Can Defined Contribution Health Insurance Reduce Cost Growth?

June 2002
EBRI Issue Brief #246
Paperback, 16 pp.
PDF, 153 kb
Employee Benefit Research Institute, 2002

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Executive Summary

  • This Issue Brief paper focuses on one key question: Can a widespread shift to defined contribution health plan arrangements (DC health) lower the growth rate of health care costs? The answer to this question is in two parts: (1) What are the root causes of health care cost inflation? (2) What will be the price responsiveness of workers with structured incentives to choose among health plans?
  • There is widespread agreement (in the research community) that by far the most important source of cost growth (greater than 50 percent) has been technological advance, such as new surgical techniques, drug therapies, and diagnostic and treatment devices.
  • National health expenditure experts are forecasting 7 percent-9 percent annual cost growth in health insurance premiums for the next 10 years. This is especially troubling to employers who had hoped that tightly managed care had "solved" the cost growth problems of the late 1980s and early 1990s.
  • There is evidence that health care cost growth never really declined, but instead was temporarily masked during the transition to managed care. Thus, while utilization management and price discounts represent real efficiencies, they may prove to be more of a "one-time shot" than a fundamental reduction in the rate of cost growth that is driven by the development and adoption of new medical technologies.
  • Employment-based health insurance pays for about only approximately 27 percent of national health care expenditures. While employment-based health insurance can be a leader in developing techniques that may improve efficiencies in the public sector, Medicare and Medicaid purchasing strategies are likely to be more important than employment-based insurance in affecting marketwide rates of technical advance in medical care.
  • DC health benefits can be part of a solution that enables workers to choose between health care cost and quality, and thereby enforce a discipline on health plans and providers that has not been present before. But DC health benefits cannot force this choice upon an unwilling work force/patient base; it is likely that Americans would do this, collectively, only if the foregone quality and outcomes are acceptably close, on average, to what could be obtained at higher cost. Whether such a tradeoff is either truly attainable or can be measured with enough precision to be persuasive is the crucial empirical question.