Defined Contribution Health Insurance

Policy Backgrounders | Health

No. 154
Thursday, October 26, 2000
by Greg Scandlen


  1. Source Book of Health Insurance Data, 1980-1981, HIAA (Health Insurance Association of America), Washington, D.C., p. 12.
  2. Ibid.
  3. Health Care Financing Administration, Office of the Actuary, National Health Statistics Group.
  4. Ibid.
  5. Ibid.
  6. Social Security Bulletin, February 1976, p.13.
  7. Paul Starr, The Social Transformation of American Medicine (New York: Basic Books, 1982), p. 394.
  8. Terree P. Wasley, What Has Government Done to Our Health Care? (Washington, D.C.: Cato Institute, 1992), pp. 55-56.
  9. Aspen Systems Corporation, A Report to the Governor on State Regulation of Health Maintenance Organizations, for the Office of Prepaid Health Care, DHHS, Twelth Edition, 1990.
  10. Wasley, What Has Government Done to Our Health Care? pp. 71-72.
  11. Ricard J. Stefan, Acme Steel Company, Testimony before the Subcommittee on Commerce, Consumer Protection, and Competitiveness of the House Committee on Commerce, 102nd Congress, 2nd Session, February 5, 1992.
  12. Dean Coddington et al., The Crisis in Health Care: Costs, Choices and Strategies (San Francisco: Jossey-Bass Publishers, 1990), p. 85.
  13. Joseph A. Califano, "A Corporate Rx for America: Managing Runaway Health Costs," Issues in Science and Technology, Spring 1986.
  14. Quoted in William B. Schwartz, M.D., "Business Forum: Health Care Inflation; Cutting Costs Means Painful Choices," New York Times, May 8, 1988.
  15. HIAA, Source Book of Health Insurance Data, 1997-1998, p. 59.
  16. William M. Mercer/A. Foster Higgins & Co., Inc., cited in "EBRI Fact Sheet," Employee Benefit Research Institute, September 1998.
  17. Research on these issues is pouring out of academia. Some examples: Daniel Altman et al. examined public employee experience in Massachusetts and concluded that the 40% cost differential between HMOs and indemnity coverage can be attributed equally to risk selection and lower prices (NBER Working paper No. W7832, August 2000); on the other hand, David Cutler et al. looked at the treatment of heart disease in two data sets also from Massachusetts and concluded that "virtually all" of the cost differential is due to lower unit prices (RAND Journal of Economics, Vol. 31, No. 3, Autumn 2000).
  18. Even on a service as fundamental to managed care as encouraging the use of preventive care, the research is mixed. One study synthesized the research published between 1990 and 1998 (18 studies) and concluded that 37 % of the studies found higher use of preventive services under managed care, but 60 % found no difference. Kathryn Philips et al., "Use of Preventive Services by Managed Care Enrollees: An Updated Perspective," Health Affairs, Vol. 19, No. 1, Jan/Feb 2000, pp. 102ff.
  19. This is particularly true for high utilizers. See Benjamin Druss et al., "Chronic Illness and Plan Satisfaction under Managed Care," Health Affairs, Vol. 19, No. 1, Jan/Feb 2000, pp. 203ff.
  20. Atul Gawande et al., "Does Dissatisfaction with Health Plans Stem from Having No Choices?" Heath Affairs, Vol. 17, No. 5, September/October 1998. This is not a new phenomenon. Even the RAND Health Insurance Experiment in the late 1970s found that patients who were randomly assigned to HMOs were less satisfied than people who chose HMO coverage. Joseph Newhouse, Free for All? (Cambridge, Mass.: Harvard University Press, 1993), p. 347.
  21. Susan Marquis and Stephen Long, "Trends in Managed Care and Managed Competition, 1993-1997," Health Affairs, Vol. 18, No. 6, Nov/Dec 1999 pp. 75ff.
  22. Greg Scandlen, "New Study Shows 992 Mandated Benefits in the States," Health Benefits Letter #15, August 29, 1991. Susan S. Laudicina and Katherine Pardo, State Legislative Health Care and Insurance Issues: 1999 Survey of Plans, BlueCross BlueShield Association, December 1999, lists 1,391 state mandates. Also see John C. Goodman and Merrill Matthews, "The Cost of Health Insurance Mandates," National Center for Policy Analysis, Brief Analysis 237, August 13, 1997.
  23. As of 1994-95, 42% of all full-time employees were in defined benefits retirement programs, while 39% were in Defined Contribution programs, according to the Bureau of Labor Statistics. The Defined Contribution numbers are pulled down by the public sector, in which 86% of workers are in defined benefits programs and only 9% are in Defined Contribution programs. See Monthly Labor Review, "Defined Contribution retirement plans becoming more prevalent," Bureau of Labor Statistics, January 1999. Available at
