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

Trade publications reporting on early pilot programs at companies suggest the new plans are attracting strong interest among employees, and are positively viewed by management. The health benefits company Humana signed up 6 percent of 4,800 employees in a 2001 pilot. The next year, it opened the plan to all employees, and 18 percent of its 14,000 employees signed up. A spokesperson for the company also noted that premium increases have fallen from 19% to 10% per year since the plans were introduced. Not all companies, however, say that saving money is their primary motivation. At Medtronic, for example, a senior benefits executive said the company was not facing onerous increases in medical costs when it introduced its plan; leaders simply believe the consumer-driven approach is a better model.

Although it is becoming apparent that the employer community is showing robust interest in adopting a consumer model, insurers are not moving as fast. “There is a high degree of inertia among a broker community that has taken a more conservative view of the movement, says Ahlquist.

Filling a Void
Booz Allen’s consultants argue consumer-directed healthcare plans exist because they address an “incomplete agenda” left by 20 years of experimentation and failure with managed care. Another reason is corporations remain paternalistic towards their employees. Even as the choice paradigm spreads, most employers today still pick the health plans themselves; then employees choose from a very limited menu. “Businesses have gotten away from that paternalistic approach in the retirement area and now they’re moving away from it in the health-insurance area,” observes Ahlquist. Companies are doing this because their employees want it that way. “In the health-care surveys we’ve done, employees tell us more and more that they want choices,” Ahlquist notes.

But with more choice comes more responsibility, and the need for employee education. These plans are not less complicated than existing options, and the financial implications for employees are not clear cut. “Managed care puts doctors and insurers at financial risk; defined-contribution plans put the employees themselves at financial risk,” says. Pauly. “This is a lot of risk for people to take on. Still, people feel more capable of handling their own health-care rationing today than they did before.”

“Managed care puts doctors and insurers at financial risk; defined-contribution plans put the employees themselves at financial risk.”
Clearly managed care, in addition to falling out of favor with consumers, has not reduced health care costs as much as was predicted two decades ago. Consumers view health benefits purchased each year as an evaporating asset they had better spend. Without provisions for carry-over or portability, rational consumers will consume such benefits or lose them. Throw into the mix that it is someone else's money (the employer’s and the insurer’s) and the result is unfettered spending. Indeed, a powerful argument for adopting consumer-driven plans is that they will make employees more cost conscious, which could substantially reduce employers’ health-care costs. “When people spend their own money, they are more frugal,” says Pauly.

Booz Allen’s Alquist and colleague David G. Knott, vice president and managing partner in Booz Allen’s New York office, suggest other factors that explain the flaws of the current system and reasons why consumer-driven plans can fill a major void:

  • Many consumers fail to recognize that the majority of their health-care benefit dollars comprise a subsidy for current, routine, predictable consumption, not catastrophic insurance against unforeseen events.
  • Consumers have no incentive to choose economically rational care and treatment options. Why stop smoking, go on a diet and exercise when one’s health plan pays for a lifelong prescription to an anti-cholesterol drug? The consumer never sees any benefit from the money that is saved.
  • Two-income households get little advantage from having two employers’ health-care options at their disposal. They are forced to choose the better of the two plans, without being able to pool two contributions to purchase superior benefits.
  • Currently tax deductibility is confined to employer-sponsored plans. Self-employed persons and those without work-based plans are out of luck. Without tax deductibility for those lacking an employer-sponsored health plan, even good risks with means opt out of the system — a bare-bones policy ($5,000 deductible) for hundreds of dollars a month leads many to depend on luck and good genes rather than insurance. Younger consumers, especially, choose this path because they see no reason to pay into a system that builds no equity for future needs.
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