Defined Health Plans Can Help With Employer Costs

June 13, 2002
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As the cost of health insurance continues to rise, employers are increasingly looking for ways to minimize the effect on their bottom line.

One option is defined contributions, a strategy that enables employers to set upfront the amount they’ll pay each year to provide an employee with health insurance. The employee then defines his or her health plan by choosing from a menu of benefit options.

If an employee, for example, has a condition that requires a monthly prescription drug, they can choose an option with low prescription co-pays. If they’re insured through a spouse’s policy, they can formulate a plan that plugs in its holes, emphasizing dental or disability care, for instance.

“Their family’s needs are better met under that strategy,” said James Kenyon, an independent agent for Pinnacle Insurance Partners LLC in Grand Rapids, formerly known as Hinds-VanderPoort-Manz.

Originated years ago as a way to provide employees greater flexibility and control over their benefits, defined-contribution plans are becoming a tool for companies to draw the line on employee health-care costs in an era of rapidly rising insurance premiums.

A company can better budget health insurance costs based on its ability to pay, minimizing the affects of double-digit increases in health premiums that have become the norm in recent years, Kenyon said. While the net result is reduced benefits for some, a defined-contribution plan can help an employer avoid the need to systematically slash or even eliminate employee health benefits altogether, Kenyon said.

“It’s a question of doing something to maintain a semblance of benefit plans for employees, but they can’t afford to bite the whole bullet,” said Kenyon, a 25-year veteran of the insurance industry.

“Whether we like it or don’t like it, the cost of health insurance is going up significantly and we have to find a way to minimize it.”

In West Michigan, employers participating in the annual Alliance for Health and Employers Association survey of health-care costs reported an average premium increase of 12.8 percent in 2000.

The organizations will publish the results of their 2001 survey soon, and Alliance for Health President Lody Zwarensteyn expects to see more of the same.

“Everything we’ve heard, the year has been no better from a cost point of view,” Zwarensteyn said.

Those kind of cost increases each year make defined-contribution plans an attractive option for employers as they push more and more of the financial burden of health insurance on to employees.

“As costs go up and up, more and more companies have been forced into a position of ‘This is what we can do and this is what the employee has to pick up,’” Zwarensteyn said.  “To make that more acceptable, they offer more choices that allow (employees) to make the best of the benefits they have.”

Yet despite the potential beneficial aspects, defined-benefit plans have been slow to gain acceptance in West Michigan, Kenyon said.

The region’s tight labor market of recent years has made employers leery of doing any reducing of health benefits — or anything seen as a reduction.

“It can be effective. It’s just a little slow to take off in West Michigan for a variety of reasons,” Kenyon said.

“The labor market is such, they don’t want to upset the apple cart too much because they can’t find adequate replacements.”

Among the West Michigan employers using a defined-contribution plan is Steelcase Inc., which since the mid-1980s has provided employees what is essentially an annual allowance they can use to buy health benefits they want or need, or put the money toward another use, such as daycare reimbursement or a retirement plan.

The amount each employee receives is based on compensation, said Marshall Beard, Steelcase’s director of benefits and health services. While the intent of defined-contribution plans is changing, the program at Steelcase largely remains a way to tailor benefits to individual needs, Beard said.

“It was Steelcase’s intent to turn the amount of money we were going to spend on benefits and turn it into part of the compensation employees had more control over,” Beard said.

Although defined-contribution plans are not widely used in the local market, the head of one regional health plan believes employers will become more willing to try the strategy as they try to cope with rising health premiums.

“Employers will reach a point where they can’t continue to do what they’re doing,” said Paul Brand of REAL Health, an employer-backed consortium with more than 33,000 members in 15 counties in West Michigan. “Defined contribution is going to be a viable option. People are going to try it.”

An additional benefit to defined-contribution plans is that consumers become more attuned to the rising cost of health care, and how their decisions and behavior affect costs.

“If I’m spending dollars that are perceived as my own, I’m going to spend them wisely,” Brand said.

On the downside, defined-contribution plans don’t deal with the issue of how efficiently care is delivered — an arena that Brand believes is the primary driver behind escalating costs. While defined contributions can help an employer contain costs in the short term, the long-term answer is far broader, Brand said.

“There are a lot of important lessons to be learned out of the effort, but it’s not a total solution,” he said.

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