NCPA - National Center for Policy Analysis

Defined Contribution Health Plans: Wave Of The Future?

December 10, 1999

Last week, the Xerox Corp. announced that it will be switching to a defined contribution health insurance plan for its employees over the next five to seven years. The idea is to give employees $5,000 to $6,000 a year tax-free to buy their own health insurance policy.

Those familiar with such plans say they offer a number of important benefits:

  • A company adopting such an approach would save money on administration costs and likely will avoid costly liability lawsuits -- since the federal government appears likely to open employers up to more liability claims.
  • The plan puts individuals -- not insurers, employers, managed care companies or the government -- back in charge of their own health care decisions, with an incentive to shop around and spend their health care dollars more frugally.
  • Legions of such frugal consumers could act as a brake on rising health-care costs.
  • Once they begin to shop for value, many workers will move to a high-deductible policy, perhaps taking advantage of a medical savings account.

Other companies are watching the Xerox move carefully. If successful, other companies will certainly adopt the policy.

Polls have shown that both employees and company executives are amenable to such a change.

Source: Editorial, "A Welcome Change in Health-Care Markets," Investor's Business Daily, December 10, 1999.


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