The term "defined contribution" has been used to describe a wide variety of approaches that employers can use to provide employees with health benefits.

In one scenario, your employer pre-screens and pre-selects a variety of group health insurance plans and then gives you cash (or vouchers) to buy from one of them. The employer contracts with the pre-selected insurers and still retains some control over your health insurance options.

Under the most controversial and yet untested arrangement, your employer hands you a fixed amount of money — let's say $5,000 for the year — and then leaves it up to you to purchase an individual plan. If you choose a plan costing more than your employer's contribution, you must pay the difference.

The defined contribution system is not without drawbacks. Under the most controversial scenario, you could lose two of the major benefits of group health insurance: the cheaper premiums that come with a group plan's increased purchasing power, and protection against exclusion from coverage of your and your dependents' pre-existing medical conditions.

In addition, there are few insurers that offer individual health plans, according to Paul Fronstin, a senior research associate at the Employee Benefit Research Institute (EBRI), a national nonprofit organization based in Washington, D.C. Given the small number of these insurers and the degree of difficulty that people currently have in obtaining coverage under individual plans due to pre-existing medical conditions, Fronstin cautions, "There's not even a market out there right now for these people to go to."

What's in it for the employee?

The defined contribution approach offers workers more choice, according to E. Thomas Garman, distinguished fellow in the Association for Financial Counseling and Planning Education, a nonprofit organization dedicated to improving personal financial management education, and the American Council on Consumer Interests, a nonprofit organization that provides research-based information on topics of consumer interest.

"It's especially good for young workers who don't make many claims," says Garman. "Let's say the employer contributes $2,500 annually toward its workers' health insurance. A 24-year-old in good health can shop around and probably find suitable coverage for around $1,000 a year."

As an employee, the biggest advantage of defined contribution health insurance is that it offers you control over your own health care. You decide which benefits you need and how much you're willing to pay for them. But do you really want the responsibility that comes with this freedom of choice?

When your employer hands you the reins to your own health insurance, you're responsible for comparing plans, making the final decision, filling out all the paperwork, and making sure the premiums are paid on time.

But it doesn't end here. Once you've researched potential insurers, you must make cost comparisons. The cheapest health plan won't necessarily be the best value. You must decide which benefits meet your personal and/or family needs and compare costs between types of health insurance plans and the insurers that offer them. This is the work employers do before they contract with health insurance companies.

You may be in for sticker shock, particularly if you have to buy individual health insurance on the open market. Individual policies are underwritten to take into account your age, gender, health status, occupation, and even the ZIP code in which you live.

"There is no such thing as an average premium in the individual market," says Deborah Chollet, a senior fellow researching the individual health insurance market for Mathematica Policy Research, a Washington, D.C., think tank.

Factors other than personal characteristics drive up rates as well, such as drug prices, which are rising twice as fast as the inflation rate, according to the Center for Policy Alternatives, a nonpartisan Washington, D.C., legislative think tank.

In light of the complicated nature of choosing good quality, cost-effective health insurance plans, current research shows that workers aren't sure they're up to the task. Forty-three percent of the workers surveyed in the 2000 Health Confidence Survey conducted by EBRI say they are either "extremely" or "very" confident that the employer sponsoring their health insurance has selected the best available health plan. In contrast, only 32 percent of those polled say they are confident in their own abilities to select the best health plan if their employers should stop offering health insurance, and 25 percent say they are "not too confident" or "not confident at all."

Studies show that increased stress is a consequence of the additional responsibility that comes with managing your own 401(k), according to Fronstin. That burden is likely to be compounded with a defined contribution health plan, he says. In a worst-case defined contribution scenario, your employer may opt for the "Yellow Pages" approach, as in, "Here's your money and here's the telephone book. Have a nice day." Even if you're a savvy consumer, armed with information, you may feel overwhelmed by the task.

Fronstin questions whether the increased choice offered by the defined contribution philosophy is always a plus for the consumer. The sickest workers, he says, are the ones most likely to frequently use their health insurance, encounter problems, and complain. But because they're in the minority, their complaints are not likely to drive change in the individual insurance marketplace. If they have a wide choice of insurers, those who are unhappy may simply switch plans. The original insurer is probably glad to see its most costly members drop out.

Additionally, the defined contribution idea that employers would simply add to their workers' paychecks to purchase health insurance and that their employees would spend the money wisely is troublesome and raises questions that no one has yet answered, says Dr. Harvey S. Frey, director of the Health Administration Responsibility Project in California.

"What forces, if any, will guarantee that [the employer's money] is used to buy health insurance rather than a large-screen TV?" asks Frey. "Will this result in an increase in the number of those voluntarily uninsured? How will they be handled when they or their families need medical care?" Continue to Page 2.