The Price of Getting to Choose

This article originally appeared in the San Jose Mercury News

Anyone who has health insurance through their work might want to take a look at the Covered California web site. For better or worse, something like it is coming your way.

The site is an explosion of choice. In easily compared tiers, Covered California lays out the premiums and deductibles charged by several competing insurance carriers. Click on a plan, and the details cascade into view for additional comparison.

Large employers are already beginning to join private exchanges that mimic the government-created exchange, including the metallic benefit tiers of platinum through bronze.

Here is the rub: all that choice likely signals a big shift of financial risk to employees.

Some background: Most of the largest employers traditionally self-insure, meaning they bear most of the burden of health benefits for employees and pay an insurance company a fee to manage the plan.

This all worked pretty well as long as annual health cost increases stayed under control. But they didn’t.

Faced with years of spiraling increases, big companies began loading more cost, in the form of premium and deductible responsibility, on employees. Now, many companies are contemplating the next step: eliminate their own plans, replace them with a defined dollar contribution for each employee, and send workers to a private exchange to pick insurance plans for themselves.

Big companies did something similar when they controlled their retirement benefit costs by eliminating pensions in favor of 401(k) plans. The companies contribute a set amount, while employees make the investment choices, and bear the market risks.

Companies clearly see the potential for controlling their health benefit costs in the private exchanges.

A variety of studies point to more than half of medium-to-large employers using defined contribution strategies by 2020. Growth among small businesses could be even faster.

Insurance companies will lose the fees they charge companies for administering health plans, but stand to make much more by selling policies directly to individual customers on the exchanges. In its presentation to security analysts in December, insurance giant Aetna predicted that it would gain $4 billion in revenue for every million policies it sells on private exchanges.

For employees, the outlook is decidedly more mixed. They will have an employer subsidy to help pay for a plan that suits them, but they will no longer have expert human benefits managers creating plans geared for them or their workplace. And they will have to shoulder most of the risk of rising costs themselves.

The competition among insurers should drive down premiums, but most of the competition is likely to be in plans with high deductibles. Because consumers in those plans pay a big percentage of the cost of care until they reach out-of-pocket maximums, they’ll have little incentive to seek early treatment that could forestall more expensive procedures later.

There is an alternative model: Employers could contract directly with clinics and wellness centers to provide preventive care and to make referrals to high quality specialists as needed. That won’t offer much choice to employees, but it might make them healthier. And by cutting out the insurance middleman, it could be surprisingly cost effective.

For employees who are worried about the trend toward defined contribution strategies, it is not unreasonable for them to ask: if employers are saving more money and insurance companies are making more money, in the long run who is likely to be paying more money?

I think we all know the answer.

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