More Employers Moving To Defined Contribution Health Plans
By Jim Van Wyck | January 25, 2008
USA Today has a story (reprinted below)
about the shift of more and more employers
towards a defined contribution model of providing health insurance.
Just as retirement and pension plans moved
from defined benefit to defined contribution in the 1980’s,
health care benefits will change in this direction.
****************
Employers put health coverage in workers’ hands
Trikolas plans to drop health insurance for his employees and give them
money to buy their own coverage. He says doing so will put him in the
vanguard of a movement by employers searching for answers to rising
health costs.
“This may be the future of
health insurance,” says Trikolas, CEO of Ilios Partners in Chicago,
which plans to switch its 100 employees from group to individual
coverage this year.
BUSINESS BEAT: Small Business front page | Company News
As
health insurance costs continue to rise, some employers are adopting a
controversial new approach: ending group coverage and giving employees
$50 to $200 or so a month to help them buy their own.
The
shift is touted as a lower-cost way for employers to offer workers some
kind of health coverage, while making smaller and more predictable
financial contributions toward that coverage. Like other companies
considering the switch, Ilios will pay a portion of employees’ medical
costs into tax-free accounts that workers can tap. It also will provide
a link to an independent website where workers can compare price quotes
from a variety of insurers.
If
broadly adopted, the new model would represent a fundamental shift in
health coverage in the USA. Most people with health insurance are in
group plans offered by their employers.
Critics
say the change would end the long-standing, implicit social pact to
provide coverage to sick and healthy workers alike in favor of a more
Wild West, go-it-alone approach that could benefit young and healthy
workers but leave those older and sicker unable to get medical
insurance.
That’s because ending group
coverage removes a key protection in group insurance plans. Insurers
cannot reject members of group plans for health reasons, and everyone
in the group pays the same premium.
In most
states, insurers can reject individual applicants for health reasons
and can charge widely varying premiums based on the applicant’s age,
health history and other factors. Only in a handful of states, such as
New York, Massachusetts and New Jersey, must insurers sell coverage to
everyone, regardless of their health.
“What
scares me is it’s tempting for an employer who may have one or two sick
employees to say, ‘You’re not my problem, try to get coverage from the
state,’ ” says John Hickman, an Atlanta attorney who advises businesses
on their benefit plans. “It could leave a lot of people without
coverage.” He says the new model could work if Congress passes national
rules requiring insurers to take everyone, regardless of his or her
health.
The idea comes as the percentage of
employers providing insurance shrinks and the number of uninsured
Americans grows. Last year, 60% of employers offered group coverage,
down from 69% in 2000. The number of uninsured rose to 46.6 million, up
from 44.8 million in 2005.
Large companies
use group coverage as an important recruitment and retention tool, but
smaller firms struggle more with costs and are less likely to offer
group coverage.
Proponents of individual
coverage, including Paul Zane Pilzer, whose Zane Benefits firm offers
services that help employers make the switch, say most workers will be
able to buy coverage on their own.
The
healthiest, Pilzer says, will get coverage for less than they pay now.
Monthly premiums can be less than $100 for some younger, healthier
people but several times that for others.
“The
healthy employees don’t have to pay for sick employees,” says Pilzer, a
software entrepreneur and author. He says employers can save money
because they contribute a set amount per employee — often far less than
they pay for group coverage.
Sara Rosenbaum,
a law professor at George Washington University School of Public
Health, says offering money toward individual policies “may be somewhat
helpful for workers in businesses that have never been able to offer
insurance coverage,” but it is a “radical step backward” for those who
decide to cancel group policies.
She says
proponents may mislead employers into thinking individual and group
coverage are the same, when there are often striking differences.
“Many
employees may find themselves shut out of the individual market,”
Rosenbaum says, “and even if they can get in, the coverage is
dramatically less than what they can get in group products.”
Reimbursement accounts
Though
no one tracks the number of employers who send workers out on their
own, it is only a fraction of the total number who offer health
insurance. Pilzer says he has more than 100 clients; his company sets
up and manages tax-free medical reimbursement accounts for the clients’
employees. He sold his first company to Steve Case’s Revolution Health,
which offers the service through Sam’s Club.
“This
is a multibillion (dollar) opportunity,” says Vik Kashyap, founder of
Canopy Financial. Last month, Canopy began a similar reimbursement
service and steers workers to insurers who sell individual health
policies.
The insurance industry has
acknowledged the difficulties some people face in getting coverage. In
2007, officials in California and Connecticut fined several insurers
for canceling individual policies after patients racked up large
medical bills.
A proposal released last month
by America’s Health Insurance Plans, the industry’s lobbying arm,
called on states to create guaranteed-access plans that would make
insurance available to people with serious medical conditions.
The
group said insurers should provide coverage to those who aren’t sick
enough to qualify for the state plans. And, it said, insurers should
not cancel policies solely because applicants provided incomplete
medical information, so long as any omissions were unintentional.
