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A tight labor market is a sign that lots of businesses are doing very well, but competition for scarce labor limits employers' options as they address persistently inflating health care costs. Whether our booming economy is on final approach for a soft landing or about to hit a patch of wind sheer, employers face significant choices about their role in health benefits within the next five years. The idea of switching from a defined benefit to a defined contribution is alluring, but caution is appropriate. Consider one scenario:
Employers define their contribution. Employees find it insufficient to cover costs in the real world, because insurers are not sufficiently motivated to make radical changes in their high-premium products for the individual market. It's not a big stretch to see the federal government stepping in to take that employer contribution in the form of taxes and use its market clout as a proxy for individuals.
In all, it seems unlikely that employers will be able to restrict their role in health care to a cash contribution. What if they selected a menu of plans and employees had the responsibility of choice? This 401(k) model is promising, particularly as it might encourage more discerning consumption of health care. Bear in mind, though, that we don't really know for sure whether the 401(k) model has worked in the realm of retirement. Relatively few people are actually living on these funds. We probably won't be certain that people are saving sufficient amounts and investing with sufficient wisdom until right around the time the Social Security safety net is scheduled to be in tatters.
Then, too, the mutual funds at the heart of 401(k) investing have a broadly accepted, government supervised and mandatory system for reporting performance. This simply doesn't exist for health care. Yes, there have been enormous strides, often under pressure from large employers, but more Americans work for small firms, a group that by all accounts barely recognizes the existence of current measures, much less uses them.
Finally, there is the problem that roughly half of U.S. adults are functionally illiterate. They can read, write and do simple calculations, but not above a 10th grade level. That means they'd have difficulty writing a brief letter about a credit card error, understanding a bar graph or calculating miles per gallon. This does not bode well for their ability to decipher health plan report cards. It may be one reason why, as reported elsewhere in this issue, three out of five current members of managed care plans are convinced they've never been in such a plan.
Some variation on defined contribution is probably inevitable. Absent a national economic catastrophe, U.S. employers are unlikely to be allowed to abandon their historic commitment to health care, yet they cannot indefinitely tolerate open-ended financial risk. As consumers assume more of that financial riskand age into riskier health territorythey will undoubtedly become more insistent about the quality of what they're buying. Have no doubt, though, that it will take a concerted and consistent effort by both the public and private sectors to make this work.
Richard Service. Next steps. Business and Health 2001;1:6.