Defined Contribution Health Insurance
Table of Contents
Over the past 50 years, employers have done a good job of voluntarily providing coverage to the American people. The vast majority of Americans get their health insurance through the employer-based system, leaving the government responsible for covering those not associated with an employer - the poor and the elderly.
"Our system of third- and fourthe party payment has distorted the economics of health care."
Unfortunately, this system of third- and fourth-party payment has distorted the economics of health care. Consumers are so far removed from the financial consequences of their decisions that costs have risen dramatically. And working people whose employers do not provide coverage are doubly disadvantaged - once because they pay prices inflated by employer and government subsidies, and again because they get no similar subsidy. The two groups of people who receive the least support in our system are the uninsured and those who purchase individual coverage. Yet the latter group is older, poorer and sicker than people with employer-based coverage, and the former is younger, sicker and poorer. In either case, the very people who most need help get it least.
For the past 25 years, employers have wrestled with the consequences of this inflationary system. They have tried almost everything - self-funding their benefits to control reserves and lower administrative costs, redesigning benefits structures to emphasize outpatient treatment, requiring second surgical opinions and utilization reviews, increasing employee cost-sharing and switching to HMOs and other managed care programs. These changes have had some success in holding down costs, but usually the effects are short-lived. And they have created resentment on the part of employees who feel that needed services are being withheld.
Partly in response to the growing resentment among employees and providers, the federal government has enacted what it views as remedial legislation: COBRA, HIPAA, mandates for maternity coverage, mental health care, mastectomy hospital stays and currently the prospect of liability for bad outcomes through the Patients' Bill of Rights proposals. To employers, it seems that every year brings new regulations. Even if the Patients' Bill of Rights is defeated, it will be small consolation to many employers who expect the next Congress to add yet more requirements.
Employers spend a lot of money on health care, often $4,000 to $6,000 per employee per year, but they get little benefit for it in terms of employee morale. Employees have little sense of what these benefits cost, but they have great expectations that all services should be covered at little cost to themselves.
There was a time when employers were happy to divert some portion of the total compensation package out of wages and into health benefits. There was little difference in administrative burden, and providing health insurance meant a more productive workforce and less sick leave expense. Further, the fact that health benefits were excluded from income was a major advantage to workers.
Now employers are concluding that the regulatory and administrative burdens of managing benefits programs are too great. It is far easier to simply pay out the cash than it is to divert the funds into benefits. If they can find a way to do so while retaining the productivity advantages of health benefits, they will have a win/win situation.
This is what Defined Contribution is aimed at. Ultimately, employers will be able to simply write the checks for coverage - much as they write the checks for payroll. But the money will be available solely for the purchase of health insurance, so the productivity issues are addressed.
"The impact of Defined Contributions on employees should be profound."
The impact on employees should be profound. They will be able to choose the health plan that is most suited to their own needs, and "vote with their feet" if a plan doesn't perform as promised. They will make their own trade-offs in benefit design and cost-sharing, allowing them to take risk at the level with which they are comfortable. They will be able to keep the same plan as they change jobs, and even enter into long-term contracts with their health plan. They will be able to amend their benefit design as they go through life's changes - beefing up on maternity and pediatric coverage when they are young, switching to vision, dental and even long-term care coverage as they age. They will be able to save money when their expenses are low, and have it available when expenses get higher.
This is a rational health care system that can meet the needs of each family. It is not a one-tiered, or two-tiered or even five- or six-tiered health care system. It is a 270 million-tiered health care system that delivers exactly those services each individual demands. Now, that is a market-based system.
Greg Scandlen is a Senior Fellow with the National Center for Policy Analysis