Savings Plan$

Defined-contribution programs promise to help put the brakes on rising health-care costs.

Lulled by relatively stable health-insurance costs in the '90s, many companies improved coverage for workers. Now, a hangover caused by skyrocketing drug and medical-care costs has prompted some manufacturing companies to ask employees to be better managers when it comes to health insurance. Using defined-benefits plans, also known as consumer-driven plans, these companies allot a preset amount of health-care money to each employee. The employee can spend the money as she or he chooses but must kick in personal funds when the employer-provided funds run out. "Cost, cost and cost is what it all comes down to," says Paul Fronstin, director of the health research program with the Employee Benefits Research Institute, a public policy research organization in Washington, D.C. Total health-care spending in the United States skyrocketed from $73 billion in 1970 to $1.3 trillion in 2000, growing from 7% to 13% of the gross domestic product, says Fronstin. That incline began leveling off in the mid-'90s, but prices have returned to double-digit increases in the past few years, and businesses already taxed by recession are searching for new ways to absorb the costs. With defined-contribution accounts, the funds exist on paper only; employees don't actually receive money. Once employees spend their allocations, they pay for health-care services from their own pockets until a deductible is met. The funds in employees' accounts can be rolled over from one year to the next. Eventually, an employee could accumulate enough funds to cover the gap between the amount the employer funds and the deductible. At the same time, the employer provides in-depth information on health care. Usually, this is available online. So far, only a handful of companies are known to have implemented these plans. Because the concept is so new, it's impossible to predict how well it will satisfy employers' and employees' needs over the long haul. Nonetheless, employers are interested because of the potential cost savings. At the same time, advocates of defined-contribution plans say they allow more choice than managed plans, make employees more discerning consumers and, as a result, help to put a lid on costs. "Now [with traditional managed-care plans], it's so easy to go to the doctor that we spend dollars we don't need to," says Scott Keyes, a Minneapolis-based senior consultant with Watson Wyatt & Co., Washington, D.C. Satisfied So Far In January, Welch Ally Inc., a manufacturer of medical, lighting and data-collection products, began offering employees a consumer-driven plan, says Jeffrey Viviano, benefits manager. The plan covers Welch Allyn's employees, as well as workers at two sister companies: Hand Held Products Inc. and Everest VIT Inc. Employment at the three companies totals 2,200. (Welch Allyn is based in Skaneateles Falls, N.Y.) The company's plan is a typical one. Employees with single coverage receive a personal-care account with a balance of $1,000; for employees with families, the balance is $2,000. If they use up their accounts, single employees have to pay up to a $500 deductible, while employees with families have to pay up to $1,000. Preventive care, such as well-baby visits and mammograms, is fully covered, so employees don't need to use their accounts to pay for these. Once the deductible is met, services provided by in-network medical professionals are fully covered. Services obtained outside the network are covered at 80%. About 10% of eligible employees are enrolled in the plan, says Viviano. Welch Allyn also offers PPO (preferred provider) and POS (point-of-service) plans. The company began the program in January and so far, claims per employee are running $153 a month, while claims for the POS plan average $214 per employee per month. What's more, employees appear satisfied and are taking advantage of the educational tools available. The most popular use of the plan Web site is to check account balances. Second and third most popular, respectively, are comparing prices of health-care services and checking for drug interactions, says Viviano. The story is similar at Woodward Governor Co., a manufacturer of control systems for the aircraft and industrial markets. That company began offering a consumer-driven plan six months ago. Jeff Huber, director of corporate compensation and benefits with the Rockford, Ill.-based firm, says health-care costs are up 7% this year, which is low considering double-digit increases are the norm. Huber says it's too early to pin the slightness of the increase entirely on the new insurance plan, but there is evidence that employees are doing more cost-comparisons for health services and drugs, based on the plan's Web site activity. Both Welch Allyn and Woodward worked with Definity Health, Minneapolis, one of several providers beginning to offer such plans (Plan Providers). Concerns And Cautions This isn't to say that the plans will cure all of a company's health-care woes. Some health-care experts worry that employees will skimp on health care so that they don't have to pay out-of-pocket costs. Others argue that the plans will attract only the healthiest employees, leaving employees with chronic conditions in other plans. Should that happen, the costs of those plans would jump. To prevent a mass exodus to the plans by healthy workers, employers should price defined contribution-plans similarly to their other options, says Keyes of Watson Wyatt. However, there's been no evidence of such imbalances, says Greg Scandlen, a Washington, D.C.-based senior fellow for health policy with the National Center for Policy Analysis, a public policy research group. Both Viviano and Huber report that the make-ups of individuals in their plans mirror their overall workforces. Another caution: Defined contribution plans don't automatically lower employers' costs. Any change in expense level will depend on the amount the employer previously had been paying for health care. Clearly, it's too early to say these plans will solve runaway health-care costs and employee dissatisfaction with managed care. But, says Scandlen, "it is a move in the right direction." Plan Providers Here are some providers of defined-contribution health-insurance plans. Aetna Inc. www.aetna.com Definity Health www.definityhealth.com HealthAllies www.healthallies.com HealthMarket www.healthmarket.com Humana Inc. www.humana.com Lumenos Inc. www.lumenos.com Vivius Inc. www.vivius.com

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