DR. TRUDE:
Thank you.
Let’s see, do we have the lights?
Defined contributions have become the
latest rage in employer-sponsored insurance. Is this the beginning of a new
revolution in health insurance, or does it merely reflect employers’ frustrations
with the current system? Hopefully by the end of this conference, we’ll have
a better sense of which.
For my part, I’d like to clarify some
of the uses of the term "defined contributions," discuss the trade-offs between
the approaches, and conclude with a look at the potential policy implications
of a widespread move to defined contributions.
What I also hope to show is that for
a discussion of defined contributions, the definitions matter. They especially
matter for understanding the trade-offs and the policy implications.
The framework I will lay out for you
today should also provide a useful context for the panelist discussion that
follows.
The Jackson Hole Group first popularized
defined contributions in the 1970s with their concept of managed competition.
They felt that health insurance would be improved if consumers would bear more
of the cost burden.
First, purchasers were expected to
pay a fixed dollar amount toward premiums, ideally the cost of the lowest-priced
plan; second, purchasers are expected to offer a range of plan choices and information
to help the consumers make their decisions; third, employees were expected to
pay any extra costs if they chose a higher-price plan.
This whole package requires substantial
administration and oversight on the part of purchasers and, hence, the name
managed competition.
Today we see that some of the structure
of managed competition has become part of the health insurance landscape, although
the inroads of fixed contributions has not been as extensive. There’s only 8
percent of employees who have a choice of plan with the fixed-dollar contribution.
Employers limited to offering a single health plan are sort of the main reason
for that.
And so the employers that offer a choice
of plans do see substantial administrative burden. As I mentioned, they have
to choose among the competing plans, assess the plan performance, and convey
all of this to their employees. Yet for all this, employers find themselves
faced with the managed care backlash and potential liability.
So now, in counterpoint to managed
competition, defined contributions for pensions have recently been suggested
as an alternative model for health benefits.
Similar to retirement benefits, the
employer contributes a dollar amount toward health benefits and shifts the risk
and responsibility for those dollars to the employee. For employers, this could
substantially reduce their administrative burden, expand choice, empower consumers
and avoid the backlash, and make their costs more predictable.
But there are drawbacks to defined
contributions for health benefits that don’t apply to pensions.
Currently, employers pool risk and
all employees within that pool pay the same amount for coverage, despite differences
in likely use. Without this, older and sicker workers may be unable to obtain
or afford health insurance.
In addition, under current arrangements,
employers and health plans limit the range of choices to avoid adverse selection.
A defined contribution approach may not be able to expand choice for these same
reasons.
Furthermore, many workers look to their
employers to negotiate with plans on their behalf, for example, in negotiating
with plans on their behalf on issues of price and coverage. This advocacy role
could be lost under a defined contribution approach.
The benefits and consequences of moving
to defined contributions will depend on the approach taken, however. I’ve already
discussed the fixed-dollar contribution approach. More recently, there’s been
a proposal, what we call a cash transfer, which involves paying the workers
higher wages in lieu of health insurance. If the worker chooses, they can buy
health insurance on the individual market, or they can use the cash for other
purchases. This approach, however, would lose the current tax advantages.
Another approach would be to issue
vouchers to ensure that the money is used for health benefits and, therefore,
you can preserve the tax advantages.
As you can see from this slide, the
voucher and cash options promise to reduce the employer’s administrative burden
and also expand choice. Now, as designed, the fixed-contribution approach was
also supposed to expand choice, and there has been an expansion of choice, but
not because of the widespread adoption of fixed contributions.
The extent to which vouchers and cash
transfers might expand choice will depend on what’s available on the individual
market.
As mentioned earlier, vouchers and
cash approaches leave more responsibility to the employee, but then they lose
the value of the purchaser clout and the risk pool.
Risk selection is common among all
three scenarios, although under the fixed-contribution approach it’s typically
handled by the health benefit manager, by the management of the benefits and
plan offerings.
In the future, though, emerging Internet
ventures may affect employers’ health insurance strategies and whether or not
they move to defined contribution. There’s been an explosion in this area of
new Internet ventures offering a vast array of options for employers. I have
broken it into basically three groups:
First, there are ventures that provide
some technological improvements that reduce administrative costs but basically
operate under the current system.
Second, there are some ventures that
would require employers to go to fixed contributions or a defined contribution
approach. And even within this group, there is a wide variety of options which
you are going to see today.
The third group supports those purchasing
health insurance in the individual market. The California Health Care Foundation
recently published a report contrasting three web sites that offer these services,
and this approach may radically change the role of brokers in some of the local
markets.
Today’s panel are all representative
of the second group I mentioned: Internet entrepreneurs that should facility
employer’s move to defined contributions. With the help of both panels today,
I hope we can resolve whether defined contribution approached are the wave of
the future and what role the Internet might play in all of this.
In closing, I’d like to note some of
the policy implications a movement to defined contributions could make, although
what the implications are is ultimately going to depend on the approaches that
employers take. And one impact could be on the number of uninsured persons.
If employers used defined contribution
approaches to target low-wage workers, we could reduce the number of uninsured,
for instance, by offering one plan at no cost, and that would make it affordable
for the low-wage workers who typically don’t take up insurance due to cost.
On the other hand, substantial reliance
on the individual market without reforms to that market could potentially increase
the number of uninsured. EBRI estimates that workers in large companies would
pay about 32 percent more on average if they had to buy their premiums on the
individual market. And older workers would be faced with much higher premiums
than would younger workers, who might not bother to even buy the insurance.
And that way you could see that there might be more uninsured as a result of
that.
Finally, defined contributions can
also have implications for patient protections. Currently, employers play an
important role resolving customer service issues and disputes over coverage.
Some employers also play an important role in patient safety, quality improvement,
and insuring accountability. So if employers move to defined contributions to
avoid the managed care backlash and employees lose their employers as an advocate,
there may be a call for government to play a stronger role in patient protection
and regulation to take up the role that employers have left behind.
DR. GINSBURG:
Thank you, Sally.