The debate in Washington over enacting
a patients' bill of rights ignores the potential results of that
approach: a barrage of lawsuits that will further increase health
care costs and compound, not solve, the nation's health care
problems. A far more effective means of addressing the health care
needs of Americans is to foster a system that offers employees and
their families a defined contribution to the health plan of their
choice. This new idea, which empowers employees to make decisions
about their own health coverage, reflects the successful approach
of the health insurance system that currently covers 9 million
federal workers, their dependents, and retirees. It is similar to
the use of 401(k) plans that enable Americans to control their
savings for retirement.
More and more employers are considering
changing from offering "defined benefits" in a health plan they
have selected to offering employees a "defined contribution" to the
plan of the worker's choice. A recent Booz-Allen & Hamilton
study found that most executives surveyed from Fortune magazine's
100 "best companies to work for" anticipate a shift to defined
contributions in the very near future. They predict, in fact, that
within 10 years, defined contributions will be as common in health
care as they are in retirement planning today.
The reason for this coming change:
Employees and employers are increasingly frustrated with the
current system. Employees are limited to the plans their employers
select, and employers are concerned about the increasing cost of
providing health coverage, with double-digit premium increases
increasingly common, and by their potential exposure to liability
for the decisions they make. The patients' rights bills before
Congress could throw open the door to such liability. The
unfortunate but predictable result of these concerns is that some
employers are changing and may even be forced to drop coverage for
The combination of employer-employee
frustration and capacities for new information technology is
fueling a growing interest in new solutions that would enable
employees to choose from among several health plans in their area
and to switch plans if they are dissatisfied. Offering employees a
defined contribution toward the cost of their health plan premiums
would make health care costs more predictable for employers. Adding
the proper protections would encourage more employers to help to
offer health coverage for their employees, which would reduce the
number of Americans without health insurance.
Before voting on any patients' bill of
rights, Members of Congress would do well to examine the growing
move toward defined contributions because:
Defined contributions help address
many of the current problems. Problems in the current system,
such as lack of choice, uncontrolled costs, the increasing threat
of lawsuits, and restricted doctor-patient relationships, would be
addressed by implementing defined contributions. Based on
free-market principles, the defined contribution approach enables
employees to choose coverage to suit their needs; this consumer
empowerment would facilitate competition in the health market to
ensure that policies would be available at affordable prices.
Defined contributions are
popular. Employers and employees respond positively when
surveyed about moving to a system of defined contributions.
According to a survey by the accounting and consulting firm of
KPMG, LLP, almost half of the 103 senior executives from Fortune
1000 companies surveyed were receptive to this idea. Among
employees, there was even greater support. Almost three-quarters of
the more than 14,000 employees surveyed from 117 Fortune 1000
companies responded that they were "extremely," "very," or
"somewhat" interested in using defined contributions to purchase
their own health insurance. A 1999 Employee Benefit Research
Institute survey found that 89 percent thought they could choose
the best health insurance if their employer offered that choice,
and 81 percent believed they could do so if their employer stopped
Defined contributions are
working. For example, federal workers enrolled in the Federal
Employees Health Benefits Program (FEHBP), which serves over 9
million federal workers and retirees, receive a contribution from
the government of up to 75 percent of their health insurance
premium to a maximum of $2,250 for singles and $5,090 for families.
Employees select a plan from participating plans in the program. In
most locations, they can choose from between 12 and 20 plans.
Insurers compete for their enrollees. This competition has resulted
in higher satisfaction rates and average annual premium increases
that are lower than in the private market. Many workers utilize
401(k) plans, and medical savings accounts that rely on similar
defined contributions from employers are now available.
What Washington Should Do.
Congress and the Administration could facilitate a move to defined
contributions by ensuring that it brings no adverse tax
consequences or additional legal liability to participating
employers and that the broadest range of insurance pools are
available to employees. Tax policy should ensure that the
employer's tax deduction is maintained and that contributions to
health coverage are not considered part of employees' taxable
income. Caps on medical savings accounts should be ended to empower
more employees to take control of their health care expenditures.
And the Employee Retirement Security Act (ERISA) of 1974 should be
amended to allow interstate pools of citizens for health insurance
and to enable employees to purchase state-regulated individual
Although there are hurdles to clear before America's
employment-based health insurance system shifts to a system that
allows defined contributions, the benefits of such a move are too
significant to ignore. Americans clearly want more choice and
control of their health care decisions and health care costs.
Defined contributions would lead to such empowerment.
James Frogue, Legislative Director
for U.S. Representative Kay Granger (R-TX), contributed to this
paper in his previous position as Policy Analyst for Health Care at
The Heritage Foundation. Grace-Marie Turner is President of the
Galen Institute, a research organization in Alexandria, Virginia,
that focuses on health and tax policy.