Interest in a defined contribution (DC) approach to employee benefits, especially health insurance, is growing. Obviously, this is a strategy that forward-thinking employers will want to consider as these programs mature and outcomes data becomes available in the years to come.
To help us understand what a DC approach might mean to health insurance, we can look to what occurred in the pension arena in the 1980s with the growth of 401(k) defined contribution pension plans. We should consider the positive and negative impacts on employees and their families, as well as, on the companies which sponsor them.
While 401(k) plans capped employer pension expenses, made them budgetable and eliminated those nasty unfunded liability issues that plagued the defined benefit plans of old, some would argue that those gains came at the expense of employees – resulting today in lower retirement savings rates, postponed retirement, etc.. Most notably, 401(k) investment results over time have strongly favored wealthier employees who tend to make better investment decisions than their lower-compensated fellow employees.
A Forbes article from 2004 entitled “Why the Rich Live Longer” is instructive as we consider what a defined contribution strategy is likely to result in for those on the lower rungs of the economic ladder. The article attempted to explain why wealthier people tended to be healthier and, therefore, lived longer. The authors assumed that wealthier people had better access to high quality care (i.e. better doctors, treatments, etc.) but that wasn’t the case at all.
Instead of greater wealth being the cause for better health, the authors found a mutual cause. One key factor caused people to be both healthier and wealthier – and that factor was intelligence. Intelligent people tend to make better financial decisions and better health-related decisions.
Now, please don’t shoot the messenger here – I realize this finding can be misunderstood, misinterpreted and that it sounds downright elitist. That’s certainly not the intent. We need to learn from this finding and be exceptionally careful when we say we’re helping all employees by giving them greater choice, freedom and flexibility. Those “advantages” might actually hurt employees.
Since Defined Contribution benefits will often be delivered in the future through exchanges (whether public or private), they will offer greater individual choice. The key to success for employees will be in properly assessing their risk tolerance, anticipating future healthcare needs, determining provider access requirements and on and on. These are not easy decisions – they require a substantial understanding of current medical conditions, standards of care, quality indicators, provider networks, etc.
For instance, low-income employees have very little risk tolerance since they can’t afford even modest increases in healthcare costs. But because they are so cost-senstive, they will tend to select lower cost plans which, inevitably, will mean greater cost-share when healthcare services are rendered. Bottom line: Too much out-of-pocket cost and those employees will simply forego needed care. In the end, this will lead to higher healthcare costs as more intensive care will be required to treat the disease progression. That is not a viable long-term cost containment strategy.
Defined Contribution (DC) healthplans may be an inevitability for many US employers in the years to come. But they will not be implemented for the right reasons: To improve employee health, reduce the demand for healthcare services and lower health insurance costs. Instead, they’ll be last ditch efforts to stop the bleeding in employer-sponsored healthplans.
Superior solutions will be those that control healthcare costs without sacrificing quality of care and while ensuring the sufficiency of coverage for employees and their families.