Defined Contribution Health Plans Start To Make Some Headway
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Defined contribution health plans are starting to show up in the real world.
Even benefits experts who are counting on the plans to save the U.S. private health finance system say most are too new to supply meaningful performance statistics.
But employers that have tested the defined contribution plans say so far, so good.
At RD Systems, a South Beloit, Ill., production automation company with fewer than 50 employees, adopting a defined contribution plan a year ago "has made a huge change in the way [employees] use insurance," says Ness Sebeck, the human resources director. "If someone has a cold, they dont run to the doctor to get overmedicated. And weve seen fewer sick days, shorter sick periods and less absenteeism."
Nanophase Technologies Corp., Romeoville, Ill., a manufacturer of nanocrystalline materials, began using a defined contribution plan Jan. 1.
"Now people are a lot more interested in their personal medical fund and how that money is spent," says Nancy Baldwin, Nanophases HR director.
Employers are shifting to defined contribution plans, which are also known as "consumer-driven" or "consumer-directed" plans, in an effort to give employees an incentive to do a better job of shopping for health care.
The typical DC health plan combines employer-funded health reimbursement accounts with health insurance that has a deductible of at least $500.
The reimbursement accounts cover only part of the deductible, to discourage employers from seeking unnecessary care or using overpriced providers.
Many of the plans also try to give members information they can use to become better health care consumers.
The Internal Revenue Service gave the companies organizing and sponsoring the DC plans a big boost earlier this year, by ruling that employees can keep unused reimbursement account assets in the accounts at the end of the year without treating the assets as taxable income.
The IRS also ruled that sponsors can use systems based on debit cards, stored-value cards and the Web to supply some of the documentation necessary to show that employees are spending account assets on eligible expenses.
Companies with defined contribution products already on the market include Aetna Inc., Hartford, and a host of smaller players, and many more companies say they are adding defined contribution plans in time for the fall enrollment season.
A recent survey by Hewitt Associates L.L.C., Lincolnshire, Ill., found that 46% of surveyed employers were interested in offering defined contribution health coverage.
Tom Beauregard, a Hewitt consultant, says that within three years DC plans will cover more than 20% of the insured employee population.
Paul Fronstin, director of health research and education at the Employee Benefit Research Institute, Washington, estimates that fewer than 200 large employers offer the plans and that fewer than a million workers are eligible to join the plans.
He also estimates, however, that the number of plans has doubled since 2002.
When Towers Perrin, New York, surveyed Fortune 100 companies recently, it found that 15 now offer defined contribution plans to a total of 500,000 employees and that at least 10 more Fortune 100 companies are thinking about adding defined contribution plans in 2004.
Although more employers are looking at the defined contribution concept, "the number that launch it is still fairly small," says Michael Taylor, a principal with Towers Perrin.
Aetna reports that 73 companies have signed up for its defined contribution program and that the program will cover more than 40,000 employees and dependents.
Experts point out that most employers offer defined contribution plans as alternatives to traditional plans rather than as replacements.
Aetna, for example, has found that only two of its DC plan customers actually are replacing existing, traditional health plans with defined contribution plans, reports Robin Downey, Aetnas director of health research and education programs.
One of the employers replacing a traditional plan is large, and one has about 300 employees, Downey says.
"We think, over time, more employers will offer [DC plans] as a full replacement," Downey says.
Taylor and Beauregard, the benefits consultants, predict the number of employers using DC plans as replacement plans will grow slowly.
"Benefit managers are still cautious about blowing up their existing health care plan," Taylor says. "Its much more likely theyre going to continue offering a choice."
Beauregard expects employers to use pricing and education to steer employees into the new plans, just as they used those tactics to persuade employees to try managed care plans.
