Defined Contribution = No Benefit

We have seen the future of private health insurance and it is a defined contribution, not a defined benefit.  Or so says Peter Orszag (current vice chairman of global banking at Citigroup and an adjunct senior fellow at the Council on Foreign Relations, who was President Obama's director of the Office of Management and Budget) in Bloomberg (find it here).  Excerpts:

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?

My comment:

Can't we all just admit that using employment as the platform for arranging for health financing is a stupid idea?  What do private employers know about health care anyway?  Why are we giving away a $500 billion tax credit annually to private employers to induce them to do something that they do only very poorly?  Naturally they want to reduce their exposure to the high cost of doing health care business in the US.  Let's just get them out of the equation entirely.  If large employers have demonstrated that they have no ability to reduce health expenditures, even as they purchase millions of dollars of health care, how is it that anyone can project that individual people buying their own health insurance, with or without a defined contribution from an employer, can have a meaningful effect on the rate of growth of health care spending.  The waste that is responsible for the massive excess cost of American health care is beyond the ability of individual people to reform.  We need societal mechanisms for reducing the wasteful business practices rampant in our health care system.  There is no benefit to be derived from the increased use of defined benefits in private health insurance purchasing.

Dr. Joe Jarvis