By Peter Orszag
Bloomberg, December 6, 2011
Over the next decade, we are likely to see a shift in health insurance in the U.S.: So-called defined-contribution plans will gradually take over the market, shifting the residual risk of incurring high health-care costs from employers to workers.
The market today is dominated by “defined-benefit” plans, under which companies determine a set of health-insurance benefits that are provided for employees. These will gradually be replaced by defined-contribution plans, under which companies pay a fixed amount, and employees use the money to buy or help pay for insurance they choose themselves.
The fundamental driver of this shift is the effort by American businesses to reduce their exposure to health-care costs. But the recent health-care-reform law may accelerate the shift.
The change in health insurance is already well under way in coverage for retirees. In the early 1990s, in response to accounting changes and rising costs, companies began to re- evaluate retiree health plans, and some capped the amount they were willing to pay at a multiple of existing costs. Over time, as those limits were reached, most companies declined to raise them, thereby effectively creating defined-contribution retiree health-insurance plans, with the company’s contribution set by the cap. Exchanges have been created to allow retirees to use these employer contributions to purchase their own health insurance.
For current workers, the precursor to a defined- contribution approach is the “consumer-driven” health plan. This typically has higher deductibles and co-payments than a traditional plan has, and it is often tied to a health savings account. It typically still provides generous insurance for catastrophic cases.
Some insurers are already anticipating the shift. Bloom Health Corp. will begin offering defined-contribution exchanges in 2012. Bloom, based in Minneapolis describes itself as “a leader in the defined-contribution health benefits marketplace,” and says it is “committed to assisting employers of all sizes move toward an employer-sponsored system that has effective cost predictability for employers and increased choice and personalization for employees.” In September, the company announced that Health Care Service Corp., Blue Cross Blue Shield of Michigan and WellPoint (WLP) Inc. had purchased a majority of its equity.
The inevitable transition to defined-contribution health insurance may get a little push from the new health-care-reform law. Indeed, the legislation may have a larger impact on the type of health-insurance plan that employers offer than on their decision about whether to drop health-care benefits altogether.
If most employers do retain their health plans, the state insurance exchanges created under the new federal health-care law will make the basic idea of a defined-contribution health plan more prevalent, and thus may speed its adoption. The regulations written to carry out the new law will determine how things play out. If defined-contribution plans that are sufficiently generous count as employer-based coverage – as is generally expected – the trend toward such plans will probably accelerate.
In any case, the bottom line is that a shift toward defined-contribution plans seems likely. I’d be willing to bet $1 that most large U.S. employer health-care offerings in 2020 will be defined-contribution plans. Any takers?
(Peter Orszag is vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)
Comment:
By Don McCanne, MD
One of the more important tools to enable the transfer wealth up the income ladder is to shift from defined benefit programs to defined contributions. With a defined contribution, a set dollar amount is contributed to the program regardless of what the future benefits may cost, whereas with a defined benefit program, the projected costs of the program must be fully funded so the benefits will always be there when needed.
In the case of pension plans, a defined contribution allows the employer to shift the risk of wage inflation and the risk of living longer from the employer to the employee. The latter is particularly a problem since many individuals will outlive the funds accumulated in their defined contribution pension plan. It is true that they could use those funds to buy an annuity, but fewer funds would be available because it is not a defined benefit plan, and converting to an annuity burns up even more of the retirement funds to pay for sales and administrative costs plus the costs of insuring against the risk of living longer.
How does this move wealth up the income ladder? Defined benefit pension plans were considered to be a standard part of the well-earned employee benefit package. These defined benefit plans were actually paid for by foregone wage increases. In the last couple of decades, contributions to the pension plans were limited by changing to defined contribution, yet wages remained flat. The foregone wages never came back. Workers suffered a net loss, while employer/owners kept the difference, thus an upward transfer of wealth.
Now we are seeing this same inequitable concept being applied to employer-sponsored health plans. Traditional health plans provided generous benefits and often had an actuarial value of 90 percent (the plan paid 90 percent of health care costs and the worker paid 10 percent). We are now seeing a decline in actuarial value. The most obvious contributing factor is the relatively abrupt increase in the adoption of high-deductibles for employer-sponsored plans, but also benefits covered are diminishing, often through less transparent, innovative changes to the plans. Once again, benefits are being reduced but without a commensurate return of forgone wages.
Particularly alarming in Peter Orszag’s article is the investment of WellPoint and Blue Cross Blue Shield of Michigan in Bloom Health Corporation. Bloom Health is “a leader in the defined-contribution health benefits marketplace.” They are committed to a system that has “effective cost predictability for employers,” but exposes employees to the ever higher costs and risks of health care.
This ongoing shift to defined contribution in health care is not limited to businesses. In a recent message, we reported that the Institute of Medicine is recommending that the essential health benefits for the state insurance exchanges under the Affordable Care Act “should be defined as a package that will fall under a predefined cost target rather than building a package and then finding out what it would cost.” “Predefined cost target” is a defined contribution.
Even Medicare is vulnerable. The New York Times, in a recent editorial, stated that for Medicare, “serious analysis and testing of premium support are clearly worth pursuing.” Premium support is a defined contribution that would be used to purchase a private Medicare plan. Medicare beneficiaries would be responsible for paying for the balance of the premium for whatever coverage they could get. Further, with tight control of the defined contribution, an increasing percentage of health care costs would be shifted to Medicare patients in the form of higher out-of-pocket spending.
What do all of these have in common? They are all methods of perpetuating the private insurance industry, while shifting risks from the insurers to the insured individuals. They reduce the financial commitment of employers and the government, but increase the financial burden for workers, their families, and reti
rees – most of us. However, it is a jobs program – for personal bankruptcy attorneys, as if our health care system didn’t give them enough work already.
Defined contribution is a nefarious conspiracy directed at the masses to benefit the well off. We can counter by demanding an end to a system dominated by private insurers and replacing it with a single, publicly-financed and publicly-administered national health program – an improved Medicare for everyone.
(After we fix Medicare, we may want to think about greatly reinforcing our publicly-financed, publicly-administered, defined benefit Social Security program so we wouldn’t have to put up with the abuses of our private, defined contribution pension plans. Really.)