In the 1970s, healthcare benefits buzzwords centered on "flex" and "cafeteria-style" plans. During the next two decades, the catchphrases became "managed care" and "HMOs" as employers searched for ways to suppress spiraling healthcare costs. But bureaucratic hassles and stingy coverage decisions left employees clamoring for more freedom in healthcare choices.
Now another round of double-digit healthcare cost inflation has caught the nation's attention. Listening to consultants and those with a financial stake, one would conclude that health insurance as the country has come to know it soon will be a thing of the past. Replacing it, they say, will be defined contributions-employers giving employees a fixed amount of money to purchase their healthcare coverage.
Consultants and entrepreneurs say that health plans will be forced to make a change or close their doors. And one could easily believe the employers who buy the bulk of the coverage are on the precipice of a healthcare revolution.
Not so fast, say industry observers and think tank experts.
"People are trying to reinvent the next thing," says Sally Trude, senior health researcher at the Washington-based Center for Studying Health System Change. "I now think of defined contributions as inventing the new next thing. I think that whatever the next thing is . . . we'll probably be putting together with Scotch tape. The first thing is that we don't have any idea of what 'defined contributions' means."
Defining defined contributions may be the first issue to resolve. It's an idea born of 401(k) planning, where employers contribute a set amount to a retirement account and employees can contribute as much or as little as they choose.
The gamut runs from companies giving employees cash or vouchers to purchase a health plan to signing up with one of the growing number of firms that will set parameters around the levels of coverage patients can choose.
HSC conducts on-site surveys every two years with employers in 12 U.S. cities to discuss benefits. "One of the questions we were asking is: 'Are you planning on changing your benefit process? Are you going to change your contribution strategies?'" Trude says. "We didn't get anyone saying they're going to go to defined contributions."
Regardless, the number of companies offering defined contribution plans has climbed in recent months. Some brick-and-mortar health plans are offering the option to small group employers, while some online firms have opened shop with defined contributions as their only business.
In another recent survey, Lincolnshire, Ill.-based Hewitt Associates questioned more than 600 major employers across the country about their thoughts on providing healthcare coverage to their employees. Almost a quarter of the employers said they're considering a defined-contribution approach to their employee health benefits but haven't switched from their current benefit structures.
Several factors are driving the slow march toward defined contributions, says Ken Sperling, practice leader for Hewitt Associates.
"The overarching force is that, from everyone's point of view, the current managed care is broken," he says. "From employers' because of costs and hassles, and from employees' because of the requirements and from the backlash that consumers are having about their managed care plans. I don't think anyone's really happy with the way managed care has evolved and where it is. It's a tough business to be in, and no one's really satisfied with where we are."
Employers also are nervous about the prospect of being sued for medical malpractice, Sperling says. Last year, a bill in Congress that would have let patients sue their health plans also would have let them sue their employers for choosing that health plan.
"It's not a liability they can measure," he says. "If it's not a liability they can manage, they're going to want to back away."
Trude isn't so sure the possibility of being sued has become a serious issue. "I would call the liability issue a wild card," she says.
Double-digit healthcare inflation has caught employers' attention as well, Sperling says.
"The sustained cost increases are going to start moving from the HR department to the CFO's office," he says. What that means, he says, is that chief financial officers will be looking for ways to cut costs in employee benefits, and defined contributions could be one way to do so.
"Absent those kind of external influences, we'll see slow and steady incremental movement until we get definite evidence that this stuff really works," Sperling says.
The market is ready for a defined contribution approach, he adds, because consumers are "completely disengaged from the financial consequences of their (healthcare) decisions.".
Trude agrees.
Employers are "trying to make the employees more aware of how much healthcare costs," she points out. "The way it's set up now makes people think a doctor's visit costs $10."
Consumers will have to become more literate about healthcare finances before costs finally drop, Sperling says.
"What appears to be next is a system where the consumer has a lot more information about the cost and quality of healthcare services and has a stake in making and in the financial consequences of a decision," Sperling says. "The proponents of these types of models think that this is the element missing."
Providers used to see managed care plans or employers as the customer, Sperling says.
Defined contributions will shift that thinking. But whether defined contributions will become more than a blip on the healthcare radar screen remains to be seen.
"I think the jury's still out on whether it's still going to work," Sperling says. "It's in its embryonic stages."
