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

Overall, the goal is to create incentives for people to pay closer attention to preserving their health and being better-educated consumers.

Policy Friends and Foes
In 2003, economic pressures and public policy trends continue to make defined-contribution plans seem sensible. The weak U.S. economy has cut into corporate earnings, and forced companies to look for ways to trim expenses any way they can.

Another factor driving up corporate interest in defined-contribution plans was an important Internal Revenue Service ruling on June 26, 2002, which allowed for the tax-free rollover of employer-contributed health-care benefit dollars, similar to the rollover permitted in 401(k) plans. Although the same feature needs to be extended to employee contributions, this IRS ruling and other proposals show the Bush administration has clearly signalled its intent to encourage consumer-directed plans.

Going forward, several ingredients are needed to accelerate the momentum of consumer-directed health plans. One, already mentioned, is the tax-free rollover for employee contributions and the portability of all unused balances. With Republican majorities in both Houses of Congress, Booz Allen consultants expect the issue of employee-contribution rollovers and portability to be addressed in 2003 or 2004. Many states, encouraged by the Administration's support of "Association Health Plans," are already looking at their insurance regulations to find new ways of pooling risk, especially for the self-employed and employees of small businesses.

Other crucial ingredients include a more competitive provider marketplace, and the success of new entrants. “Yes, we need people to be responsible and educated consumers of health care, which should bring down costs, but we also need real competition among providers. Defined-contribution plans may have an impact on reducing the overall cost of health care in America, but the existence of these plans alone is not enough to do that,” says Knott.

To be sure, not everyone supports widespread adoption of defined-contribution health plans. There’s the argument that these plans are only a good deal for the young and healthy. “Some employers are afraid if they offer one of these accounts alongside very strict managed care plans, the healthy people will go right after the self-directed plan and the chronically ill will be stuck with managed care and premiums will rise,” says Wharton’s Nicholson.

“Consumer-directed plans give employees the power to make choices, but they also give people the power to screw up. That worries some employers.”
Organized labor has also spoken out strongly against them. “Unions say consumer-directed plans are a scam,” Nicholson explains. Labor advocates argue that deductibles are certain to rise over time, and unless employers are willing to make ever-increasing annual contributions to employee medical accounts, the gap between the employer contribution and the deductible will also widen and leave a major burden on employees. “Unions feel that there may be nothing inherently risky now about these plans that will scare anybody, but if that gap becomes $4,000 or $5,000, that can be a real hardship,” adds Nicholson.

Another hurdle: Some employers feel obliged to continue the paternalistic approach in the sincere belief that there are many employees who are unable or unwilling to take charge of their own health spending. As Wharton’s Pauly puts it: “Consumer-directed plans give employees the power to make choices, but they also give people the power to screw up.” That worries the employers Wharton surveyed, says Pauly. Although they believe education and communications strategies are critical to the success of these plans, they’re also concerned education is costly, and may not always be effective.  “Employees like seeing the upfront money, but if they get a big medical bill and have to spend all the money and start paying out of their own pocket, they blame it on their employer for not explaining it well enough,” he says.

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