Defined contribution health plans growing

Faced with double digit inflation in the cost of the health insurance premiums they pay for employees, employers are exploring in ever greater numbers the new insurance option of "defined contribution" health plans.

In defined contribution plans, employers offer their workers an insurance product with a high deductible (as high as $3000 per year for family coverage,) combined with a medical savings account contribution of up to $1000 per year.  The employees are thus responsible for paying for their own health care up to the deductible amount, after which the insurance coverage takes over.  They may use the money in the medical savings accounts to pay toward the deductible.  Any money left over at the end of the year accumulates tax free.

The main advantage to the employer is that the amount of their contribution toward employees' health coverage is relatively fixed, and highly predictable.  

Whether defined contribution plans are advantageous to the employee depends on how you look at it.  The disadvantage is that employees are now at risk for up to $3000 per year for their families' health care.  That disadvantage is partially offset by the amount contributed to the medical savings account - and if a family can manage 3 or 4 years without spending a lot on health care, the amount in the medical savings account can accumulate to cover their entire deductible amount.  

The real advantage is that defined contribution plans again begin to place medical spending decisions directly into the hands of the consumer.  Doctors, hospitals, insurance companies, drug companies, and medical device companies will suddenly need to worry about pleasing patients.  As we have seen, the ability of all parties to completely ignore what patients want is at the root of  what ails the health care system today.  So defined contribution health plans ultimately promise to empower patients.

Before we get to patient empowerment, however, the system will need to change.  Patients who are now making spending decisions will be surprised and angered to find out how difficult it is (if not impossible) to learn what medical care will cost before medical decisions are made.  Making informed health care spending decisions today is, essentially, impossible.   The powers that be will need to be confronted with thousands of angry, demanding patients - who now, suddenly, are really their customers - before they figure out how to make such cost information available.

So in the long run, defined contribution plans are likely to be a catalyst for consumer-centric health care.  But these plans are going to cause some pain, anguish, and furor before that time comes. 

October, 2001

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