'Self-directed' health plans shift risk, cost to workers

Growing practice mirrors the evolution of retirement benefits

Health-insurance costs are spiraling out of control again, and employers are demanding that employees take the hit.

They may not do so quietly. Three thousand Hershey Foods workers walked out in April, for example, when the company demanded that workers double their share of health-insurance premiums.

The strike at Hershey grew more tense when the AFL-CIO announced that chief executive officer Richard H. Lenny rakes in more than $22 million a year in total compensation – 600 times the annual average pay for a rank-and-file Hershey worker.

After six weeks on strike, the workers reached an agreement with the Pennsylvania chocolatemaker that leaves their cost-sharing unchanged in exchange for a smaller wage increases over the life of the four-year contract.

Unions are threatening to strike over the sharing of healthcare costs at dozens of major US companies that are currently in negotiations or heading into them.

Firms face mounting costs

Companies that used managed care and employee cost-sharing to rein in runaway benefit costs a decade ago are once again facing double-digit increases for healthcare programs, including even the most basic HMO plans.

"Double-digit increases in health-plan costs over the past two years, coupled with the expectation that this trend will continue in the near term, are simply not sustainable from an employer's perspective," says Brad Benton, a partner in the healthcare practice of KPMG LLP in Atlanta.

Health-insurance premiums are rising 10 to 15 percent per year nationwide, and even more in some parts of the country. Nancy Vice, a senior consultant with CBIZ Benefits & Insurance in Cleveland, reports that rate increases in northeast Ohio are averaging 20 to 40 percent.

Most of her clients have handled the rate hikes by redesigning their benefit plans and increasing employee contributions.

"There is no silver bullet to control costs at this time," Ms. Vice says.

According to the US Bureau of Labor Statistics (BLS), 3 out of 4 employees with company healthcare coverage are already in managed-care plans. For many employers, offering managed care no longer helps contain costs.

Employees' burden grows

Among workers with single coverage under employer-sponsored health insurance, 68 percent contribute to the cost of premiums, up sharply from 28 percent 20 years ago, according to the latest survey from the BLS. For workers with family coverage, 81 percent share the cost, up from 49 percent in 1980.

The majority of insured workers in the BLS survey contributed a flat monthly amount toward premiums in 2000, averaging $54.40 a month for single coverage and $179.75 for family coverage, often in addition to deductibles and copayments.

A recent UCLA survey of 460 companies found that three quarters raised copayments or deductibles over the past year, and two-thirds raised employee contributions to premiums.

In a new survey from Watson Wyatt and the Washington Business Group on Health, two-thirds of employers reported that they are unwilling or unable to absorb additional healthcare cost increases.

According to Jane Cooper, president and CEO of Patient Care, a New Orleans patient advocacy company, "the majority of companies are renewing health plan options [for] late 2002 and early 2003 that increase the deductibles and coinsurance for employees and their families."

With managed care and increased cost-sharing, employers have been able to control the percentage of compensation paid in health-insurance costs despite steadily rising healthcare costs. But with costs now spiking to new levels, many companies may soon adopt a new approach to healthcare benefits.

Rise of 'defined contributions'

Unlike traditional "defined benefit" plans, where the employer chooses and pays for some or all of an employee's health insurance, "defined contribution" plans allow companies to contribute a flat amount toward medical expenses – not insurance – and the employee selects and pays for the services and covers any additional costs.

This new approach to healthcare is similar to the changes that retirement benefits went through over the past two decades.

Until the 1980s, the retirement vehicle of choice was the defined-benefit retirement plan. With these traditional pension plans, the employer guaranteed a fixed benefit and assumed responsibility for funding it. But these plans have given way to defined-contribution retirement plans, such as 401(k)s.

Here, the company makes a voluntary, predetermined contribution to an account controlled by the employee, with no guarantee of final benefits.

Similarly, defined-contribution health plans, also called "self-directed" or "consumer driven" plans, allows an employer to pay a set dollar amount toward healthcare annually instead of providing a specified package of healthcare benefits with open-ended costs for the company. With defined-contribution plans, the risk of higher expenses or cost increases is largely transferred to employees.

Any unspent employer contributions are typically carried over from year to year.

In many cases, the company offers catastrophic coverage to protect the employee from the devastating costs of major illnesses or injuries.

Stand-alone defined-contribution healthcare plans are still uncommon.

"Most employers are offering defined-contribution plans next to traditional plans, so the employee still has a choice," says Clelland Green, chief executive of America's Choice Healthplans in King of Prussia, Pa.

Louisville, Ky.-based Humana, one of the largest healthcare companies, now provides modified defined-contribution plans for its 14,000 employees.

Jonathan Lord, Humana's chief clinical strategy and innovation officer, reports that the company began offering a pair of low-cost defined contribution plans last year.

"These products include an up-front allowance for the first $500 of healthcare spending, a large deductible for the next $1,000 or $2,000, and then insurance coverage for subsequent expenditures, capped to limit employee out-of-pocket costs," he says.

An official mandate

In July, the IRS gave the green light to defined-contribution healthcare plans, a sure sign of growing employer demand.

A survey by the Employee Benefits Research Institute, however, found that most Americans do not favor a defined-contribution approach.

Still, experts predict substantial numbers of companies will adopt these plans within the next 3 to 5 years.

For many employees, this development will mean immediately higher out-of-pocket costs.

Another likely consequence, says Ms. Cooper, "will be an increase in the number of uninsured."

David Cowles, executive vice president of Benemax, a benefits-management firm in Medfield, Mass., believes that "initially, some costs are shifted under such plans, but that doesn't mean that employees end up paying more, especially if costs are calculated over several years."

Employees who tend not to tap their health plans often may end up paying the same or even less for health coverage under a defined-contribution plan, he says, while employees with higher medical expenses may spend more.

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