Maryland Bar
Bulletin
Publications :
Bar Bulletin
Editor: W. Patrick Tandy
January, 2004
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 the October 22, 2003, edition of 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 percent 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 work like this, in concept. An employer purchases a preferred
provider organization (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, then 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 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 personal care account. 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?
R. Dane Rianhard is Vice President and
Coordinator of Group Benefits for FranklinMorris, coordinating broker for the
Bar Associations Insurance Agency, Inc., providing discounted insurance products
to Bar Members.
