Defined Contribution Health Insurance
Table of Contents
To date, there has been little implementation of a Defined Contribution approach to health care. Employers are still working through the implications of such a move for their workforce and for their companies. But recent surveys show a significant level of interest among both employers and employees.
"Recent surveys show a significant level of interest by both employers and employees in a Defined Contribution approach."
Cigna/Benefits Access. One of the first surveys was conducted by Benefits Access, Inc. (owned by Cigna), published in October 1998.24 The firm surveyed human resource executives at 900 mid-sized companies and found that "60% of HR executives wish they could provide employees with enough information to make their individual benefits decisions and 'leave the rest to them.'" It also found a great deal of frustration among HR executives who felt underfunded and overworked.
PricewaterhouseCoopers. About a year later, PWC released its "Healthcast 2010"25 report, which included a survey of "U.S. Healthcare Leaders." The report stated flatly that "Defined Contribution programs will emerge in healthcare." It explained:
Moving to a Defined Contribution program may allow employers to better control their cost obligations of providing healthcare benefits. "Health benefits are becoming more of a dissatisfaction of employees," says one employer who spoke of the hassles of negotiating coverage denials with insurers on behalf of workers.
PWC reported that some 62% of "healthcare leaders" expect that employers will move to Defined Contribution by 2010, 58% expect Medicare to do the same and 60% think that most employers will offer Medical Savings Accounts by then.
KPMG. KPMG surveyed 103 senior executives and over 14,000 employees of Fortune 1000 companies to test their interest in the Defined Contribution concept.26 The results were first presented at the "Consumer-Driven Health Care Conference" organized by Prof. Regina Herzlinger at the Harvard Business School in November, 1999. KPMG asked employees:
What if you were able to select from any health plan being offered in your area, at the cost you choose, using both your employer contributions and the personal contributions you make, instead of having your employer select plan options for you? How interested would you be in this concept as a replacement for your current health care selection options from your employer?
"The vast majority of those interested in a Defined Contribution approach were satisfied with their current choice of health plan."
As Figure V shows, 25% were "extremely interested," 19% "very interested" and 29% "somewhat interested." It is worth noting that of the 73% of employees who were interested, the vast majority (84%) were either "highly" or "somewhat" satisfied with their current choice of health plan.
A similar question was asked of the employers, and 46% were found to be "receptive" while 31% were "unreceptive." Of those who were receptive, 80% said they would be likely to switch if there were no negative tax consequences for their companies or their employees. Employers underestimated how interested their workers would be in the new approach - 45% thought their workers would be unreceptive, while only 40% thought they would be receptive.
"The Commonwealth Fund put its own spin on its survey results."
Commonwealth Fund. The Commonwealth Fund released a survey in January 2000 called "Listening to Workers."27 It surveyed some 5,000 adults from January to May of 1999 to ask about their experience and preferences in acquiring health insurance. The key question and breakdown of responses are shown in Table I:
This survey provides an interesting example of political spin in the way it reports its results. In the narrative, the authors take dead aim at the KPMG study and say:
The vote for employers, rather than direct purchase, appears at least in part to be a vote for group coverage and the value of having a group sponsor when selecting health plans. These findings speak against a move by some employers to convert plan sponsorship to a defined "contribution" in which employees would be on their own when arranging coverage. A significant majority - 67% - wanted some form of group coverage, either through employers or government.
That's one way to spin the results, but quite a stretch for several reasons:
- The question doesn't really test the interest in Defined Contribution. Unlike the KPMG survey, it says nothing about employers paying most of the premium but implies that employees would have to pay out of their own resources.
- The question omits any possibility of non-employment groups being formed to help find coverage and retain marketing efficiencies.
- Combining support of government programs and employer-sponsored care as forms "of group coverage" is peculiar. It is doubtful that people on Medicaid consider themselves enrolled in "group coverage." It would be more logical to combine employer-based and individual coverage as forms of private insurance, supported over public programs by 72% of the respondents. Certainly private individual coverage and private employer coverage have more in common than either does with Medicaid.
- It is far more interesting that only 56% of people who currently have employer-based coverage think that is the best way to get coverage in the future. Over one-third (35%) would prefer something different.
- A plurality (31%) of people currently in public programs would prefer direct purchase, and only 22% would choose to continue in a public program.
"The small to mid-sized companies are the ones most eager to find a new way to deal with health coverage."
Booz-Allen & Hamilton. More recently, the consulting firm of Booz-Allen surveyed Fortune magazine's "100 Best Companies to Work For" and found "all but a few were anticipating a shift to defined-contribution systems, which would save them millions of dollars in administrative costs by taking them out of the selection and retailing process." One of the authors, Vice President David Knott, said, "We believe the move to defined-contribution health plans is no more than three to five years away. Within 10 years, the defined-contribution system will be as common in health care as it is in retirement planning."28
Notably, these surveys focus on larger employers. Yet they are the very ones that currently have sophisticated human resource departments and can do a relatively good job of administering a health benefits program.29 The small to mid-sized employers are the ones that are especially hard-pressed. The car dealers and plumbers and print shops with 100-500 employees can't afford professional benefits management and are the most eager to find a new way.