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Consumer-Driven Health Insurance Products Answer Need for Cost
Cutting and Consumer Control
By R. Dane
Rianhard
For many
employees, the days of health insurance coverage with low co-pays and
rich prescription plans are coming to an end. According to an October
22, 2003, article in The Wall Street Journal:
Few big
employers have dropped health-care coverage. In fact, the percentage
of large companies that do offer benefits has actually increased
slightly, to more than 99% in recent years, according to U.S.
government survey data. But as employers’ health-care costs continue
to soar, many are pushing benefits out of the reach of some low-income
employees with stricter eligibility criteria and higher premium
contributions for workers.
This
cost-sharing has been the subject of much debate and has been a
particularly contentious issue in some recent labor contract
negotiations.
In almost every
consumer market, people make choices with every transaction. When
buying groceries, people choose not only which supermarket they
patronize but also each item they put into their cart based on their
current needs and day-to-day convenience. They save money when they
can and then spend it later when they need to. Now, consumer-driven
plans are being offered in the health insurance marketplace.
Defined Contribution Health Insurance Plans
There are some
creative programs being used by large, Fortune 500-type employers as
an alternative to fully-insured health insurance plans. They lower
employer costs and introduce an element of consumer choice and control
for employees. These so-called “defined contribution” health insurance
plans in concept work like this: an employer purchases a PPO insurance
plan with, say, a $3,000 deductible for family coverage. In theory,
the employer’s health insurance rates drop by 40 percent or so and the
employer uses that savings to fund an allowance for each employee. If
that allowance is $1,500 per employee, that amount is placed into a
personal care account (PCA) that covers routine discretionary care.
Any unused amounts in the PCA could be rolled over from year to year
and used as needed. In the event that a family exceeds $1,500 in
medical expenses in any given year, the next $1,500 would be the
responsibility of the family until the $3,000 deductible is met and
the insurance plan would begin to absorb subsequent health care costs
up to a specified policy limit. Such designs have been around for many
years in the form of Medical Savings Accounts, but they have not
addressed the core issues associated with the third-party payment
system. The new models of consumer-driven health care require that
financial incentives apply not just once a year but every single time
an employee interacts with a health care provider.
This new model
works for a number of reasons, one of which is the ability to roll
over PCA balances from year to year, encouraging employees to treat
this money as if it were their own – using it wisely to pay for needed
medical care. Fortunately, the IRS has recently ruled that the funds
in these plans retain favorable tax treatment. Money deposited by the
employer and distributions to the employee are both done without any
tax liability to the employee.
Personal Care Accounts (PCA) for Employees of Small Employers
Defined
contribution plans are not really available to small employers because
insurance companies do not offer insurance policies with deductibles
as high as $3,000 to employers of less than 1,000 employees. However,
smaller employers can increase the deductibles in their health care
plans to, say, $1,000 to contain their costs and then share some of
their savings with their employees in the same way as larger companies
do, using a PCA. This would mean that the employees would have an
amount to spend on their health care funded by their employer and
would self-insure the rest of the amount of their deductible. Unused
funds provided by the employer could be rolled over from year to year
and would not be taxable to the employee. This could mean premium
savings for employers and control in health care spending for
employees.
Consumer-driven
markets work in every other segment of the economy, from fast food to
computers to housing and cars. Why shouldn’t it be allowed to work in
health care, as well?
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