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Vol. 3. No. 3
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May/June 2001 |
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Train Rescue or Train Wreck: Defining the Future of "Defined Contribution"
by Barry Scheur and Hilary Lyon
Recently, there has been an emerging trend in attempts to once again control health benefits costs. Over the past twenty-five years, we have migrated as an industry from primary care management to medical management to case management and to disease management -- all are ways of trying to de-escalate the never-ending need to raise premiums to cope with healthcare cost increases. One of the reasons that consumers' expectations are so high when it comes to healthcare is that they have been treated as blind purchasers: naive about what employers pay and, even more significantly, unaware of the costs of specific healthcare services that, when mathematically coupled together, are translated into an insurance premium.
Within the past year, a number of large employers have been seeking ways to limit their contributions to healthcare benefits, while at the same time transferring more of the decision making about healthcare benefits to their employees. Thus, the concept of "defined contribution," in which an employer designates a fixed number of dollars that can be spent by consumers on a variety of health plan choices. This also permits consumers with differing medical needs and family situations to make decisions on how much they want to spend on their healthcare benefits.
Defined contribution plans may also be coupled with Section 125 plans in which employees are given a cafeteria menu of benefits choices that include health benefits in various pricing, network, and coverage level configurations that allow further flexibility according to the needs of the employee and family.
The defined contribution model is gaining proponents, particularly among large employers, because it permits capping healthcare expenditures and forces more direct consumer involvement in decision making about the value of healthcare coverage as a fringe benefit.
The key element in the success of defined contribution will be educating consumers about their choices in terms of cost, coverage and value.
How Defined Contribution Would Work
Just imagine the following scenario for consumers, with all of the flexibility and freedom it offers. This is the way that defined contribution plans could operate. |
- The employer allocates the same amount of money spent last year on an employee's healthcare premium to a medical spending account. This would be before tax dollars, let's say $5,000.
- The employee accesses, via the Internet, a health plan or every-business web site to choose from a menu of healthcare options.
- The employee picks from a variety of services with varying co-payments dependent upon individual and family needs that particular year. For example, the employee picks a benefit package with a $10 doctor office co-pay and a $30 drug co-pay, and then, if warranted, spends an additional $25 PMPM on a diabetes wellness program.
- In addition, he or she chooses life insurance and the option that provides for long-term care.
- The employee also likes targeted case management services at a premium of $20 PMPM for a covered dependent undergoing rehabilitation services.
- Comprehensive dental, vision and mental health services are also available, and the member chooses to purchase that coverage.
- Then comes the selection of doctors from several network options: the first group of doctors has a premium of $65 per month; the second set costs $85 per month. A click of the mouse allows the consumer to see the difference in the utilization patterns of each doctor in the network compared to peers in the same specialty. The profile contrasts the number of procedures a physician performs in a year, the patient outcomes and the average cost.
- After all the selections have been made, the employee is notified of the total costs.
- The employee is responsible for any amount over the $5,000 amount defined as the employer's healthcare contribution.
- Again, this has to be created and offered in terms the employee understands, with choices and options available as alternatives.
If this all sounds far-fetched, it isn't. In fact, it is here today with over thirty software companies offering this service online for a purchase fee by MCOs. The question of the future realistic feasibility and success, not to mention usage, of these plans' usage remains sketchy. There are discrepancies regarding the number of employees signing on, as well as the number of employer groups using this service, with only a relatively few MCOs actually implementing this service.
Although the scenario outlined above is not an exact replica of what is being offered today in terms of an integrated defined contribution package, it does represent the possibilities that exist. In the near future, employers will be able to isolate themselves from making healthcare choices for their employees, relieving themselves of the liability and some financial burden by depositing predetermined defined contributions into healthcare accounts where employees may select the services of benefit to them. Furthermore, these benefits can be redefined annually to reflect the employees' current needs and health status.
The Advantages
Defined contribution does have a number of advantages over the current approach to health benefits selection and management:
1. It forces the insurance industry to gear its communications directly to consumers with more explicit information pertinent to coverage, prices negotiated for various healthcare services, and the real differences between competing plans.
2. It has the potential for reducing the role of the "middleman" broker or consultant, with a resulting reduction in commission fees.
3. It will result in many consumer-tailored health benefits offerings because the decision on how much to spend for healthcare will be driven directly by consumers, and their influence will be felt when it comes to designing benefits and defining the scope of the network.
4.The emphasis on direct marketing will increase, which should result in overall improvement of communications between the healthcare organization and its customers.
5.Customers will be freer to demand needed accountability by having increased power to vote with their feet.
6.It increases significantly the reliance on Internet-based technology for delivering information to customers and purchasers. The evolution of relying on the Internet for distribution of information and interactive communications will be vastly speeded by the market opportunities envisioned through direct consumer benefits choice and purchasing.
The Disadvantages
There are several blatant and troubling disadvantages to the use of defined contribution as a mechanism for shifting the burden of choice and selection, not to mention payment, from employers to employees.
1. What will happen when employees make unwise health benefits choices in the face of needing major care that is not covered under their package? Lawyers are likely to argue on their behalf that they were not briefed appropriately, and the field of sufficiency of disclosure under defined contribution plans will be a fertile one for litigation.
2. Defined contribution plans will only work for large businesses until the complexity of administration and employee communications become part of a templated package. Thus, rates for the other traditional benefits choice products actually may be adversely affected by the introduction of a new breed of benefits design.
3. Defined contribution plans will be paired with self-funded arrangements by large employers. The spread of the popularity of these arrangements will further erode the state-mandated benefits coverage requirements, which means that plans will bedesigned without key mandated features, and only later will customers realize their selection mistakes. Not providing maternity coverage, not treating mental health services on an equal basis to other inpatient services, and limitations on drug benefits are just three examples of benefit designs that could severely hurt the consumer.
Most middle-class consumers are going to be cost conscious, and will try to take the least costly healthcare benefits program, until they are damaged by its lack of comprehensiveness and/or payment. For this whole system to work, a massive educational phase-in needs to exist.
4. Defined contribution plans cannot be instituted en masse without a mechanism for state regulatory oversight. Plans will promise anything to get business, but once the premium has been paid, if there has not been truthful and full disclosure, it will be the state that has to clean up and deal with unmet customer expectations and broken promises. A regulatory framework is needed before, not after, the introduction of such a sweeping benefits revolution.
5. Health plans will have to evolve to something different, primarily a marketing and back-office support organization, if defined contribution gains wide acceptance. The risks of betting on books of business is eliminated, and replaced by random freedom of choice programs. It will be harder for health plans to continue to operate in a defined contribution environment, because they won't know the risks they are running until they are already under one contractually.
Conclusion
There have been a number of good ideas for managing and restructuring healthcare, and defined contribution may be one. But it is going to require a recognition of the risks and possible damage to both the credibility of the involved organizations and the physical and emotional well-being of consumers when they step into that mythical health care voting booth for the first time.
About Hilary Lyon: For SMG clients and the health plans in SMG's new business initiative, Venture Health Partnership Group (VHPG), Hilary Lyon applies an extensive background that spans 20 years' experience in healthcare management and operations to the strategic focus of rethinking provider relations management for the new century in health care. Her global perspective on the healthcare industry -- derived from work in hospital administration, managed care plans, public health research and national consulting -- is the foundation for her work as a change agent with SMG. |
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