Just as do-it-yourself 401(k) investing has started to lose some of its appeal, along comes a do-it-yourself health insurance plan. Gee, thanks.
The latest innovation, known as a defined-contribution plan, seeks to cut health care expenses for employers and give workers more control in choosing their doctors. But by letting people choose their own insurance, the plans could end up making health care more expensive and harder to get for some people. While young, healthy workers might benefit, the old and sick may end up worse off than under more traditional health care plans.
For now, only a handful of companies offer the plan as an option, including Raytheon Technical Services, a subsidiary of
, and Ciba Vision. But some insurance companies already are testing interest in the plan among their own employees, including
. UnitedHealthcare, a subsidiary of
expect to debut plans later this year. Experts think the idea could catch on with more companies, as they struggle to cap double-digit inflation in insurance premiums and drug costs.
The plans work like this: A company gives a single worker a grant, typically $500 to $1,000, to spend on health care in a year. Using that money, the employee can pay to go to any doctor, but will get discounts on those who are part of an insurance network. (Some plans also pay for preventive health care separately, so it's not deducted from the employee's grant account.)
If the employee doesn't spend the full amount, some plans roll the remainder over into an account for the following year, adding to that annual grant. But if the employee spends more than the allotted sum, he'll pay expenses up to the deductible amount, from $1,500 to $3,000. Once the employee has met the deductible, a traditional insurance plan usually goes into effect.
The Advantages: More Control, Lower Premiums
Proponents of the defined-contribution plan say the innovation will save companies money because consumers who must pay directly for their own health care are likely to be thrifty. One insurer offering such a plan, Definity Health, reported that participants used fewer prescriptions during its plan's first year, with an average of six prescriptions per consumer compared with an industry average of eight or nine. Participants also were more apt to use generic drugs. Overall, the plan reduced health care costs by 10%, says Definity spokesperson Chris Delaney.
Moreover, assuming employers provided a $1,000 grant, the majority of employees wouldn't have to fork out additional money for health care out of their own pocket. The Pacific Business Group on Health, a health care purchasing coalition for large California companies, says actuarial research shows 70% of employees spend less than that sum on medical costs per calendar year.
Another feature is likely to appeal to consumers: Most plans let them choose their own doctor. They can see specialists without waiting for a bureaucratic go-ahead from the insurance company. "It's a move away from that paternalistic kind of system, back to a doctor-patient relationship," says Clark Miller, spokesperson of the Pacific Business Group on Health, which will roll out a similar plan to members this year. "It will appeal to people who like to have a lot of control over health care decisions, because they're no longer constrained. They can go out of network; they can spend health care money where they think it's appropriate."
Employees who choose the plans also may benefit from paying smaller premiums. At Humana, employees who choose the defined-contribution plan pay $5 per pay period, while those enrolled in the HMO plan pay $17 per pay period.
Caveat: Just Don't Get Sick
For now, defined-contribution plans tend to be treated as an alternative for employees, who also could choose an HMO or PPO. "It's viewed among our members as an option to be offered side by side with others. We don't see it as replacing traditional plans," says Miller.
But health care advocates worry that may not always be the case. "What will happen is the sickest folks will go with the HMO because the medical account
offered by a defined-contribution plan wouldn't be large enough for them," says Kathleen Stoll, associate director of health policy at Families USA, a consumer health advocacy group. "The folks who will use the most health care will be the losers under defined-contribution. So if healthy people self-select into defined contribution and sicker people are in HMOs, that will drive up the cost of coverage for folks in HMOs."
In other words, it could increase health care costs for people with health problems. "The whole reason insurance is great is that it pools risk," says Stoll. "When you start allowing people to self-select by their needs, you've really hurt the whole insurance concept."
It's too early to tell if healthier people are selecting defined-contribution plans. At least some data suggest that's not necessarily the case. After a year in operation, Definity Health reports the average enrollee in its defined-contribution plan is 42, with a typical family size of 2.6 people. Its plan enrollees don't seem to have an unusually high proportion of chronic illness. "The data don't support the idea that it's a plan for the young and healthy," says spokesperson Delaney.
Still, the California Public Employee Retirement System, the giant retirement system for California's public employees, is taking a wait-and-see attitude toward defined-contribution plans. "If we start offering defined-contribution plans, that favors people that don't have chronic diseases -- younger, healthier people. So what are you going to do for your retirees? Who pays for them?" says Clark McKinley, a Calpers spokesperson.
Indeed, defined-contribution plans would appear to benefit healthy people. A typical company grant of $1,000 would be quickly exhausted in the event of serious illness. And once employees have exhausted their grant, they may have to pay a lot of expenses out-of-pocket before insurance goes into effect.
"In most employer plans, in PPOs and others, you have to pay maybe $200, $250, and then your insurance kicks in," says Pat Schoeni, director of public affairs at the National Coalition on Health Care, a policy group. With defined-contribution plans, she says, deductibles are much higher, at $1,500 to $3,000. Paying the higher deductible could come as an unexpected financial blow for people who have fallen ill, she says.
But for people with moderate health needs, Definity's Delaney says defined-contribution plans aren't more expensive than the plans most Americans are already enrolled in. A PPO and a defined-contribution plan may actually end up costing about the same, he says, assuming a PPO enrollee makes four doctor visits a year with $20 co-pays, shells out $15 a month for a drug prescription co-pay, and spends an extra $250 a year in paycheck contributions for a PPO. That adds up to a little more than $500.
That's about equal to the out-of-pocket cost for an employee in a defined-contribution plan, assuming she receives a $1,000 company grant for health care and has a $1,500 deductible.
An HMO may work out to be a few hundred dollars cheaper than Definity's plan, he admits. But some people may decide the extra cost is worth it because they'll be able to choose their own doctors.
Because defined-contribution plans have been around only a short time, it's too early to tell if critics' fears are justified. There's no question the plans offer freedom to consumers weary of insurance plan constraints, but it's not yet clear which consumers stand to benefit most from them. In any case, their cost-saving appeal to companies is clear, so don't be surprised if a plan shows up where you work.