'Defined
Contribution' Health Plans
Offer Savings, Greater Choices for Workers
 There
was a time in corporate America when employer-sponsored pension
systems were an open-ended promise to pay fixed retirement benefits no
matter what. That changed with the advent of the 401(k) plan, which
places more flexibility — along with added responsibility and risk
— in the hands of workers.
A similar shift may be about to occur with group health benefits.
Until now, employer-sponsored health plans, like the pension plans of
our fathers and grandfathers, were based on a “defined benefit”
concept: a list of covered benefits was typically agreed upon by the
employer and the plan, with workers having little if any role in the
decision making.
“Defined contribution” health care, in contrast, is based not on a
list of plan benefits, but on a commitment by the employer to fund the
plan. Under such a system, which is now being piloted in six locations
(Alexandria, Va., Atlanta, Dallas, Minneapolis, Santa Rosa, Calif.,
and Washington, D.C.), the employer offers a fixed dollar amount to be
used by the worker, who is given the menu of benefit options to choose
from. If an employee selects a benefit option whose cost surpasses the
amount set by the employer, it is up to the individual to foot the
difference through pre-tax payroll deduction. A less costly choice
enables the worker to direct the savings into another benefit program
— legal services or supplemental life insurance, for example.
Employers are attracted to the approach because it caps health plan
liability, holds down costs and offers employees more in the way of
choice.
“This is likely the year to study defined contribution plans,”
says Paul Mahoney, executive director of the North Carolina
Association of Health Plans. “It’s unlikely we’ll see anything
like them in North Carolina until 2003.”
Mahoney and others are concerned that defined contribution plans may
place too much responsibility on employees, who are largely content
with having the company design plan coverage. “People will have to
read what they’re given,” he says, pointing out the likely
complexity of such a product. And, he continues, there are difficult
questions yet to be answered. Among them:
 Are HR offices equipped to
provide education and information about the options?
Will blue-collar workers
feel comfortable making such decisions?
What are the regulatory and
tax implications?
Interest in the defined benefit approach began with larger employers,
whose economies of scale could extend a broader range of options to
employees without spurring huge new administrative costs. More
recently, the Internet affords a similar course for smaller firms by
offering an inexpensive way for employees to interact with their
benefit systems. “Technology is definitely making it more
attractive,” Mahoney says.
Another of Mahoney’s concerns involves maintaining a sound,
broad-based risk pool. “How many options can you offer consumers
before you begin to flush out the good risks?” he asks, referring to
the likelihood that the healthiest employees may well opt out of the
more benefit-rich health plans.
There may also be unanticipated headaches for employers, according to
Steve Graybill, a senior health care consultant with William M. Mercer
in Charlotte. “There are serious questions that arise when it comes
to deciding how to allocate benefit dollars,” he says.
Is there, for example, a flat fee that is set aside for each employee,
or do an employee’s age, health history and dependent status form a
calculus for determining the contribution? As in the recent noisy
debate over cash-balance pension plans, Graybill expects fairness to
become a key issue. “When you get into actual decisions about
allocating dollars, it becomes a real challenge to decide,” he says.
Others consultants believe defined contribution health care is an
inevitable and positive next step for employers. “Despite
employers’ best efforts in areas of disease management, promotion of
more healthy lifestyles and the enlightenment of health care
consumers, costs continue to increase,” says a report issued last
year by Deloitte & Touche LLP, a leading professional services
firm.
The company cites rising pharmaceuticals costs, expensive
technological advances and direct-to-consumer advertising as the main
culprits. The task falls to employers to find other tools to control
health costs, adding, “The only way employers can truly limit their
health care costs is to define their contribution to the employees’
health care and to educate employees on the best ways to finance their
remaining health costs.” -- Lawrence Bivins
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