Defined-contribution health plans to make inroads? Regulatory, cultural barriers exist
Most Americans receiving retirement benefits from private-sector employers are part of defined contribution retirement plans.
While, in the past, pensions were designed to provide a certain level of income after retirement, the 401(k)s of today provide a set contribution – often a matching percentage of an employee’s contribution or income.
As the cost of health care – such as retirement benefits – is becoming more unpredictable, the concept of defined-contribution health plans has become an attractive, but controversial, option. Some industry insiders feel that once a few legal questions are ironed out, the trend toward defined contribution health plans will mirror the rush toward 401(k)s a decade earlier.
What it is
Defined-contribution health benefits, in their purest form, would entail an employer getting out of the business of providing health insurance and simply giving employees a lump sum with which to shop for their own insurance. However, under current law, such a contribution would be taxable as income, reducing the value of the benefit. That and other factors are leading insurers to offer specific benefit packages that involve high-deductible policies and flexible spending accounts.
In April, Cobalt, parent company to Blue Cross and Blue Shield of Wisconsin, launched its defined-benefit product offering. While there is a flexible spending component, the plan carries many of the trappings of a traditional health plan.
"Defined contribution in its purest form implies that the employer gives employees money to buy their own plans," Cobalt Corporation senior vice president of marketing Cathy Harvey said. "For tax issues, this is not very practical. With Freedom Blue, an employer buys a bundle of options – and the employee buys a standard or buy-up plan. Many employers are going to these plans and putting in a very high deductible to a base plan – putting money in an MSA (medical savings account) or a flexible spending account. You can use that money to pay for deductibles or office visits or to buy up to a lower-deductible plan. Most have some sort of flexible spending account associated with them."
Humana and United Health are preparing to launch similar products in Wisconsin. Others offering such plans in various markets include:
Blues shoot
for smaller firms
While many of the plans, including Aetna’s, target companies with more than 300 employees, Cobalt’s Freedom Blue offering would include all but the smallest companies – every business with more than 50 employees.
And because smaller employers have been the hardest hit as insurance premiums have increased, the fact that Harvey claims significant savings are possible could be a strong inducement.
"We anticipate savings of 20% to 30% – a definite cost savings," Harvey said. "It is up to the employers how much they want to contribute."
The high deductible means employers or employees can pony up more dollars to reduce the deductible or the co-pays.
"If the employer wants to put in a defined contribution plan with a $750 deductible and allow employees to buy up to $250, they can do that," Harvey said. "As a transition strategy, they can put $300 into an account to make up for the deductible."
The policy features other trappings of more traditional plans, as well.
"With our defined-contribution plan, there is still a PPO, so you get richer benefits when you go in network," Harvey said.
The fact that Cobalt’s product offering looks and feels a lot like a PPO is necessary, according to Harvey, for regulatory reasons.
"If you just give employees money and tell them to buy their own coverage, they are going to get taxed on that as income," Harvey said. "That greatly diminishes their purchasing power. Our defined contribution really is the best of both worlds. Employers can fix whatever contribution they want to the plan and the employee can go with the base plan or buy up to more coverage."
While the nature of the defined contribution plans eliminates much of the risk-pooling inherent in group insurance, some risk-pooling still exists.
"Within the employer, we are going to give them a composite rate increase for the base plan and the buy-up option," Harvey said. "More than 100 employees, we would look at the experience of their own group. Within a group, that happens anyway. You have employees that never go to the doctor and employees with five kids who go in there all the time."
May 10, 2002 Small Business Times, Milwaukee
