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The Way I See It

Defined contribution: Should you be afraid?

By Ken Terry
Managed Care Editor

"Defined contribution" is the latest buzzword among employers, insurers, and health policy wonks. The term refers to a restructuring of employer-based health insurance that’s still mostly a pipe dream of corporate executives, but it could become a widespread reality in the next few years. Instead of offering employees a package of defined health benefits, as they do now, employers would provide a certain amount of money–a defined contribution–that employees could use to buy insurance or pay directly for their health care.

The advantage to employers is obvious: They’d be able to fix their health costs and the rate of increase in those costs. The primary disadvantage to employees is, or ought to be, equally obvious: They’d be shouldering a higher percentage of their health costs. And if medical inflation continued to outpace the CPI, it’s a good bet that their share of the burden would grow heavier every year.

A lot of physicians welcome the idea of defined contribution. As reported in Michael Parrish’s article ("When patients buy their own health care," Mar. 5, 2001) defined contribution is a hot topic for many physicians in California and other areas who are heartily sick of managed care. The AMA also supports a defined contribution approach, and the American Academy of Family Physicians recently ran an enthusiastic article on the subject in its house organ. Underlying this upwelling of support is the unexamined belief that, if patients had more control over health care purchasing, managed care controls would wither away, and the doctor-patient relationship would improve.

This naive faith recalls the sloganeering of the Bolsheviks when they took over Russia. They claimed that socialism was an interim step to the withering away of the state. Of course, all it led to was the peculiar form of dictatorship known as Communism.

Defined contribution won’t lead to state ownership of health care. What it will do, I believe, is greatly reduce the health purchasing power of consumers and their ability to use physicians’ services. In the long run, as their share of the cost rises, they’ll either visit their doctors less or opt for cheaper treatments that might not be the wisest choices. If you have any doubts about this, just think of how much health costs have risen since health insurance became widespread. A well-known Rand Corporation study definitively established the connection between insurance and the use of health care a couple of decades ago.

In one of the two main defined contribution approaches, consumers would buy health services directly while purchasing catastrophic insurance policies. In this scenario, they’d go to Internet-based provider "marketplaces," where they’d shop for primary care and specialty services much as they buy groceries in the supermarket. Doctors would post their charges and qualifications, and perhaps some information about their outcomes would be listed next to their names.

Even if reliable quality information on individual physicians could be obtained, how’d you like to duke it out on the Internet with your competitor down the street? Do you think the value of your services should be compared with those of other doctors, just as consumers compare the prices of pork chops?

A more likely approach to defined contribution would have patients use their employers’ voucher checks to buy insurance from conventional health plans. Guess what would happen as they began to realize how little their money would buy them? Many would probably join the least expensive HMO in the market. So, despite the supposed control of consumers over health care purchasing, managed care would have just as much influence as it does today, and it would continue to interfere in the doctor-patient relationship.

Another little problem: The only way for insurance to be affordable to the vast majority of people–let alone those with chronic diseases–is for them to use the group buying power of their employers. If they were thrust into the marketplace by themselves, they’d be paying exorbitant rates for individual insurance. But only the largest employers can negotiate group rates with a wide variety of plans. So in actuality, all defined contribution would mean is that employees would have the same choice of one to three plans that most of them have now—but they’d have to pay more for them out of pocket.

Still think defined contribution is the greatest thing since sliced bread? Be afraid. Be very afraid.

Agree? Disagree? Let us know. Send your comments to Ken Terry, Managed Care Editor, at ken.terry@medec.com.

Ken Terry. Defined contribution: Should you be afraid?.

Medical Economics

2001;5.