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.