DEFINED CONTRIBUTION: A PART OF OUR FUTURE Reginald F. Baugh, MD Dearborn, Michigan
Rising employer health care costs and consumer backlash against managed care are trends fostering the development of defined contribution plans. Defined contribution plans limit employer responsibility to a fixed financial contribution rather than a benefit program and dramatically increase consumer responsibility for health care decision making. Possible outcomes of widespread adoption of defined contribution plans are presented. (J Natl Med Assoc. 2003;95:718-721.)
Key words: defined contribution + consumerdirected health plans Health care costs are again rising. Dissatisfaction with the current situation seems widespread, but no clear consensus regarding a solution has arisen'. As in the past, health care insurers will act as intermediaries executing employers' desires to increase the value of their health care purchases. In the 1990s, rising costs led to managed care in all its forms. Fundamental to managed care was to surrender control for the promise of lower costs. Managed care's exploitation of the overcapacity in the system achieved immediate savings, controlling costs for a time. However, costs have again begun to spiral out of control. Rate increases in the past year have been significant-from 15% to 20%. Employers are able to accommodate only about 8% of the increase2. Pressure is mounting for a change. A shift to greater consumer responsibility for health care costs is an interim action taken by employers, for whom the question has been, how much are employees willing to pay? Cost shifting from employers to employees has occurred through © 2003. Send correspondence and reprint requests for J Natl Med Assoc. 2003;95:718-721 to: Reginald F. Baugh, MD, 3 Parklane Boulevard, Suite 1212 West, Dearborn, Ml 48126; phone: (313) 996-3980; fax: (313) 996-3984; e-mail:
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tiered pharmacy benefits, a greater number and amount of co-pays, and the demand for larger employee contributions for basic health coverage. Over the last two years, 75% of U.S. companies have increased their health care plan deductible, out-of-pocket payments and employee and retiree monthly premium contributions3. Employees paid 27% more for health care in 2002 than in 2001, according to the Henry J. Kaiser Family Foundation and The Health Research and Educational Trust.4 As long as employees are willing to accept responsibility for health care increases, the status quo will continue. The canary in the mine is small businesses. Increasing numbers of small businesses drop or reduce health care coverage for their workers,5 even as large employers' clout to control health care costs have diminished.3 As employees begin to reject further increases, then conditions are ripe for a watershed change. The trend of employers asking employees to "go Dutch" on health care costs has not altered the fundamental premises: the employer determines and pays for specific health benefits. Defined contribution and consumer-directed health care have advanced by some as a solution to the current dilemma. Defined contribution refers to the way contributions are made by employers. Under the current defined benefit system, companies pay for specific health benefits regardless of cost. For example, all treatments of pneumonia are a covered benefit, whereas a facelift to counter the appearance of aging is not, regardless of the cost. VOL. 95, NO. 8, AUGUST 2003
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Under defined contribution plans, the employer pays a fixed sum or defined contribution for health care. Any illness or condition that arises is paid for out of the fixed sum regardless of the employee's health experience. Theoretically, payment could be made for treatment of pneumonia or a facelift. The dollar amount, not the benefit, is defined. The companion term, consumer-directed health care, describes the outcome of the system that consumers not employers or insurance companiesdetermine where, when and with whom their health care dollars are spent. Will defined contribution plans be the answer? For many employers, it will become part of the answer. Nearly 60% of the largest companies are considering a change to a defined contribution plan6. Nearly three quarters of the 500 major companies surveyed intend to offer defined contribution plans if they believe their costs will drop by just 10%. Thirty-seven percent intend to offer the plans if the costs are the same2. The allure of defined contribution is simple and strong: * Employees are responsible for health care decisions and expenditures; * Employers have much greater control over total health expenses; * Someone other than the employer can handle the administration of health care benefits; * The employer's risk of litigation is reduced, since decision making is the responsibility of the employee; * Employees are afforded a greater range of choices; and * Doctors and patients would have more control of health care decision-making. Consumer-directed health plans are being offered in increasing numbers by larger employers. In 2002, just 4% of large employers offered such plans. In 2003, the number will increase by 400% to 16%. Estimates by Forrester Research suggest that the number may rise to 24% in 20047. Mainstream insurers such as Aetna, Anthem and Humana in contrast to the start-ups of a few years ago, are beginning to offer consumer-directed plans as part of the portfolio of products they offer. Over the next few years, defined contribution plans seem poised to be become part of an individual's future. Defined contribution options vary from a strictly financial model: the equivalent of a health care debit card to which the employee may buy whatever he wishes, to a more standard health plan model. JOURNAL OF THE NATIONAL MEDICAL ASSOCIATION
