THCB

Defined Contribution Health Care—The Conservatives’ Silver Bullet

Conservatives are in a full court press these days telling us the answer to America’s out-of-control health care costs—and our fiscal crisis—is to move Medicare, Medicaid, and the tax code subsidy for private insurance to a defined contribution system.

Instead of the federal government defining a benefit and then shouldering the cost of whatever that promise leads to (today’s defined benefit plan), many conservatives are suggesting that we gradually move to a system where the government only promises an annual payment (or tax credit) for health care in the form of a voucher and then the consumer uses it (arguably more efficiently) to buy one of many health plans competing for their business.

First, let me tell you that I think defined contribution health care is generally a good idea. For too long the federal tax system and Medicare policy has subsidized careless health care spending.

Many worry that defined contribution health care would lead to poor people getting second-class health care because they would not be able to afford more than the voucher allows them. That is a legitimate concern and while that outcome can be tempered it cannot likely be eliminated. But that also occurs today, as many seniors have nothing more than a combination of Medicare and Medicaid while the wealthier can afford much better supplemental insurance. And, it will occur in the future under the Affordability Act because the new federal health care subsidies are based on the more limited plans available.

But I will also tell you that it is naïve to think the way to control health care costs is to simply move to a more market-oriented defined health care system.

We’ve had forms of defined contribution health care in the health benefits business for at least 20 years. It has long been common for employers to fix their contribution and then offer a cafeteria-like set of health plan choices. Not only has that approach not controlled costs, it has become somewhat passé as many employers have been disappointed with the results and more recently gone back to consolidating their health plan offerings.

Many conservatives cite the Federal Employees Health Benefit Plan (FEHBP) as an example of a defined contribution program that has worked. It is very well run. But just where is the full cost of a federal worker’s health benefits under control, sustainable, and affordable or measurably lower than any other large employer?

The argument goes that if consumers have vouchers then health plans will compete with each other to control costs and make health care more affordable. Well, isn’t that what has been going on in all of these defined contribution employer plans over the years? And, just where are the affordable plans?

And, isn’t this what the Medicare Advantage program of private choices has been about? It has been operating in one form or another for more than 20 years. And, once again, where are the private plans that are less costly than Medicare? Hasn’t the recent health care debate been about the extra payments, above the cost of standard Medicare, that these plans have been receiving?

The health care industry actually took a pretty impressive run at offering health plans that worked hard to control costs back in the post-Clinton Health Plan period of the mid and late 1990s. The insurers did such a good job of screwing down the provider costs and limiting “unnecessary” care that we got the “Patient Rights Rebellion” (or maybe it was the “Provider Rights Rebellion”).

When employers and consumers actually had the chance to choose lower cost plans with more limited networks and tighter cost controls they rejected them. When that was all there was available to employees, they rebelled and employers ran from them. The result was a movement away from pure HMO plans in the late 1990s and a return to fee-for-service models.

What makes conservatives think the consumer/voter won’t rebel again when they figure out the voucher doesn’t give them the health care they think they are entitled to? What makes the conservatives think the politicians won’t chicken out and just keep increasing that voucher at unaffordable levels just like they now keep bailing out the less powerful physician lobby?

I think defined contribution health care is a productive tool that has a lot of potential to make consumers more careful purchasers and health plans more cost effective sellers of insurance—when it is part of a more comprehensive approach to unavoidable cost containment and value-based purchasing—when we also say no.

But then I guess I can be criticized for believing in “Death Panels.”

But defined contribution health care as a standalone strategy to fix what ails the American health care system without having to face real limits on what we pay and what we pay for? That is naïve.

But that argument does have some political appeal to the right (albeit not to the left) because it offers a somewhat painless solution—you still have the right to have whatever you want and no one is going to take away or limit anything you have today. Magically, we’ll all be enlightened purchasers happily cognizant of the health plan offering us both the lowest cost and the best brain surgery in town and everyone will have affordable health insurance.

