Employment-based health insurance has grown over the past 50 years to become the dominant form of private health care financing. But as the cost of health benefits continues to increase, a growing number of employers are considering switching to "defined contribution" health insurance, says health policy expert Greg Scandlen.

• By 1965, 72.5 percent of the population was covered by some form of private health insurance.

• Half (50.3 percent) of these covered were by "major medical" plans -- double the percentage just five years earlier (26 percent in 1960).

• Even in 1960, most health care spending was paid out of pocket -- out of total health care spending of $23.6 billion, $13.1 billion (55.5 percent) was paid out of pocket (see Figure I).

• But after the creation of Medicare and Medicaid, by 1980, only 27.8 percent of total health care spending was out-of-pocket.

In 1998, out-of-pocket spending diminished to 19.6 percent of the total (see Figure III).

Federal regulations intended to slow health care inflation have not been effective. Nor has managed care brought the hoped-for rationalization of health care -- increased quality at a lower cost through coverage of preventive health care.

As with employee retirement benefits, employers are interested in substituting predictable, defined contributions to their employees' health care for the open-ended commitment of defined benefit health plans.

Moving to defined contribution plans would empower health care consumers, making health insurance "personal and portable."

As with pension programs, defined contribution would let workers "own" their own policies. They would no longer "borrow" the coverage from their employer or lose it once the employment stops. A number of changes in federal tax laws would need to be made, and the exact details of such proposed plans are being developed.

Source: Greg Scandlen (NCPA senior fellow), "Defined Contribution Health Insurance," Policy Backgrounder No. 154, October 26, 2000, National Center for Policy Analysis.

For text http://www.ncpa.org/bg/bg154/bg154.html