Employers Embrace Consumer-Driven Insurance

Published November 1, 2001

In a continuing effort to give employees more control over their health insurance coverage, defense contractor Raytheon Co. has chosen Definity Health as its insurance provider, becoming another in a growing list of employers offering defined-contribution health benefit plans.

Minneapolis-based Definity Health also provides coverage for Aon Corp. of Chicago, Ridgeview Medical Center of Wackonia, Minnesota, and the University of Minnesota, among others.

Starting in January 2002, Lexington, Massachusetts-based Raytheon will offer its approximately 26,000 employees in Texas and Arizona the defined- contribution-style plan managed by Definity Health. The program is designed to give employees greater freedom to choose the doctors and types of care they want. Employees also will receive information on wellness, prevention, and treatment, as well as data on pricing and the quality of local health care service providers.

Under the plan, employees choose their health care services and pay for them out of individual Personal Care Accounts, funded by employers at a set amount each year. Funds remaining in the account at the end of the year are rolled over for use in subsequent years.

The funding level for the accounts of Raytheon employees who choose the Definity Health option will vary depending on regional health care costs, in order to keep per-employee costs consistent across the company, a Raytheon spokeswoman said. She also noted Raytheon will continue to offer employees its other health plan options, including a point-of-service plan and health maintenance organization. Next year, Raytheon will add a preferred provider organization option.

Health Care A La Carte

Across the country, a growing number of employers are using the 401(k) concept for employee health benefits: They’re depositing their health insurance budget into flexible spending accounts and letting employees direct how the funds are used, just as they do their retirement investments.

The practice gives a new twist to defined-contribution plans, a term generally used to describe retirement plans. Employers are adopting defined-contribution health insurance plans for at least three reasons:

  • to control insurance premiums, which are increasing at double-digit rates;
  • to give employees more control over their health care benefits; and
  • to allow employers to defend their businesses against the threat of expensive litigation.

For employers, the prospect of satisfying an aging and demanding population of employees—who are seeking ever-more-expensive life-enhancing benefits—is daunting.

According to Jean M. Wodarczyk, a partner with Pricewaterhouse Coopers in Chicago, employers will either make changes “around the edges” of their existing benefit systems or, more likely, will switch to different systems entirely, favoring those that give employees more responsibility for selecting and paying for their health care plan.

According to the Health Care 2010 study published by the National Coalition on Health Care, experts tend to agree employers will gravitate toward defined- contribution-type health benefits. Employers will allocate a fixed amount to each employee, regardless of which plan the employee chooses or how much it costs. At least 60 percent of 380 top health care executives surveyed for the report said it’s “very likely” employers will move to a defined-contribution system within 10 years.

Not a New Concept

The defined-contribution approach isn’t new. Most employers already pay a fixed amount for each employee’s health care coverage, with employees picking up the remainder of the tab. Because the employer contribution is “defined,” the employee’s contribution varies according to the plan selected.

Managed care has slowed year-to-year medical cost increases in recent years. But with the return of double-digit health care inflation, employees will bear more of the cost burden. Employers will provide information on insurance policies, prices, and provisions, but give employees increasing responsibility for choosing how to spend their allocations.

Both new technology and new attitudes are partially responsible for the popularity of the defined-contribution model. Employees are already using the Internet for other types of health care information, making it an ideal medium for choosing health insurance.

Human resource professionals predict within five years workers will use the Internet to select from a rich mix of benefits ranging from catastrophic care to acupuncture. Empowered by access to health care information, consumers will find it easy to learn about and compare available choices and, from there, customize their own benefit packages.

For more information . . .

about defined-benefit and defined-contribution models, especially as they relate to Medicare reform, see Comprehensive Medicare Reform: Defined Benefit vs. Defined Contribution, a September 1998 report from the National Coalition on Health Care. The report is available on the Internet at http://www.americashealth.org/benefit_vs_defined.html.