Rising Costs Stir Interest, Not Action in DC Healthcare Model

March 19, 2001 (PLANSPONSOR.com) - The tight labor market has slowed employer adoption - but not the interest - in a defined contribution model for healthcare, according to new research from the Employee Benefits Research Institute (EBRI).

The report identified three primary reasons for an increased interest in a shift toward a defined contribution service model for health care:

  • Employer interest in containing costs
  • Concern that increased healthcare legislation and regulation will further increase costs if they aren’t insulated from the healthcare decision
  • The “DC” model is consistent with current trends toward offering employees more choice – and accountability for their benefits decisions

The “defined contribution” approach to healthcare plans generally involves a program where the employee is allocated a certain employer contribution for those expenses, and the employee makes their own choice as to the type of program and/or provider as such needs develop. 

These programs generally allow an employer to fix, with some certainty, its outlay for such benefits, and at the same time shields the employer from the risks associated with choosing a plan.

From an administrative standpoint, these programs have existed as “cafeteria” or Section 125 plans, since the 1980s.  However, under a defined contribution health plan, employees may face different premiums based on their personal health risk, as well as other factors such as age.

Historical Trends

The study notes that managed care grew out of a time when healthcare costs were rising faster than both the consumer price index (CPI) and the medical component of the CPI.  In fact, the study notes that in 1988 while the CPI stood at 4% and the MCPI was a 7%, employer spending on health benefits stood at 19%.

That gap first narrowed, and then was eliminated with the widespread acceptance of managed care as a means of cost and care management.  That changeover altered the incentive structure from that of a fee-for-service or cost-plus reimbursement stream to one that essentially offered health care providers a “salary”, a fixed amount per patient, or a pre-negotiated discount on fee for service model, according to the study.

Future Tense?

Healthcare costs are once again rising higher than the cost of living, currently an average of 10%/year.  Employers have been reluctant to pass those costs along to employees due to the tight labor market.  Furthermore, those trends look seem likely to continue into the future, based on the following factors:

  • The aging US population – healthcare expenditures typically increase with age
  • New technologies and drugs will continue to be developed – driving demand for the latest and greatest
  • Healthcare providers and insurers now feel in a better bargaining position vis-à-vis employers
  • The backlash on managed care might have resulted in insurers relaxing access to managed care services
  • The strong economy is likely to continue to result in more employees having access to greater choices

That same backlash may also be stimulating additional employer interest in the defined contribution delivery model.