Defined-Contribution Health Plans Not A Panacea

Compiled By Tonya Vinas Consultants at Towers Perrin, New York, have noted a recent increase in interest in defined-contribution health plans (DCH) and are advising companies to think about more than just money when considering such plans. DCH models vary, but a common approach is for the employer to set aside a defined amount of money annually for an employee's health-care expenses. The employee then decides how to spend the money, which can carry over from year-to-year but is forfeited when the employee leaves the company. Supplemental insurance covers catastrophic health problems. Currently, fewer than 100,000 U.S. workers are enrolled in these consumer-driven plans, according to Towers Perrin, but rising health care premiums are increasing interest in them. However, Towers Perrin cautions, there are pitfalls to DCHs:

  • A poorly designed plan could actually drive up costs because benefits might be improved for the healthiest (lowest-cost) employees without managing costs for ill (high-cost) employees. Jim Foreman, managing director of Towers Perrin's health and welfare practice, notes that about 20% of employees drive 80% of health-care costs.
  • Failure to effectively communicate the benefits and how-tos of the plan will mean a low enrollment. The consultancy says early research shows a moderate communications plan will deliver only 5% to 8% enrollment.
  • One of the biggest unknowns related to DCHs is how much they will cost in the long-run. For example, will the plan alter behavior of participants, leading them to put off preventive care in an effort to stockpile dollars? If so, will that ultimately lead to higher health-care costs later?
The bottom line, Taylor says, is that the plans might save money for some companies, but without appropriate implementation, could actually increase costs for other companies.
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