Over the next decade, we are likely to see a shift in health insurance in the United States: 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 market today is dominated by “defined-benefit” plans, under which companies determine a set of health-insurance benefits that are provided for employees. Under defined-contribution plans, companies pay a fixed amount, and employees use the money to buy or help pay for insurance they choose themselves.
The fundamental driver of this shift is the effort by American businesses to reduce their exposure to health care costs. But the recent health care-reform law may accelerate the shift.
The defined-contribution concept is already familiar to most American workers through their retirement benefits. Over the past two decades, company retirement programs have moved decisively away from defined-benefit plans, in which workers are paid a given amount of retirement income, and toward defined-contribution 401(k) plans, in which risks – from fluctuating financial markets, for example – are borne by 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 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 copayments than a traditional plan has, and it is often tied to a health savings account. It typically still provides generous insurance for catastrophic cases.