To me, hearing a conservative say the answer to America’s health care (and deficit) problem is a defined contribution health care system that reinvigorates the markets is as naïve as hearing a liberal saying that a single-payer government-run health care system will magically give everyone the health care they need for an affordable price.

Robert Laszweski has been a fixture in Washington health policy circles for the better part of three decades. He currently serves as the president of Health Policy and Strategy Associates of Alexandria, Virginia. Before forming HPSA in 1992, Robert served as the COO, Group Markets, for the Liberty Mutual Insurance Company. You can read more of his thoughtful analysis of healthcare industry trends at The Health Policy and Marketplace Blog, where this post first appeared.

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18 replies »

  1. Ha, I’d love to see the people who so favor charter school vouchers faced with medical care vouchers instead of Medicare. Boomers included, and I am one.

  2. I am guessing from this comment that MD as HELL does not live in Wisconsin because it shows a complete lack of understanding as to what is really going on here. And the tone of the the comments and terms used to refer to fellow humans in these comments are troubling.

  3. “What makes conservatives think the consumer/voter won’t rebel again when they figure out the voucher doesn’t give them the health care they think they are entitled to?”

    The benefit of a voucher is the citizen is making the decision to be in the HMO. If you don’t like a slim network and referrals then pay the additional cost to have a PPO.

    For the most part people don’t complain they don’t eat filet and lobster every night or drive a BMW. They have $x to spend on food and transportaion and if they can’t afford the nices things accept that it is due to their limited income. If I had Filet and Lobster money and someone told me I was only allowed to eat tofu I would be pissed.

    “But then I guess I can be criticized for believing in “Death Panels.”

    What does CDHP have to do with death panels? Death panels are government or quasi government organizations that dictate healthcare decisions. Liverpool Care Pathway is a death panel. Voluntary election of a healthplan is in no way similar to Liverpool Care Pathways.

  4. Barry – You can really get some incredibly wide variations in the numbers. It was just something I got from a friend at Milliman. Basically it does depend on the individual but generally once someone reaches 65, they will on average have a pretty chunk of time ahead of them. For males, it is 13 years and up (on average). For females, it is 15 years and up (on average).

    http://www.cdc.gov/nchs/data/hus/hus10.pdf#022

    Medicare tax (Hospital Insurance) only started in ’66 at 0.3% and even now it is only 1.45% now for employees (2.9% for self-employed workers). It wasn’t unitl the Omnibus budget bill in ’93 either that the income threshold was lifted either.

    http://www.ssa.gov/OACT/ProgData/taxRates.html

    I would be more than willing to bet that a significant percentage of the population (85-90%) occurs medical costs that are quite significantly higher than the share they contributed and that the Boomers will too.

    I agree with you about end of life care. Several things would help (e.g., mandatory advance directives in place that will likely be a future Meaningful Use requirement in Stage 2/3) but it is just a hard cultural issue to overcome.

  5. MG –

    It would be interesting to see data regarding lifetime medical expenses paid by Medicare, and Medicaid where applicable, for each individual 65 and older from the time they turn 65 until they die. We could well find that a significant percentage of this population incur medical costs between age 65 and death that are less than the sum of their Medicare taxes paid, their employer’s matching share plus a nominal rate of return on that money equal to, say, the interest rate on 10 year Treasury bonds.

    As you probably know, in any given year, the most expensive 5% of Medicare patients account for over 40% of program costs and the top 25% consume 85% of costs. The bottom 50%, over 20 million people, account for a mere 4% of costs. Many seniors are quite healthy for extended periods and don’t take any drugs. Only 15% or so reach the Part D donut hole in any year. While there will be plenty of Alzheimer’s, dementia, cancer and heart disease among this population, there are also lots of seniors who don’t consume as much healthcare as the money they and their employers paid in plus a conservative return on that sum would have paid for. To the extent that they do, a more sensible approach to end of life care could help to mitigate the problem.

