This Issue Brief discusses
the emerging issue of “defined contribution”
(DC) health benefits. The term “defined
contribution” is used to describe a wide variety of
approaches to the provision of health benefits, all of
which have in common a shift in the responsibility for payment
and selection of health care services from
employers to employees. DC health benefits often are
mentioned in the context of enabling employers to control
their outlay for health benefits by avoiding increases in
health care costs. DC health benefits may also shift responsibility
for choosing a health plan and the associated
risks of choosing a plan from employers to employees.
There are three primary reasons why
some employers currently are considering some sort of DC
approach. First, they are once again looking for ways to
keep their health care cost increases in line with
overall inflation. Second, some employers are concerned
that the public “backlash” against managed care
will result in new legislation, regulations, and
litigation that will further increase their health care
costs if they do not distance themselves from health care
decisions. Third, employers have modified not only most
employee benefit plans but labor market practices in
general, by giving workers more choice, control, and
flexibility.
DC-type health benefits have
existed as cafeteria plans since the 1980s. A cafeteria
plan gives each employee the opportunity to determine the
allocation of his or her total compensation (within
employer-defined limits) among various employee benefits
(primarily retirement or health). Most types of DC health
benefits currently being discussed could be provided
within the existing employment-based health insurance
system, with or without the use of cafeteria plans. They
could also allow employees to purchase health insurance
directly from insurers, or they could drive new
technologies and new forms of risk pooling through which
health care services are provided and financed.
DC health benefits differ from DC
retirement plans. Under a DC health plan, employees may
face different premiums based on their personal health
risk and perhaps other factors such as age and geographic
location. Their ability to afford health insurance may
depend on how premiums are regulated by the state and how
much money their employer provides. In contrast, under a
DC retirement plan, employers' contributions are based on
the same percentage of income for all employees, but
employees are not subject to paying different prices for
the same investment.