Because
individual policies are tied to each applicant’s medical history,
insurers can limit or exclude certain conditions. For example, an
insurer may offer a person with hay fever a policy that excludes
coverage of any upper respiratory condition. “Something as simple as
hay fever may mean you are not covered if you get pneumonia,” Rosenbaum
says.
Bosses offer assurances
Like
some other employers contacted, Trikolas says he doesn’t expect his
employees, who are mainly in their 20s and 30s, will have a problem
qualifying for individual insurance. If any do, he says the company
will help them find coverage.
“I can guarantee you that no company would leave those people high and dry,” Trikolas says.
David
Davis, executive vice president of Sweet and Sassy Franchising, which
franchises salon and spa services aimed at girls ages 5 to 12, says his
company plans to introduce the Canopy program this year and end its
group coverage. Davis, whose company is based in Southlake, Texas, says
the main goal is to give workers more options.
“We
have employees who have families with young kids, some have older kids
and some employees are single,” Davis says. “Those scenarios present
widely varying health care needs. Something like this gives us and our
employees a little more flexibility.”
What happens if some can’t get coverage?
“Currently,
we don’t have any issues like that at all,” Davis says. “We’ll have to
address that if it occurs. As we bring new people on, we’ll get a
better sense of how it will work. We may jump into it and say it’s the
best thing we’ve ever seen, but we will evaluate that as we go.”
Canopy’s
Kashyap says most people can get insurance. Those who cannot, he says,
should be looked upon like bad drivers, who have to pay more for auto
insurance. He expects health insurers, possibly with the help of
government or employers, ultimately will develop coverage for
higher-risk people.
“There are some people in
the minority who will be adversely impacted, but the system in general
is designed for the majority,” Kashyap says.
Bret
Berneche, chief executive officer of Cardinal Homes in Wylliesburg,
Va., used Zane benefits to help get health insurance for himself and
his 112 employees.
In August, Berneche told his employees that their group health insurance would end that month.
Between
premium increases and mounting state and federal rules, offering
insurance was costing the company too much — $846,000 a year.
“It was certainly a blow,” Berneche says. “The choice was having the health plan we had or going out of business.”
After
he canceled the group plan, he heard about Pilzer’s program and signed
on. Cardinal puts $100 to $200 a month into each employee’s health
reimbursement account.
Even if Berneche
carries out his plan to nearly double the size of his company, he still
expects to save at least $360,000 this year with the new program. Zane
Benefits handles the accounts and reimburses employees out of their
individual accounts for medical expenses.
Many
employees were able to buy individual policies for less than the
monthly amount put in by Cardinal, Berneche says. The money also can be
used for eyeglasses, dental care and other medical expenses.
“I
don’t know if everyone bought insurance. But there are various ways to
get some kind of health coverage, through state programs and self-pay
programs and catastrophic insurance programs,” he says. “Everyone here
has a health reimbursement arrangement that they can spend the way that
best suits their families’ needs.”
Though some pay less for premiums than they did under the company-subsidized group plan, others, including Berneche, pay more.
He
and his wife, Dorothy, both in their 40s, pay about $900 a month in
premiums, and each has annual deductibles of $5,000, meaning that’s
what they pay before coverage kicks in each year. The cost of
prescriptions adds $200 to his monthly costs. He says his total costs
are at least $1,000 a month more than under his group policy. Still, he
says, “I am happier today with this program … than I was before.”
Berneche
says he can talk more openly with company employees about health
issues. He does not feel as constrained by federal and state rules and
has more control over health costs.
“I had to worry about that every year,” Berneche says. “We’re no longer in the health care business.”
Legal issues
Legal
questions remain about whether to classify this hybrid coverage as
group or individual policies. Consumer protections are not as strong in
individual plans because states allow them more leeway than group plans.
Berneche
had to certify on his individual insurance application that his company
was not reimbursing him. Yet the contributions his company provides are
at least a partial reimbursement.
In Virginia
and many other states, policies sold as individual plans have different
rules on what they must cover and how applicants can be scrutinized.
The
Department of Labor and the Treasury Department are considering whether
federal rules that apply to group insurance also apply in programs such
as Zane’s, in which an employer makes a contribution but doesn’t offer
a group plan, a statement from the Department of Labor says.
For
instance, says Mila Kofman, a health policy professor at Georgetown
University, “what happens if an employee can’t buy an individual
policy” but others in the company can? “Then you have a potential
violation of the non-discrimination provisions” in federal law.
Daryl
Richard, a spokesman for UnitedHealth, says, “A number of groups,
including brokers, insurers and government agencies, are seeking to
fully understand the nuances of how individual and employer-sponsored
coverage may best work together in compliance with both state and
federal regulations.”
The main goal, he says, “is finding ways to make health coverage available to as many Americans as possible.”
Topics: Individual Health Insurance, Individual Plans |
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