradigm shift in health care. Defined-contribution plans won’t be the final form of American health care, but they will be the next dominant form,” says Gary Ahlquist, a Booz Allen senior vice president, based in Chicago.

These experts say that consumer-directed plans will never completely replace managed-care institutions, such as health maintenance organizations (HMOs) and preferred provider organizations (PPOs). But they are another option that could have as significant an impact on the operating principles and direction of the health-care sector as HMOs and PPOs did when employers began to embrace them in the 1980s and 1990s. Under defined-contribution plans, HMOs and PPOs are products a consumer may choose, not a single answer for everyone.

.Ahlquist says that the future of health-care insurance seems to be evolving into “a pluralistic system, a continuum, in which health benefits are tailored to the needs of employees.” The defined-contribution plan, he notes, is one part of the spectrum. But Ahlquist believes that over time consumers will be able to choose from a broad array of products, all of which are flexible and can, to varying degrees, be customized for the individual. “Some customers will be attracted to the defined-contribution plan and some won’t,” says Ahlquist. “But employers increasingly see the need to offer alternatives to their employees.”

How the Plan Works
A typical consumer-driven plan works this way: An employer places a certain amount of money each year (a defined contribution of, say, $2000) into an employee account that can be used to pay medical expenses. So-called Health Reimbursement Accounts (HRAs) are often the foundation of defined-contribution plans. The contribution is funded directly by the employer on a pretax basis rather than through salary reductions; employees are reimbursed up to the limit when expenses are incurred. These plans also include an employer-funded catastrophic insurance policy with a high annual deductible, perhaps $3,500 for a family and $1,500 for individuals.

If the employee uses all of the $2,000 for medical expenses, he or she would then be responsible for the additional $1,500 in expenses to meet a $3,500 deductible. Afterwards, the catastrophic insurance takes effect. The percentage of expenses the insurance covers is often 80%, with employees paying 20%. But that could vary, depending on whether or not the employee’s physician for that problem participates in a managed-care network. Any of the $2,000 that remains in the account at the end of the year can be carried over to the following year and added to the new employer contribution of $2,000.

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