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.

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Publications : Bar Bulletin: January, 2004

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