DC Health Plans May Not Save Costs

June 26, 2002 (PLANSPONSOR. com) - Companies shouldn't expect defined contribution health plans to produce tremendous cost savings despite the continuing surge in the price of medical care, a new report said.

The reason, according to an Employee Benefit Research Institute (EBRI) report: collectively, the defined contribution health programs aren’t big enough to put downward pressure on medical costs. US employment health care is less than a third of total medical costs.

The research shows that employees would have to accept cost-quality tradeoffs to control costs.

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Generally, defined contribution health plans allow employees wide latitude in selecting their specific coverage and, some observers say, help impose a cost discipline on health providers.


EBRI found that national health expenditure experts are forecasting 7% to 9% annual growth in the cost of health insurance premiums for the next ten years. This is especially troubling to employers who had hoped that tightly managed care had solved the cost growth problems of the late 1980s and early 1990s.

Further, the research shows that more than half of the price increases comes from technology advances such as new surgery techniques, medications, or diagnostic and treatment machines.

EBRI research also revealed that Medicare and Medicaid purchasing strategies are likely to be more important than employment- based insurance in affecting marketwide rates of technical advance and, therefore, cost increases.

There is evidence that health care cost growth never really declined, the research shows, but instead was temporarily masked during the transition to managed care. While utilization management and price discounts represent real efficiencies, they may prove to be more of a “one-time shot” than a fundamental reduction in the rate of cost growth.

“Whether the tradeoff required to make defined contribution health benefits viable is either attainable or can be measured with enough precision to be persuasive is the crucial empirical question,” said EBRI President and CEO Dallas Salisbury.