New Insurance Option Leaves Many Unanswered Questions

The bloom is off the managed care rose for employers, and they are once again looking for a solution to ever-escalating health care costs.

David S. Blitzstein, director of the Negotiated Benefits Department of the United Food and Commercial Workers International Union, told a focus group convened by the Center for Studying Health System Change (HSC) in October 2000, “Medical costs are coming back with a vengeance, and the low-lying fruit for savings has already been picked. Employers are now looking for something that’s going to protect us for the next five years.”

Since his statement, reports have documented an even greater level of employer frustration with the capability of managed care to produce savings (Psychiatric News, September 21; October 19).

Some employers think they can find protection from rising costs in a new health insurance option: defined contributions (DC). Like managed care, the term “defined contributions” actually covers a range of strategies for dealing with health care costs and insurance coverage. The basic approach comes from the defined-contribution model for pensions. As with those retirement benefits, the employer contributes a specified dollar amount toward benefits and shifts the risks and responsibility for the use of that money to the employee.

In the purest form of DC, an employer gives each employee a fixed amount of cash with the understanding that he or she will use the money to purchase health insurance, adding personal funds to the employer’s contribution if necessary. Health care analysts have pointed out a major flaw in that approach: tax consequences. Both employers and employees lose the tax advantage of having the health insurance premium excluded from taxable income.

The use of vouchers would preserve the tax advantage by ensuring that funds were spent on health insurance. According to a study by the Employee Benefit Research Institute (EBRI), however, health insurance purchased by individuals on the open market with vouchers could be up to one-third more expensive than comparable insurance available through a group rate negotiated between insurance company and employer. Also, an October EBRI study found that employees themselves are somewhat reluctant to accept the responsibility for selecting their own health insurance.

Who Benefits From DC?

At the heart of traditional insurance coverage is the idea of pooled risk. Absent any safeguards to protect those with high-cost health needs, a young, healthy employee purchasing his or her own insurance will fare better than will an older employee with health problems. An employee with the skills and resources to evaluate insurance options will likely make a better choice than one who is not inclined or able to do research.

Health care practitioners also have different stakes in the defined contribution debate. In EBRI’s October issue of Notes, Donald Palmisano, M.D., secretary-treasurer of the AMA, writes that the AMA supports a DC health benefits program because it would be an essential element of a consumer-driven system. He assumes that consumers would become more cost conscious, and the market would respond with user-friendly information. Physicians would do well in the marketplace because of cost and quality, rather than because of an employer’s choice of insurance plan.

James Bentley, M.D., senior vice president for strategic policy planning of the American Hospital Association, writes in the same issue that studies find that “20 percent of the population consumes 80 percent of the health care resources,” and those heavy users are concentrated in hospitals.

He fears that DC would result in an increase in the number of uninsured and in uncompensated care if individuals choose insurance poorly. Hospitals would end up subsidizing anyone who selects a level of coverage that is too low.

Lots of “ifs” cloud the potential fate of psychiatrists under DC. If employees value mental health benefits, they will vote accordingly with their dollars. But even if they do think some form of mental health benefit is important, it is by no means certain that they will spend their money on psychiatric benefits as opposed to a less costly alternative.

Robert Schreter, M.D., assistant professor of psychiatry at the University of Maryland School of Medicine, said, “The upside is that the psychiatric profession will be forced to become more service oriented. We will have to provide better service by telephone and at times when patients need us. We will need to get information out about the patients and medical situations for which psychiatry is more effective than other mental health professions.”

Kevin Smith, M.D., a member of APA’s Committee on Managed Care, agreed that a positive aspect of DC could be the return of choice about health care to the consumer working with a physician. But, he added, “Not all patients can handle that choice. There can be a great deal of denial on the part of patients who have the most serious forms of mental illness. They might choose not to get the mental health benefits they need. And it is possible employees will not make payments for insurance coverage unless the money is taken from their paychecks.”

What’s Next?

James Maxwell, author of the survey “Corporate Health Care Purchasing Among the Fortune 500,” said, “It’s unlikely that a full-blown version of [DC] will appear in the short term” (Psychiatric News, September 21).

Gary Ahlquist, senior vice president and managing partner of Booz-Allen and Hamilton’s Insurance Group, however, sees “a trillion-dollar opportunity.” With other company analysts, he wrote in the July edition of eInsights that “consumer-directed health care accounts could soon become the norm. This will create 50 to 100 million new retail investment accounts with combined long-term annual funds flow in excess of $1 trillion.”

Ahlquist envisions a DC model built around a Web site where employees make choices using a voucher or specific amount of pretax employer dollars (risk adjusted, in some manner yet to be determined) with options to increase coverage and features with their own funds.

Attitudes toward health benefits would change, according to Alquist. Consumers would begin to change their views of those benefits from “a nearly free good to be consumed as thoroughly as possible, into a lifelong stream of annuity payments to be managed for maximum value today and security in the longer term.”

Smith and Ahlquist agree on one fact. “Remember,” said Smith. “This new form of insurance is all about cutting costs and making money.”

The Web site of Booz-Allen and Hamilton is www.boozallen.com; Center for Studying Health System Change, www.hschange.org; Employee Benefit Research Institute, www.ebri.org. ▪