Defined-Contribution Plans: the Next Big Thing after Managed Care?

How to get employees to spend less on doctors.

With managed care apparently dead as a cost-containment tool, what can employers do to stop the steep rise of their health-benefit expenses?

For a long time, CFOs could delegate such worries to their human resources people, confident that HR could use managed care to curb medical inflation.

But with health care’s emergence as one of the most sharply rising costs in a time of low inflation, however, senior financial executives are likely to become concerned.

What may be worse than the cost hikes, however, is the failure of managed care to curb costs.

On the heels of years of double-digit premium hikes, health maintenance organizations, those classic forms of managed care, are typically asking employers now for 20 percent increases in their January 1, 2002 premium renewals, and 50 percent rises aren’t uncommon, says William M. Mercer, the benefits consulting firm. For more on why HMOs aren’t working, click here.

Employers have thus been searching for a new cost-containment model to replace traditional managed care. The idea that some companies, prompted by consultants, have come up with is an import from the pension arena: the defined-contribution approach.

At first, the notion was crudely conceived. As you would with a 401 (k) plan, simply plunk down a set amount of cash into an annual account to be used by employees to pay health care costs. Thus, workers would have to pay their doctor bills out of their own pockets, as it were, and feel the cost pain their employers’ have long felt.

Employees are bound to spend less if they spend their own money, the theory goes. The problem, however, has been that employees’ health could suffer if, motivated solely by cost, they made bad decisions. Employers could then feel the brunt of those choices in bad employee relations and, worse, lawsuits. For another column on defined-contribution health benefits, click here.

Now, however, some employers are experimenting with a more clearly defined form of the approach that seems to protect employees a bit more. Since “defined contribution” already has gotten a bad name, consultants are calling it “self-directed” or “consumer-driven” health care.

While the plans vary, they essentially involve an employer setting aside a yearly amount of money that employees can draw on to buy health services and prescription drugs. Employees manage the money, termed a “personal care account” (PCA) by one small plan administrator, as they choose. The plans tend to include four elements:

  • Full reimbursement for basic preventive medicine when done through a network of providers. This includes payment for services like prostate-cancer screening, well-baby care, and physical exams.
  • A PCA, which pays for traditional health care, including doctor visits, and a host of non-traditional ones, like lead-based-paint removal. The employer holds accounts of, for instance, $1,000 for an individual and $1,500 for a family, in trust.

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