HELPING THE LITTLE GUYS
The plans can be a good option for smaller businesses as well. Dick Bernstein owns Security Auto Loans Inc., a New Hope, Minn., subprime auto loan provider with about 40 employees. He wanted to offer health insurance to attract and keep workers. But other small business owners warned him that premiums in more traditional plans could soar as high as 20 percent annually.
So in January, Bernstein began offering his employees a defined contribution plan through Bloom Health. Bernstein's company gave each worker $3,000 and sent them to a secure website run by Bloom to pick a plan. On the site, workers are asked about 35 questions to pin down their health needs, financial situation and comfort with risk.
For example, the website offers a hypothetical scenario: A total of $1,500 in medical bills due in 60 days arrives. It then asks if the worker has the money to pay for it. The question is intended to determine whether a high-deductible plan would make sense for that employee.
Bernstein says the program is good for his business because he can contribute a fixed amount every year, making his costs predictable. Plus, Bernstein doesn't have to devote staff to finding the right insurance plan to offer.
"That was another key point for me — I didn't have to be part of this decision-making process," he says. "I didn't have to figure out what's best for my employees."
Heather Lockman, who works as a loan processor at Security Auto Loans, was skeptical at first about the new plan. But she changed her mind after she wound up with 20 different plans — eight pages of options — to choose from after she answered the questions on the Bloom website.
In the end, the 36-year-old picked a low-cost option that came with a $3,000 annual deductible. She chose maternity coverage but declined the mental health benefit. The $3,000 that Security Auto Loans gave her covered her annual premium, so Lockman will have few out-of-pocket expenses if she stays healthy.
"It gives me more control over my health coverage," Lockman says. "It makes it fit my lifestyle."
THE RISKS AND REWARDS
Proponents of the defined contribution approach say it forces people to pay more attention to details like costs, and that could force insurers to compete more on price and quality. That could ultimately lead to lower health care costs overall.
"In every consumer marketplace when you have real competition, prices go down, and we have seen those competitive juices flowing as we have gotten rates from participating insurers (for exchange business)," said Ken Sperling, Aon's national health care exchange strategy leader.
But critics argue that such an approach can stick customers with bigger bills if the employer's set contribution doesn't rise over the years to match growing health insurance costs. And that could mean that employees would be forced to switch to cheaper plans that offer less coverage over time, says Cutler, the Harvard economist who advised the 2008 Obama campaign on health care.
"That's a very big risk," he says.
And workers may find educating themselves about health insurance daunting. "I think people are going to have to spend more time understanding their options," says Paul Fronstin, an economist with the Employee Benefit Research Institute. "There are all kinds of dimensions of information you'll be provided, potentially."
Mark Pauly, a University of Pennsylvania health economist, agrees. He says there's an "enormous amount of inertia" among consumers when it comes to shopping for the right insurance plan.
"Life's too short to spend all your time worrying about health insurance," he says.
Despite the possible downsides, insurers say defined contribution plans are becoming more common. WellPoint Chief Financial Officer Wayne DeVeydt says he expects interest in the plans to pick up in the coming years.
"Right now employers are really trying to understand what the health care landscape will look like," he says.