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

Issues, such as the amount of the company’s annual contribution, the deductible, the catastrophic insurance premium, and whether accumulated savings can be rolled over to another company if an employee leaves, vary from employer to employer. Employers also differ on the maximum amount they will allow an employee to accumulate in a medical account. Most companies place limits on the total amount of money that is allowed to accumulate in an employee’s account as funds are rolled over from year to year.

Not coincidently, the health-insurance industry has borrowed the term “defined contribution” from the choice-driven 401(k) retirement-planning nomenclature. Defined-contribution retirement plans are those in which employers make contributions to the accounts of employees, who then have the power to invest the money themselves as they see fit. These retirement plans have revolutionized corporate pension schemes and largely replaced old-fashioned defined-benefit plans, under which employers used a formula to determine the monthly sum an employee would receive each month upon retirement.

Precise figures on the adoption of consumer-directed plans are hard to come by, but various estimates suggest defined-contribution plans now account for about 2% of all health care coverage in the United States. That’s only about 300,000 to 400,000 people, or less than 1% of all company-insured employees. Booz Allen, Wharton, and other healthcare industry experts looking at the future see the trend accelerating among companies large and small, and believe, within five years, these sorts of plans will be much more common. According to a 2002 survey by Mercer Human Resource Consulting, 7% of employers with 20,000 or more employees offer defined-contribution plans, and another 14% will likely make them available by the end of 2004.

“Defined contribution plans will never grab 100% of the market, but they will eventually be used by about 10% to 15% of U.S. employees.”
Among large corporations, early adopters include Novartis, Aon, Budget Group Inc., Scientific Atlanta, Inc. Textron, and Medtronic, Inc. In 2002, every employer member of the Pacific Business Group On Health, including CalPERS, the giant California state pension fund, offered a defined-contribution plan to at least some of their employees. Launched in January 2002, Budget’s first consumer-directed plan enrolled about 13 percent of eligible employees, according to HR Magazine. Mark V. Pauly, professor of health care systems, at Wharton says his research has turned up “a few cases where a third of a company’s workers have signed up” for defined-contribution benefits.

On the supply side, Web-savvy companies provide the technology tools and administrative support to help companies manage their plans. Definity Health and Lumenos were among the firms that pioneered HRAs. CareGain recently created a variation on the HRA it calls the “Healthcare IRA”. As reported in Employee Benefits News in April 2003, the Healthcare IRA “skims” a percentage of each member’s HRA funds, say 25%, and at the end of the year puts the money into a “portable lifetime medical expense account,” which is regulated by Section 213 (d) of the IRS code. Providers offering similar technology and services, include Destiny Health, FlexScape, MyHealthBank, PlanScape, and WellPoint.

Sean Nicholson, a professor of health care at Wharton, says rising healthcare costs are making companies pay closer attention to defined-contribution plans. According to the Towers Perrin 2003 health care costs survey (conducted in August/September 2002), the average HMO rate of increase for active employees is 15%. While this is not dramatically higher than historical increases, it is still irksome to companies. “At some point employers become infuriated with another 12% to 15% increase in annual premiums. They say, ‘We’ve got to try some new way to get costs down. No single type of plan will be able to keep medical costs growing at less than the rate of inflation. If any plan can keep costs from growing faster than inflation, it’s done its job.” According to Nicholson, good plans will be those that allow premiums to increase at 6% to 8% a year rather than 12% to 15% a year.

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