NCPA - National Center for Policy Analysis

Employers May Switch To "Defined Contribution" Health Plans

July 7, 2000

"Defined contribution" health plans is one of the hottest concepts in health care financing today, say experts. Under a defined contribution health insurance program, employees choose their own health plans using the money the employer already spends on health care.

If the employer contribution fails to cover the full cost, employees supplement it with their own funds. Or they can choose a less generous plan and pay less out of pocket. Either way, the employees make their own decisions about available resources and acceptable trade-offs.

A poll by the consulting firm KPMG found, among the 14,000 employees of Fortune 1000 companies it questioned, widespread interest in moving to a defined contribution approach.

  • KPMG found that only 23 percent of the workers polled were "not at all interested" in a defined contribution plan.
  • The rest were "extremely interested" (25 percent), "very interested" (19 percent), "somewhat interested" (29 percent) or had no opinion (4 percent).

By contrast, the authors of a recent Commonwealth Fund survey claim that their "findings speak against a move" to defined contribution plans. But they did not directly ask about defined contribution.

Most people looking at defined contribution programs assume employers would continue to help pay employees' insurance costs, while workers would be free to form other groups to reap the benefits of joint purchasing -- such as labor unions, homeowners' associations, churches, credit unions and fraternal clubs.

Experts say benefit consulting firms like KPMG, Booz-Allen Hamilton, and Pricewaterhouse Coopers are discussing with their clients how to make the transition to defined contribution plans.

Source: Greg Scandlen (NCPA Health Policy Senior Fellow), "Health Insurance: Letting Employees Choose," Brief Analysis No. 325, July 6, 2000, National Center for Policy Analysis.


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