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Are defined contribution programs for health care flawed?

Defined contribution plans for health benefits, the latest rage among consultants, which promises employers a way to lessen the considerable administrative burdens in

managing health plans, is quickly gaining notice in Mississippi. But health care professionals say there are fundamental problems with the concept.

“Through our relationship with our member hospitals, the Mississippi Hospital Association knows that the utilization of defined contributions is an emerging trend

among health care employers,” said Brent Alexander, spokesperson for MHA.

Rod Olps of Palmer & Cay of Jackson, an employee benefits consulting firm, said a key issue for major employers is “the realization of the financial impact of health

care benefits.”

“In the past, health care benefits have been perceived as an entitlement, but more often, we’re seeing financial people and CFOs directly involved in health care costs,”

Olps said. “We go through a process of helping them determine what the appropriate percentage of total cost ought to be for employee contributions so the employer

is able to better match the fix of his cost to the plan. Sometimes, we’ll even have employers tell us what they want the budget to be for the next plan year, and we’ll

help them determine the plan design changes and contributions on the part of the employers required to help them manage their budget.”

The percentage of employee contributions typically ranges from 22% to 50% of the total cost, with many employers allowing for multiple plan options, including

deductible plans ranging from high to low, to better manage fixed health care costs, Olps said.

“Employers are really struggling with what’s appropriate,” he said. “Of course, you’ve got to consider the compensation. You may have a high employee contribution,

but if the salary is high as well, it may not matter as much. Employee compensation and employee benefits costs need to be considered together, not independently.”

As health insurance premiums soar and patient protection legislation opens the door to health plan liability, defined benefits provide a multiple choice for health care

providers, said Julie Jacob of American Medical News.

“Employers (are) talking about stepping back from their role as the purchasers of health insurance for their employees,” Jacob said.

The American Medical Association endorses the concept that employers provide a defined contribution for the purchase of health expense coverage within the private

sector for all full-time employees, supports continued study of all approaches to providing health services for the uninsured and cooperation with business groups to

develop approaches that are best suited to the needs of small employers, and supports development of a package of basic health benefits in conjunction with other

health organizations.

“Many are considering revising their health benefits role by making defined contributions toward coverage,” said an AMA spokesperson. “Under the law’s current

concept of health benefits, however, employers will have difficulty keeping the contribution within the benefit system. Achieving tax parity of individually purchased

insurance is therefore in the interest of such employers, and the AMA will begin to coalesce with them around our mutual interest in this issue.”

H.J. “Jimmy” Blessitt, administrator of South Sunflower County Hospital in Indianola, said defined contributions allow employers to cap expenditures for employee

health insurance.

“The ultimate aim would be to give employees the money spent on employee health insurance and let them purchase their own,” Blessitt said. “The amount of money

would no longer be tied directly to the cost of the insurance. The employee would be able to select the level of insurance coverage they wanted instead of being tied to

the benefit structure of the group policy of the employer.”

Even though the concept sounds like a good one, there are several issues that consultants often overlook, Blessitt said.

“We must remember the history of ‘employer paid health insurance,’ that came into being in the 1950s as a result of a deal between industry and organized labor,” he

said. “The labor unions wanted a pay increase for their membership and, at the time, it did not appear industry could afford one. They got together and had Congress

pass a law that made employer paid health insurance a tax exemption for both the employer and employee. Such insurance was practically nonexistent at the time and

it did not amount to much of a tax break.

“On the other hand, the labor unions won a benefit for their workers, and industry didn’t have to spend much money. Also, health care costs during the

low-technology 50s were very cheap. Sulfur drugs, penicillin and narcotics were about the only effective medicines in widespread use.”

The tax benefit received today by employees with employer paid health insurance exceeds the combined Medicaid budget of all 50 states and the U.S. government,

Blessitt said.

“Unless consultants get the laws changed, do employees really want to forfeit the billions of dollars a year received from tax credits and purchase health insurance with

‘after tax’ dollars?” Blessitt said.

Studies show that an individual’s income is spent in a relatively fixed order, with food, clothing and shelter being the first three, with health insurance purchased with

any funds left after entertainment expense, Blessitt said.

“Do employers really want the health care needs of their workforce in this system of prioritization? While consultants admit there will be a huge problem with what is

called ‘adverse selection’ in the insurance industry, where healthy individuals purchase inexpensive policies and the unhealthy are left with companies that have very

high and ever increasing premiums, the only remedy I have heard from them is ‘community rating’,” he said.

“This is totally absurd and demonstrates a total lack of understanding of health insurance, as community rating can only exist where there are limited health insurance

companies in the market and an individual cannot select a cheaper company. Adverse selection is what bankrupted the Blue Cross/Blue Shield organizations that kept

trying to community rate after the health insurance industry matured and there were more companies in the market.”

In an annual report to the AMA Council on Medical Service in 1998, defined contribution systems were said to “accelerate adverse selection,” adding that “defined

contribution systems are neither a necessary nor sufficient condition for market exit of generous insurance plans.”

Without substantial legislative changes, where the government agrees to continue subsidies that they are currently wanting to find some way to eliminate, the defined

contributions idea will probably be of greatest financial benefit to consultants, Blessitt said.

“It sounds good on the surface but has many fundamental problems,” he said.

Contact MBJ contributing writer Lynne Wilbanks Jeter at lynne@thewritingdesk.com or (601) 853-3967.


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