September 3, 2012

WE ALL KNOW WHERE WE'RE HEADED...:

Defined Contributions Define Health-Care Future (Peter Orszag, 12/06/11, Bloomberg)

Over the next decade, we are likely to see a shift in health insurance in the U.S.: So-called defined-contribution plans will gradually take over the market, shifting the residual risk of incurring high health-care costs from employers to workers. [...]

The movement toward defined-contribution plans for health insurance is, in some ways, similar to the one that occurred for pensions, as Kenneth L. Sperling and Oren M. Shapira explained in an article earlier this year. The pension shift occurred in a series of stages: First, the traditional defined-benefit plan was redesigned. Then a hybrid approach was introduced (the cash- balance plan). Finally, defined-benefit plans were frozen.

The change in health insurance is already well under way in coverage for retirees. In the early 1990s, in response to accounting changes and rising costs, companies began to re- evaluate retiree health plans, and some capped the amount they were willing to pay at a multiple of existing costs. Over time, as those limits were reached, most companies declined to raise them, thereby effectively creating defined-contribution retiree health-insurance plans, with the company's contribution set by the cap. Exchanges have been created to allow retirees to use these employer contributions to purchase their own health insurance.

For current workers, the precursor to a defined- contribution approach is the "consumer-driven" health plan. This typically has higher deductibles and co-payments than a traditional plan has, and it is often tied to a health savings account. It typically still provides generous insurance for catastrophic cases.

The share of workers enrolled in such plans remains quite low but is expanding rapidly. A recent survey of large companies found that, in 2012, almost three-quarters will offer consumer- driven health-insurance plans.

The natural next step will be for employers to strictly limit their health-insurance contributions to a set amount of money that workers could use to buy insurance. Companies will thus eliminate their exposure to unexpectedly high health-care costs.

Posted by at September 3, 2012 7:43 AM
  
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