NCPA - National Center for Policy Analysis

Advantages of Defined Contribution Health Plans

October 2, 2002

Researchers have traced the shift from "defined benefit" to "defined contribution" health insurance plans, and examined the advantages of the new system. Under defined contribution, the employer determines up front how much it will spend for health care, then typically provides an array of options from which beneficiaries can choose.

These self-directed plans permit the enrollee to become his own benefits manager, He decides which services are worth purchasing, at what price and from whom, and manages the money in his account to promote prudent purchasing of the health care he values. For employers, the obvious advantage is the ability to limit expenditures at the outset, rather than promising a level of benefits and then hoping to find an affordable price.

Among other advantages of defined contribution:

  • Where patients pay for the daily, mundane health care expenses out of a dedicated account, they face no significant financial barriers to care.
  • Thus, if the dedicated health account is sufficient to cover most routine expenses plus purchase a catastrophic plan, patients need not forego ordinary care on account of cost.
  • The patient has virtually complete control over which services he chooses; no HMO or other health plan can dictate which tests, treatments, and drugs he may receive, or deny coverage for nonstandard services such as acupuncture or laser vision correction, because the patient covers theses directly.
  • The patient likewise controls which providers he sees because the patient, not the plan, directly incurs the expense. He can choose any physician or specialist, any time he wishes, without begging for gatekeeper approval.

More important, the patient is free to continue in a physician-patient relationship he likes.

Source: E. Haavi Morreim, "Defined Contribution: From Managed Care to Patient-Managed Care," Cato Journal, Volume 22, Number 1, Spring/Summer 2002, Cato Institute.


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