  24. "HR Execs Want to Empower Employees to Make Own Benefits Decisions," press release on survey from Benefits Access, Inc., Hartford, Conn., October 14, 1998.
  25. Sandra Lutz, "Healthcast 2010," PricewaterhouseCoopers, Fall 1999.
  26. "A New Direction for Employer-Based Health Benefits," KPMG, LLP, publication 99-12-05, November 1999.
  27. Lisa Duchon et al., "Listening to Workers: Findings from the Commonwealth Fund 1999 National Survey of Workers' Health Insurance," Commonwealth Fund, January 2000. See also
  28. Philip Lathrop, Gary Ahlquist and David Knott, "When Consumers Rule: The Next Revolution in U.S. Health Care," Strategy+Business, reprint from Booz-Allen & Hamilton, March 2, 2000. See also article on the Booz-Allen & Hamilton Web site at
  29. One little-noticed result from the Commonwealth Fund survey is the correlation between income and group size and support for continuing an employer-based system. When looking at firm size, only 48% of workers employed by firms with fewer than 25 employees think employers are the best source, while 62% of those in firms with at least 500 workers think so. Similarly with income, only 40% of people making under $20,000 think employers are the best source, while 58% of those making $50,000 or more do.
  30. John Sheils, Paul Hogan and Randall Haught, "Health Insurance and Taxes: Impact of Proposed Changes in Current Federal Policy," National Coalition on Health Care, October 19, 1999.
  31. 26 USCS Sec. 106 (a).
  32. Revenue Ruling 61-146, 1961-2 C.B. 25.
  33. Adkins v. United States (1988 ND Ohio) 693 F Supp., 88-2 USTC, 9437.
  34. Greg Scandlen, "Legislative Malpractice: Misdiagnosing Patients Rights," Cato Institute, Briefing Paper No. 57, April 7, 2000.
  35. 29 U.S.C. Section 3(1).
  36. 29 U.S.C. Section 4(b)1-2.
  37. P.L. 104-191, Section 706 (a)(1).
  38. For a good review of these provisions, and how they relate to state-based small group reform efforts, see Len Nichols and Linda Blumberg, "A Different Kind of 'New Federalism?' The Health Insurance Portability and Accountability Act of 1996," Health Affairs, Vol. 17 No. 3, May/June 1998.
  39. P.L. 104-191, Section 2701(b)(1,2).
  40. The individual market includes 29.6 % who are below 200 % of the poverty level and 18.8 % who are between the ages of 55 and 64, while the percentages for the employer-based market are 16 and 9.2, respectively. Deborah Chollet, "The Individual Market: Consumers, Insurers and Market Behavior." KFF, January 20, 1999.
  41. The term "underwriting" is often misunderstood, in part because it is used to mean many different things. It goes back to the early days of insurance, especially shipping insurance, when a few investors would evaluate the risk of each journey and decide whether to insure it by "writing" their names "under" the manifest and description of the voyage. For a readable description of the early days of the insurance industry, see Andrew Tobias, The Invisible Bankers (New York:The Linden Press, 1982). As used in this paper, underwriting means the evaluation of individual risk. Carriers may then decide what to do with that evaluation - charge less or more than average, add an exclusionary rider, or deny coverage altogether, depending on the controlling laws and regulations.
  42. There are at least eight companies working on developing this model, often with the support or involvement of major benefits consulting firms. These companies include Lumenos, Vivius, HealtheCare, MyHealthBank, Sageo, HealthSync and some others that are not yet named.
  43. One recent example is "HealthPass" in New York. HealthPass was organized by the New York Business Group on Health with the aid of a $1 million grant from the City of New York. HealthPass offers the employees of small companies a choice of four different carriers and 20 different benefit programs. More information is available at
  44. Elliot Wicks, Mark Hall and Jack Meyer, "Barriers to Small-Group Purchasing Cooperatives," Economic and Social Research Institute, March 2000.
  45. Louise Sheiner, "How Do Wages Reflect Employer-Based Health Insurance Costs?" American Enterprise Institute, December 1999.
  46. Barbara Martinez, "Most Companies See Rising Cost of Health Care as Pressing Issue," Wall Street Journal, July 5, 2000.

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