Defined Contributions Define Health-Care Future: Peter Orszag
December 07, 2011, 2:13 PM EST - Businessweek
By Peter Orszag
Dec. 7 (Bloomberg) -- Over the next decade, we are likely to see a shift in
health insurance in the U.S.: So-called defined-contribution plans will
gradually take over the market, shifting the residual risk of incurring high
health-care costs from employers to workers.
The market today is dominated by gdefined-benefith plans, under
which companies determine a set of health-insurance benefits that are provided
for employees. These will gradually be replaced by defined-contribution plans,
under which companies pay a fixed amount, and employees use the money to buy or
help pay for insurance they choose themselves.
The fundamental driver of this shift is the effort by American
businesses to reduce their exposure to health-care costs. But the recent
health-care-reform law may accelerate the shift.
The defined-contribution concept is already familiar to most
American workers through their retirement benefits. Over the past two decades,
company retirement programs have moved decisively away from defined-benefit
plans, in which workers are paid a given amount of retirement income, and toward
defined- contribution 401(k) plans, in which risks -- from fluctuating financial
markets, for example -- are borne by workers.
In 1985, a total of 89 of the Fortune 100 companies offered
their new hires a traditional defined-benefit pension plan, and just 10 of them
offered only a defined-contribution plan. Today, only 13 of the Fortune 100
companies offer a traditional defined-benefit plan, and 70 offer only a
defined-contribution plan.
Defined-Contribution Plans
The movement toward defined-contribution plans for health
insurance is, in some ways, similar to the one that occurred for pensions, as
Kenneth L. Sperling and Oren M. Shapira explained in an article earlier this
year. The pension shift occurred in a series of stages: First, the traditional
defined-benefit plan was redesigned. Then a hybrid approach was introduced (the
cash- balance plan). Finally, defined-benefit plans were frozen.
The change in health insurance is already well under way in
coverage for retirees. In the early 1990s, in response to accounting changes and
rising costs, companies began to re- evaluate retiree health plans, and some
capped the amount they were willing to pay at a multiple of existing costs. Over
time, as those limits were reached, most companies declined to raise them,
thereby effectively creating defined-contribution retiree health-insurance
plans, with the companyfs contribution set by the cap. Exchanges have been
created to allow retirees to use these employer contributions to purchase their
own health insurance.
For current workers, the precursor to a defined- contribution
approach is the gconsumer-drivenh health plan. This typically has higher
deductibles and co-payments than a traditional plan has, and it is often tied to
a health savings account. It typically still provides generous insurance for
catastrophic cases.
The share of workers enrolled in such plans remains quite low
but is expanding rapidly. A recent survey of large companies found that, in
2012, almost three-quarters will offer consumer- driven health-insurance
plans.
The natural next step will be for employers to strictly limit
their health-insurance contributions to a set amount of money that workers could
use to buy insurance. Companies will thus eliminate their exposure to
unexpectedly high health-care costs.
Some insurers are already anticipating the shift. Bloom Health
Corp. will begin offering defined-contribution exchanges in 2012. Bloom, based
in Minneapolis describes itself as ga leader in the defined-contribution health
benefits marketplace,h and says it is gcommitted to assisting employers of all
sizes move toward an employer-sponsored system that has effective cost
predictability for employers and increased choice and personalization for
employees.h In September, the company announced that Health Care Service Corp.,
Blue Cross Blue Shield of Michigan and WellPoint Inc. had purchased a majority
of its equity.
Health-Care Reform
The inevitable transition to defined-contribution health
insurance may get a little push from the new health-care-reform law. Indeed, the
legislation may have a larger impact on the type of health-insurance plan that
employers offer than on their decision about whether to drop health-care
benefits altogether.
A misleading survey by McKinsey & Co. has suggested the
potential for huge declines in employer-based health insurance. But projections
from the Congressional Budget Office and other respected researchers generally
point to only a modest net decrease. And the experience to date in
Massachusetts, which has a health-care law similar to the Affordable Care Act,
is consistent with this prediction. (All such estimates are highly uncertain,
and what actually happens will probably depend, in no small measure, on herd
behavior. Employer surveys indicate that most companies will consider dropping
their health plans only if other firms do.)
If most employers do retain their health plans, the state
insurance exchanges created under the new federal health-care law will make the
basic idea of a defined-contribution health plan more prevalent, and thus may
speed its adoption. The regulations written to carry out the new law will
determine how things play out. If defined-contribution plans that are
sufficiently generous count as employer-based coverage -- as is generally
expected -- the trend toward such plans will probably accelerate.
Whether this turns out to be a good thing will depend in no
small part on whether the defined-contribution model helps to constrain overall
health-care costs. Therefs little point (and much potential harm in terms of
risk-sharing) in having individuals, rather than businesses, take on the
responsibility of paying for health care if there is no change in the total
cost.
I have written elsewhere that although consumer-driven plans
could help somewhat, they are unlikely to be a crucial step toward reducing
health-care spending over the long term. The evidence to date, with a few
exceptions, suggests that such plans reduce costs only modestly. After all, the
majority of costs come from the expensive cases that are still generously
insured by catastrophic-care provisions in consumer-driven plans.
Full-blown defined-contribution plans could perhaps generate
better results, though it will still be crucial to get doctors and other
providers to deliver more efficient care especially for high-cost cases.
In any case, the bottom line is that a shift toward
defined-contribution plans seems likely. Ifd be willing to bet $1 that most
large U.S. employer health-care offerings in 2020 will be defined-contribution
plans. Any takers?
(Peter Orszag is vice chairman of global banking at Citigroup
Inc. and a former director of the Office of Management and Budget in the Obama
administration. The opinions expressed are his own.)
--Editors: Mary Duenwald, David Henry.
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To contact the writer of this article: Peter Orszag at
orszagbloomberg@gmail.com
To contact the editor responsible for this article: Mary Duenwald at
mduenwald@bloomberg.net