According to several experts, including Peter Orszag,Over the next decade, we are likely to see a shift in health insurance in the U.S. with defined-contribution plans gradually taking over the market, shifting the residual risk of incurring high health-care costs from employers to workers.
Orszag expounded on this opinion recently for Bloomberg Business Week The market today is dominated by “defined-benefit” 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. These are often consumer-directed plans including those partnered with HSA's.
The fundamental driver of this shift is the effort by American businesses to reduce their exposure to health-care costs. But the recent enactment of the PPACA, i.e. health-care-reform, 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 or pensions, toward 401(k) plans and the like, 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.
Orszag shows how the movement toward defined contribution plans have shifted dramatically. He says that 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.
The movement toward defined-contribution plans for health insurance is, in some ways, similar to the one that occurred for pensions. Orszag notes that 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-- where it still exists, that is. For current workers, the precursor to a defined- contribution approach is the “consumer-driven” health plan as noted earlier. This typically has higher deductibles and co-payments than a traditional plan has, and it is often tied to a health savings account. These high deductible plans typically provide generous insurance for catastrophic cases.
The share of workers enrolled in such plans remains quite low but now sits at roughly ten million american workers. A recent survey of large companies found that, in 2012, almost three-quarters will offer consumer- driven health-insurance plans.
Some insurers are already anticipating the shift to higher defined contribution levels. Bloom Health Corp. will begin offering defined-contribution exchanges in 2012. Bloom, based in Minneapolis describes itself as “a leader in the defined-contribution health benefits marketplace,” and says it is “committed 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.” 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's Impact
The inevitable transition to defined-contribution health insurance may get a little push from the new health-care-reform law. Actually, the PPACA may cause employers to change their benefit offerings rather tahn drop coverage altogether as the health insurance exchanges develop.
Orszag suggests that a misleading survey by McKinsey & Co. indicated 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.
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, Orszag says.
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. There’s 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. 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.
The key to constraining the rapid growth in health care costs is to target each leg of the three legged stool. Greater consumer choice in heath care cost decision-making, provider incentives for more efficient care, and tort reform to reduce practice of defensive medicine.
From an employer standpoint the key at this point is that a shift toward defined-contribution plans seems likely.