Recent IRS rulings establish "health reimbursement arrangements"'' which allow companies of all sizes to offer these arrangements. Everything from managed care, medical savings accounts (MSA) or fee-for-service (FFS) arrangements may be accommodated. Empowered employees choose plans based upon personal values, price, and insurance needs. A health plan MSA may combine highdeductible catastrophic health insurance with defined contribution benefits to cover routine care. Qualified MSA participants have tax-deductible dollars available to them in a custodial investment or savings account. Health care expenses are paid from the account as needed. Catastrophic events (premature births, accidents) are covered under a more traditional insurance plan. Routine care (blood pressure checks, sprains, sore throats) are paid for out of the savings account with few or no restrictions. Unspent money in the savings account may be rolled over and accumulate in a variety of investment vehicles. The accumulation of more than $500,000 is quite possible over the course of a working lifetime (45 years) with a modest $1,500 annual investment contribution in equities (assuming a modest 8% return and limited illness). Rollover amounts can even be carried forward beyond employment and can be used to buy COBRA or other insurance, such as a Medicare supplemental policy. Prior to managed care, patients directed themselves or followed the direction of their family doctors. Would defined contributions turn back the hands of time to a kinder, gentler era when health care was strictly a two-sided dialogue between physicians and patients? Many advocates believe so. Removing insurers and employers from between patients and their doctors will not turn back the hands of time. Times have changed. Thirty years ago there were fewer specialists, fewer treatment options, less information available and fewer places to receive care. Despite the widespread perception that care was better prior to managed care, most evidence points to the fact that under managed care the quality of health care in America has improved. Even the widely accepted premise that care was better is suspect."' Preventative services and access to drugs and services have improved.'°0" Even if we accept that the environment is the same, most physicians would agree that patients today are different from the patients of 30 years ago. The Internet makes information that was previVOL. 95, NO. 8, AUGUST 2003
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ously available only to health care workers available to anyone with an Internet connection. Twenty-five thousand health information web sites, more than any other topic exist on the Internet,'2 dispense information detailing the cause, natural progression and treatment of most conditions, from the common to the obscure. Patients with the motivation, time and willingness can become informed consumers. For defined contribution plans to result in optimal health outcomes, informed, empowered consumers are required. Discernment between valid and misguided, biased and just plain wrong health information remains a challenge on the Internet. The digital divide between the poor, people of color and the rest of the American public may adversely affect the ability of these populations to fully participate in these health plans. The difference between providing health information and obtaining understanding will be highlighted by defined benefit plans. Access will not be enough. Information is not the only issue. Clearly, health will become very personal under defined contribution plans, which are structured so as to engender the perception that the money in the account is personal. Employers are counting on a new found conservatism by employees about "spending their money" on health care to fuel the necessary cost savings to slow future health care cost increases. Currently, consumer non-participation in the actual cost-benefit decision-making makes the value judgment difficult. A visit to the specialist for a sore throat does not cost $10 for the co-pay but $150 dollars that the insurance company pays the physician. The disconnect between what the patient pays and the actual bill drives some health care utilization. Defined contribution plans may alter our patient's attitudes and values. Money was seldom a significant decision factor in medical decision-making when it was not the employee's money. What changes can be anticipated when it will be a factor in every decision? For example, do patients really value preventative services? How many women will choose to spend $350 dollars on a mammogram, if they were actually paying for it? Would they choose to save the money for a rainy day? Good evidence exists to support the beliefthat health care utilization will be affected. Even among the chronically ill, consumption of medical services may be decreased if patients paid more out of pocket.'3 The consumer-driven health care movement assumes that empowerment of patients through 720 JOURNAL OF THE NATIONAL MEDICAL ASSOCIATION
access and information will lead to sound decisionmaking. Empowerment will not be enough. Our health care system lacks the necessary systems to inform patients of the cost prior to medical decisionmaking. As much as we proclaim our patient focus, it has not been medicine's practice or policy to inform or explain the economics of various treatment options before patients are asked to make decisions. Except for the simplest of medical decisions, most patients do not know exactly what they are buying or what it ultimately will cost. Failure of consumers to make reasoned decisions could cost employers as well as the consumer. Potential changes in employee productivity (workdays lost to illness, reduced productivity at work) as a result of employee conservativism, ignorance, or misinformation under defined contribution plans remains an unanswered concern. Other unintended consequences of consumerdirected health plans may also occur. Price competition, the initial battleground between health care providers, will lead to commodization of some areas of medicine. Commoditization will accelerate the drive for the development and acceptance of standardized measures of physician quality and performance. Failure may lead to more traditional advertising strategies such as