As far as employers are concerned, the jury is still out on the merits of a defined contribution approach to health insurance. The greatest advantage for employers is that defined contribution allows them to focus on their core business and move away from the business of providing employee health benefits. It also gives them tighter control over benefits spending.

Because most employers don't want to raise their employees' contribution as fast as health care costs are escalating, the defined contribution approach allows them to draw a line in the sand by saying, "Here's what we're giving you for your health benefits. If you want more, you have to pay the difference."

Yet a majority of the employers surveyed by EBRI express their reservations about defined contributions. Most (84 percent) say they believe some of their workers would not get coverage under such a system, due to chronic illness, because they couldn't afford it, or because they felt they didn't need the coverage.

And while the majority (55 percent) say it's impossible to predict the impact that a general move to a defined contribution approach would have on the overall cost of health insurance, 28 percent say they believe it would actually raise costs, while only 8 percent say they believe it would lower costs. In fact, employers as a whole are lukewarm about the whole idea, according to consulting giant William M. Mercer Inc.

Only 5 percent of the employers surveyed in Mercer's December 2000 study on employer-sponsored health plans say they would be "very receptive" to the defined contribution approach, even if the nation's current tax laws were changed to favor it. (The survey is statistically weighted to represent nearly 600,000 employers.)

Furthermore, employers are reluctant to tinker with their employees' benefits. Their concern is that employees may see a defined contribution health plan as a benefit take-away, rather than an enhancement — a ploy solely to reduce the employer’s expenses and involvement with workers' complicated health care decisions. "Defined contributions have gotten some really bad press," says Blaine Bos, a consultant with William M. Mercer. "Many employers are reluctant to upset workers with 'bad' news about their medical benefits."

Xerox learned that lesson in 2000 when a company official spoke at a conference sponsored by the Robert Wood Johnson Foundation, a national philanthropy dedicated to improving health care, and said the company was planning to move toward a defined contribution approach. The news sparked a major employee protest and a firestorm of media coverage. Xerox has since publicly backed down from its plan.

Despite serious misgivings, the talk continues

The discussions will continue because employers are just plain reluctant to be the middleman in their workers' personal health care decision making, according to Heather Loebner, a consultant with accounting and human resource services giant PricewaterhouseCoopers. "Employers are asking themselves, 'Why should we be so involved in whether Sally Jo's husband's Viagra is covered?'" Loebner says.

Other factors that will continue to fuel the interest in defined contribution health plans include:

• More healthy workers are seeking the choice to drop full-service managed care plans and select low-cost, high-deductible "catastrophic" coverage.

• Other workers are demanding access to services often not covered by their HMOs, including infertility treatment or alternative medicine, such as chiropractic care or acupuncture.

• Labor unions may have to support the defined contribution approach and view it as an enhancement to their health benefits packages, rather than a take-away.

• Insurers would have to find ways to form alternative "risk pools" to accommodate individual policyholders. Insurers like to cover large groups, not only for the premiums, but also because they come to the insurer as the only "naturally occurring" group that doesn't form expressly for the purpose of buying health insurance. That means the pool contains healthy as well as sick members. If only the "sick" employees who need to take advantage of insurance join a particular plan, the high number of resulting claims could cause the payouts of the plan to soar and threaten it with financial collapse, a phenomenon known as "adverse selection."

When all is said and done, the defined contribution approach is probably best seen as a long-range option, a transition from the managed care model on our way to somewhere else, according to Loebner. "No one is going to flip a switch and everyone wakes up tomorrow with a defined contribution health plan," she says. Back to Page 1.