According to a recent study by Conning & Company, an investment management and research firm headquartered in Hartford, Connecticut, the U.S. is at the beginning stages of a significant change in how health insurance is delivered to most Americans.
The study, “Defined Contribution Approaches to Health Care Benefits: The Long Awaited Answer?” was released on November 26, 2001 and written by Conning Vice President Samuel Levitt.
“We now see the kind of incremental approaches in health care benefits that signal a shift toward defined contribution,” explained Levitt in a Conning news release. “And, we also see clearly that employers, insurers, and employees all have something to gain from this shift. It’s a combination that is gaining momentum in the marketplace, and that stands a good chance of controlling the runaway cost of health care for the first time. The question is how far we will go, and how fast benefits will shift.”
The movement toward defined contribution (DC) has been reported frequently in Health Care News. Free-market advocates of health care reform see DC as an important step toward restoring freedom of choice and financial stability to the nation’s health care system.
Dr. Stephen Barchet, manager of the Defined Contribution Project at the Evergreen Freedom Foundation, explains, “A defined contribution approach to health care creates a new, more sustainable financial framework for an employer seeking to provide its employees with health benefits. This framework establishes clearly and predictably how much the employer will contribute to benefits.”
“In its fullest expression,” says Barchet, “the defined contribution also distances employers from health plan selection. It permits employees to directly control the range of health plans they may consider, producing a real sense of ownership over their eventual plan choice.” (See “The Defined Contribution Health Benefit: A Practical Primer,” Health Care News, August 2001.)
The Essence of DC
The Conning study identifies three attributes that form the core of the defined contribution model:
- Employers will contribute a fixed or defined amount of money for each employee.
- Employees will be free to purchase insurance benefits from the provider of their choice through the individual market, paying whatever they want at or above the employers’ contribution.
- Employer and employee contributions alike will be excluded from taxable income.
“Defined Contribution is attractive to employers because it caps costs and keeps them in the benefits business, not in the healthcare business,” said Levitt.
Greg Scandlen, senior fellow in health policy at the National Center for Policy Analysis, covers defined contribution for Health Care News. He agrees with Levitt’s positive assessment of the DC movement.
Citing last year’s study from Booz-Allen Hamilton, Scandlen reports “the firm is focusing more on the opportunity presented to financial institutions by a change to defined contributions. In their analysis, ‘The Next Trillion Dollar Opportunity,’ authors Gary Ahlquist, Phillip Lathrop, and David Knott point out that DC will create 50 to 100 million new individual investment accounts, and that financial institutions will probably service the bulk of these accounts.”
Defined contribution approaches benefit all health care stakeholders, according to Levitt.
“The erosion of ERISA protection has made employers potentially more vulnerable to legal risks, something they don’t want. For the insurers, [Defined Contribution] has made it likely that they will be able to offer more tailored products without government restrictions. For employees, it will mean more choice in plans and coverage, at least once the insurers have made the transition to large individual markets. This, of course, is the biggest bottleneck in the process.”
Learning from Experience
The seed for defined contribution health care benefits was planted more than a decade ago, when employers shifted their retirement plans from defined benefit to defined contribution models.
Rather than offer their employees a fixed income at retirement age (defined benefit), most employers offer regular payments into an employee-directed plan (defined contribution), such as a 401(k), leaving the choice of investment options and performance to the employee.
For more information . . .
The full text of Dr. Stephen Barchet’s introduction to defined contribution, “The Defined Contribution Health Benefit: A Practical Primer,” is available from the Evergreen Freedom Foundation for a suggested contribution of $25. An online ordering form can be found at http://effwa.org/website/DCHBorderform.htm.
More information about the November 2001 Conning & Company study, “Defined Contribution Approaches to Health Care Benefits: The Long Awaited Answer?” is available from the company’s Web site at http://www.conning.com. The full text of the study can be purchased for $575 at the Web site, or by calling 888/707-1177 or 860/520-1521.