branding-and multi-media ads may supplant more scientific assessments of patient outcomes to project quality as physician practices attempt to set themselves apart from the rest of the pack. The need to convey a clear understanding of a physician, his practice and his results to patients will be evident. Expect efforts to open now-closed disciplinary and state-sanctioned databases as the public clamors for access to additional information about medical providers. Warranties, implicit or explicit, may arise as physicians compete based on quality. Solutions to patient problems, not treatments of their conditions, are likely to be rewarded. Areas where it is either difficult to provide solutions, obtain consistent outcomes or have poorer payment will attract fewer providers. Absent the development of robust quality measures, medicine may be transformed by brutal price competition sparked by defined contribution plans. For most physicians, payment for their services is standardized and is determined by an insurer's fee screen regardless of the perception or lack of perception of quality. How "good" a physician is remains largely immaterial relative to payment, since quality VOL. 95, NO. 8, AUGUST 2003
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is not recognized and no acceptable methodology has emerged to judge physician quality. In the new environment created by defined contribution, perceived quality may matter since perceived quality may drive price. In such an environment, practices that successfully communicate the virtue of their solutions and outcomes may be able to charge a premium. The reverse may soon become true as well. Defined contributions may accelerate the trend of undistinguished providers receiving less'4. Or perhaps all physician reimbursement may become depressed, as patients will simply demand greater discounts from providers. A slowdown in the American economy may provide the stimulus needed for change for both employees and employers alike. Continuing stock market declines and low interest rates will pressure employers to consider difficult trade-offs on employee benefits, pay or profits. For many companies, the robust stock market has provided such strong returns that they have had to contribute little or nothing from their bottom line in recent years to adequately fund their pension plans. For example, Ford Motor Company will spend $1 billion in the next two years to make up a pension shortfall that doubled last year to more than $7 billion. A list of companies with more than $5 billion in unexpected pension losses reads like a blue chip index: General Motors, Boeing, IBM, Lucent Technologies, Verizon, General Electric, and SBC Communications.'5 A slowing economy will stiffen the resolve of employers to engage their workers in a dialogue about health care benefits despite the tight labor market. As the stakes escalate in an economic downturn, however, the exploration of different benefit options-such as defined contributionbecomes more appealing to both labor and management than layoffs, wage stagnation, or plant closures. Change is embraced by no party in health care. Every player is vested in the status quo. Defined contribution plans will change the balance of power in favor of first the consumer, then doctors and hospitals to the detriment of health plans. Consumers are unlikely to value health plan marketing departments, customer service departments any more than physicians value their claims or utilization departments. Health plans have come to manage costs rather than care. With cost managed by the employers' contribution, health plan value is less clear. For
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the healthy patient, the promise of defined contribution is that their medical costs will more closely approximate the true costs of their care. Hence, for the healthy, health care costs may drop dramatically, since healthy employees in effect subsidize the cost ofhealth care for the sick. The impact on states, companies or industries with older, sicker workers may make them cool to the idea of defined contribution only as long as they embrace the concept of health care as a right. Should prevailing beliefs about health care as a right wane, the question may become who will make up the gap for the sick, infirm and the elderly. For people of color, the prevalence of diabetes, hypertension, cancer and other chronic diseases could make defined contribution plans a much less desirable proposition. The attractiveness of a predictable manageable cost to employers, the promise of financial benefit for most employees, and the lack of a viable alternative ensure at least incremental adoption.
REFERENCES 1. Taylor H. The Harris Poll #28, April 28, 1999. 2. Hewitt Associates. Employer Concerned About the Impact of Rising Health Care Costs Are Evaluating Alternatives. January 14, 2003. 3. The Changing Face of Health Care: Balancing Employer and Employee Needs. Towers Perrin October 2002. 4. 2002 Employer Health Benefits Survey. Henry J. Kaiser Family Foundation 2002. 5. 2002 National Survey of Employer Sponsored Health Plans Mercer Human Resource Consulting. 6. Lathrup JP, Carlebak DC. HMO R US: A Prescription For The Future. Strategy and Business 1998: 13 (4). 7. E W Boehm et al. Healthcare 2002, Forrester Got It Mostly Right. Forrester Research. 8. Rev. Rul. 2002-41 and Notice 2002-45. 9. R Miller, H. Luft. Managed Care Plan Performance since 1980: A Literature Analysis. JAMA 1994: 271(19): 1512-1519. 10. R Miller, H. Luft. A Reply to Sullivan's Reanalysis of Managed Care Plan Performance since 1980. Am J Pub Health 2000: 90(16): 984-985. 11. NCQA. The State ofManaged Care Quarterly, September 2000. 12. Mednuro M. Hospital and Health Networks 1999: 73(3): 44-50. 13. MD Wong et al. Effects of Cost Sharing On Care Seeking and Health Status: Results For the Medical Outcome Study. Am J Pub Health 2001; 91(11):1889-1894. 14. P Neurath. Puget Sound Business J February 14, 2003. 15. J McCafferty. Funding Fun House. CFO. January 2003: 65-67.
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