  6. More like the suckling pigs in Wisconsin who think they can get more milk from a dead cow.

  7. Peter – No but my point was that the Boomers I talk with including my own parents and their relatively well-educated friends actually think they are getting ripped off by Medicare and won’t get back in health benefits the Medicare taxes that were collected from them during their working lives.
    Unless they pass away by the time they are in their late 60s/early 70s and likely do so suddenly, this just isn’t the case. Not even a debatable argument.

    I am not for a Medicare system as advocated by Ryan but there is a huge misconception among Boomers about what they paid in & will get back in health benefits. It is like the dopes at Tea Party rallies who rail against gov’t spending but yell and scream about Medicare cuts as a part of Obamacare.

  8. I had no idea when I first started reading THCB, that the article authors and commenters were mostly the same people. Just commenting on one anothers blog posts. Very disappointing.

  9. “Most actuarial work I have seen on the topic projects that the average Boomer can expect at a 3.5-4x payout in actual healthcare benefits than the taxes they paid in over time indexed to inflation. Now it obviously varies but that payout is considerably better than Social Security where the numbers I have seen range in the 1.5x range.”

    MG, have you seen the actuarial work on lobbyist costs and subsequent corporate payoffs, or wealthy contributions and protection from taxes, or acceptance of donations and voting the right way and corporate jobs for politicians and their relatives?

  10. George Carlin summed up the Boomers mentality with his 1996 bit from “Back in Town”: “Gimme that, it is mine!”

    And I am in this generational group, so don’t think you can attack me for any other agenda than this generation is entitled, demanding , and probably a sizeable group in the Wisconsin protestors who think their free ride is endless and deserving! They are staring down the barrel of the end of middle aged life, and they don’t like it, per Carlin. So, their hypocrisy when they ruled in the 60s to 80s as the major faction in this country truly shows their intent: rules do not apply if they don’t like it, and now that they are in the power positions they so resented when younger, change the rules for their benefit alone and screw their offspring!

    Just the kind of representation America really wants? Well, if we survive past 2012, or beyond if this legislative assault stays in place, the boomers will eventually die off. Let’s hope my clueless peers don’t take the planet with them though!!!

  11. As soon as the young voting block overpowers the boomers there will be Medicare reform.

    No healthcare debt should outlive the patient. The government cannot pay for care with borrowed money. If the family wants to mortgage the farm, that can be their business.

    People die. Live your life while you have it.

  12. But that just it, the conservatives (including Ryan) aren’t calling for the Boomers to sacrifice anything. No conservative is pushing for a defined contribution healthcare plan for any Boomer for several reasons but the main one being that the white greying Boomers are going to be a key voting constituency for the GOP for at least the next 20 years.

    Just trying explaining to any Boomer that their lifetime Medicare taxes will no where nearly pay what they will receive in benefits if they have an average life expectancy once they hit 65. If anything, they have seen massive benefit increases especially since Medicare D was passed. Most actuarial work I have seen on the topic projects that the average Boomer can expect at a 3.5-4x payout in actual healthcare benefits than the taxes they paid in over time indexed to inflation. Now it obviously varies but that payout is considerably better than Social Security where the numbers I have seen range in the 1.5x range. Not bad but nowhere nearly as lucrative as the payout in healthcare benefits through Medicare.

    Eventually this is going to lead to a huge generational showdown between the children of the Boomers (Gen X and Y) vs. their parents because on average the Boomers don’t want to pay for the lucrative benefits they want in retirement.

  13. “Many worry that defined contribution health care would lead to poor people getting second-class health care because they would not be able to afford more than the voucher allows them. That is a legitimate concern and while that outcome can be tempered it cannot likely be eliminated. But that also occurs today, as many seniors have nothing more than a combination of Medicare and Medicaid while the wealthier can afford much better supplemental insurance. ”
    ___

    This is otherwise simply known as The Shit Sandwich Theory of Life. The more bread you got, the less shit you gotta eat.

    Undeniably true.

    Not to worry, though. John R. Graham has just found the solution to health care cost: Groupon.

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