Sep 10, 2011

Development of Defined Contribution: Consumer Driven Health Plans

An increasing number of plan sponsors are considering a new strategy for their health benefits, to maintain control of employer costs while giving plan members an increasing degree of choice and decision-making. While managed care continues to be the main component of most employers' health benefits, employees are demanding a greater ability to select those plans which best suit their individual needs—another aspect of increased consumerism.
Some analysts see the defined contribution concept as being driven by the convergence of several factors, including:
  • General backlash against the restrictive nature of managed care plans;
  • Broad popularity and acceptance of 401(k)-style retirement plans where the member acts much more as a "informed consumer" of their benefits package;
  • Rapid rise of Internet access to help members gain information about medical care choices; and
  • A sense that accountability demanded by end-consumers will have more real impact on health plans and providers than can be demanded by the plan sponsor (e.g. members ultimately vote by their enrollment).
Historically, healthcare plans have been "defined benefit" in nature. The plan sponsor defined the benefit by picking the plan fetaures (e.g., copay levels, deductibles, coinsurance, etc.) which then applied to all covered participations—much in the way pension plans were historically "defined benefit" with a rigid formula for determining benefits at retirement age.
The new defined contribution form of healthcare plans is conceptually akin to today's popular 401(k) retirement plans in that the plan sponsor would contribute a fixed amount for each employee's health benefits, often tied to either the lowest-cost plan available or some composite index of available plans. Then, plan participants typically would be able to select from several types of health plans often including several managed care plans and perhaps traditional fee-for-service.
Any difference between actual plan premiums and the plan sponsor's contribution would be paid by those participants who select that particular health plan. In this manner, the fixed contribution serves to cap current and future plan sponsor costs, with any future premium cost increases being borne in whole or in part by plan participants.
Several impediments still remain before defined contribution health plans gain broader acceptance, including:
  • Lack of consistent performance data among competing managed care health plans, or no data in the case of traditional fee-for-service plans;
  • Plan sponsor concerns about employees making poor selections relative to their health needs or high-risk employees being able to qualify for affordable coverage;
  • Rising health care costs, and employee contributions, forcing some participants to drop coverage altogether further increasing the number of working uninsured.
Nonetheless, there is significant plan sponsor interest in the development of the defined contribution health plan strategy. Key changes to the federal tax code included in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 may help foster greater plan sponsor move towards defined contribution health plans. The law extended and expanded the concept of health savings accounts (HSAs) which allow members to set aside dollars for medical expenses on a tax-favored basis and to roll over unused funds year to year, from job to job or into retirement.
HSAs must be set up in conjunction with a high-deductible health plan (HDHP), which for 2005, requires a minimum $1,000 deductible for an individual and $2,000 for a family. A "safe harbor" list of preventive services may be covered at 100 percent, before the deductible, such as annual physicals, immunization and certain screening services. Otherwise, the HSA, which can be funded either by employee contributions on a tax-free basis or by employee contibutions on a pre-tax basis through a cafeteria-style plan, serves to cover most or all of the high-deductible, after which the plan starts covering expenses at a coinsurance level.
The plan can be integrated with a PPO network, such that different coinsurance rates apply, after the deductible, for network versus non-network physicians. UM controls can also apply for selected services (e.g., precertification for hospital admission).
The whole concept is centered around putting the member more in charge of the utilization of services, by making tax-preferred funding available to handle the more common but less-costly healthcare decisions that typically face an individual or family. The concept has been dubbed consumer-driven health care (CDHC)


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