The Evolution of Health Insurance The Case for a Defined Contribution Model By Bradley K. Arends, J.D.
I
n the wake of President Obama’s
reelection, Washington will continue to hammer out the details of implementing the PPACA. We can expect changes at the company level as well based on one unassailable truth: healthcare costs are rising so precipitously that many employers can no longer afford to provide employee healthcare coverage according to the current group insurance model. The situation is analogous to the pension landscape in the 1980s. Back then, employers were sinking under the weight of the cost of providing pensions for their retiring employees. The pension model, known as a defined benefit, simply became unsustainable. As a result, companies began to migrate to the defined contribution model, which now takes the form of the ubiquitous system of 401k plans. In the healthcare realm, a similar shift from the current defined benefit model to a defined contribution model is also likely to occur. Although some employers are skittish about switching to a different healthcare model, just as they were about switching from pensions to 401k plans, a defined contribution model can have significant upsides, both in terms of a company’s financial wellbeing and employee health and well-being. My own experience is a case in point. For a number of years, my 100 employees comprised an extremely healthy group, which kept insurance costs in check. But as the workforce started to age and a handful of employees continued to maintain
January / February 2013
Bradley Arends, JD, is President and CEO of Alliance Benefit Group in Albert Lea, Minnesota.
unhealthy lifestyles, healthcare costs skyrocketed. The deteriorating health of a handful of workers, combined with rising healthcare costs across the board, forced my firm’s renewal rates up more than 25 percent for three straight years. In order to control costs, we decided that we needed to do two things: change the model for providing healthcare insurance and help employees take responsibility for their behaviors. We replaced our group health plan with an allowance, or defined contribution, that employees could use to purchase their own individual health insurance. In addition, we instituted aggressive wellness and disease-management programs to encourage employees to take care of themselves, which could help them to lower their insurance premiums and healthcare costs. The shift to a defined contribution model helped my company bring healthcare costs to a manageable and sustainable level, both for the firm and our employees. But the more profound change came thanks to the wellness program, which monitors and grades employee health. Employees who maintain high scores or significantly improve their scores receive more money that they can apply to their insurance payments. This incentive-based model has yielded tremendous results. For example, it encouraged our employees to band together to lose weight. Through an on-site Weight Watchers program that the employees established, some 23 of our workers dropped over 900 pounds in less than six months. The program
also effectively created a separate, lower rate for employees who quit smoking. Instituting a defined contribution program raises a number of issues. On the practical side, applying for individual insurance takes work. Employees need to learn how to shop for and evaluate insurance plans, a task that should become easier as online “shopping malls,” a.k.a. private exchanges, spring up. While a defined contribution healthcare program may sound too complicated and harsh to some who believe that employers are responsible for providing healthcare at any cost, the fact is, Americans’ poor lifestyle choices are simply driving employer healthcare costs up to unsustainable levels. Just look at diabetes. Since 1984, the number of Americans suffering from diabetes has risen nearly four-fold to 20 million people. Medical expenses for people with diabetes are estimated to be more than 2 times higher than for people without diabetes. In the current defined benefit system, employers must cover the rising costs of this disease, which is affecting more and more people. Right now, employers have an alternative for providing health insurance to employees, and it’s a good one. A defined contribution system based on consumer choice and wellness programming can both cap employer healthcare costs while encouraging employees to take responsibility for their lifestyle choices. This is a model whose time has certainly come. ■
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