For some American workers, picking the right health insurance is becoming more like hunting for the perfect business suit: It takes some shopping around to find a good fit and avoid sticker shock.
In a major shift in employer-sponsored health insurance coverage, companies such as Sears Holdings Corp. and Darden Restaurants Inc. are giving employees a fixed amount of money and allowing them to choose their own coverage based on their individual needs.
The approach, called defined contribution health insurance, contrasts to the decades-old practice by most U.S. employers of offering workers a one-size-fits-all plan with benefits they may not want. It also means American workers who've grown accustomed to having their benefits chosen for them could wind up with bigger bills and inadequate coverage if they don't choose wisely.
"It's a big, big change in the nature of what it means to have health insurance," says David Cutler, a Harvard University economist.
Until now, defined contribution health insurance plans have been largely limited to small businesses and retirees. But more employers are considering them as a way to control their rising health care costs. After all, the average annual premium — or cost for insurance coverage — for an employer-sponsored family health plan has almost doubled in the past decade to nearly $16,000, according to the nonprofit Kaiser Family Foundation. And companies generally foot at least 70 percent of that bill.
But now the plans are catching on. Benefits consultant Mercer found that 45 percent of the 2,809 employers it surveyed earlier this year are either using or are considering a defined contribution approach.
As a result, insurers and benefits companies are rolling out online exchanges where workers can buy insurance coverage roughly similar to how they buy plane tickets on travel websites. The private sites are similar to the public online exchanges that will enable people to buy insurance starting late next year as part of President Barack Obama's health care overhaul.
Aon Hewitt, a benefits consulting giant, expects 200,000 people to enroll this fall in coverage offered through its online exchange. Darden, which operates the Red Lobster and Olive Garden chains, and Sears are offering their defined contribution plans through Aon's exchange site.
WellPoint Inc., the nation's second-largest health insurer that runs Blue Cross Blue Shield plans in several states, plans to debut its exchange next year. The insurer has an ownership stake in Bloom Health, a Minnesota company that expects the number of people covered by plans through its exchange to more than triple to about 100,000 people next year.
Defined contribution health programs can differ greatly from the typical coverage offered by U.S. employers. Most coverage that companies currently offer gives employees the option of one plan or maybe two.
With defined contribution plans, the company gives the employee a set contribution toward coverage, and the worker then picks the plan. That may involve choosing from among a few plans the employer offers or using an exchange to sort through dozens of choices offered by several insurers.
The employer's contribution may cover the entire premium or a smaller slice of it, depending on the coverage that the worker choses. A young, healthy, single worker, for instance, may pick a plan that balances a smaller premium with a higher deductible, which is the annual out-of-pocket amount a patient pays before most of his or her coverage kicks in.
The plans are an attractive option for companies that want more predictable health care costs or more choices for their workers.
Neither Sears nor Darden would say how much they're planning to give employees so that they can buy health insurance. Sears, the Hoffman Estates, Ill.-based retail chain, said 90,000 of its employees will be eligible for its new approach, and they will have 15 choices for health insurance instead of about 4.
Darden, which has 45,000 full-time employees, said its workers will be able to go online and pick from five medical plans, four dental plans and three that provide vision coverage. The Orlando, Fla., company had previously just offered one health insurance plan.
The company said that the sum Darden will give workers to cover costs for their insurance will rise as health care costs climb. Ultimately, it said workers will have about the same out-of-pocket costs that they currently have for about the same level of coverage — but they'll have more flexibility.
"One of the things (employees) asked for was more choice in their health care," says Ron DeFeo, a spokesman for Darden. "As we looked for a way to do it, this was the best option."
HELPING THE LITTLE GUYS
The plans can be a good option for smaller businesses as well. Dick Bernstein owns Security Auto Loans Inc., a New Hope, Minn., subprime auto loan provider with about 40 employees. He wanted to offer health insurance to attract and keep workers. But other small business owners warned him that premiums in more traditional plans could soar as high as 20 percent annually.
So in January, Bernstein began offering his employees a defined contribution plan through Bloom Health. Bernstein's company gave each worker $3,000 and sent them to a secure website run by Bloom to pick a plan. On the site, workers are asked about 35 questions to pin down their health needs, financial situation and comfort with risk.
For example, the website offers a hypothetical scenario: A total of $1,500 in medical bills due in 60 days arrives. It then asks if the worker has the money to pay for it. The question is intended to determine whether a high-deductible plan would make sense for that employee.
Bernstein says the program is good for his business because he can contribute a fixed amount every year, making his costs predictable. Plus, Bernstein doesn't have to devote staff to finding the right insurance plan to offer.
"That was another key point for me — I didn't have to be part of this decision-making process," he says. "I didn't have to figure out what's best for my employees."
Heather Lockman, who works as a loan processor at Security Auto Loans, was skeptical at first about the new plan. But she changed her mind after she wound up with 20 different plans — eight pages of options — to choose from after she answered the questions on the Bloom website.
In the end, the 36-year-old picked a low-cost option that came with a $3,000 annual deductible. She chose maternity coverage but declined the mental health benefit. The $3,000 that Security Auto Loans gave her covered her annual premium, so Lockman will have few out-of-pocket expenses if she stays healthy.
"It gives me more control over my health coverage," Lockman says. "It makes it fit my lifestyle."
THE RISKS AND REWARDS
Proponents of the defined contribution approach say it forces people to pay more attention to details like costs, and that could force insurers to compete more on price and quality. That could ultimately lead to lower health care costs overall.
"In every consumer marketplace when you have real competition, prices go down, and we have seen those competitive juices flowing as we have gotten rates from participating insurers (for exchange business)," said Ken Sperling, Aon's national health care exchange strategy leader.
But critics argue that such an approach can stick customers with bigger bills if the employer's set contribution doesn't rise over the years to match growing health insurance costs. And that could mean that employees would be forced to switch to cheaper plans that offer less coverage over time, says Cutler, the Harvard economist who advised the 2008 Obama campaign on health care.
"That's a very big risk," he says.
And workers may find educating themselves about health insurance daunting. "I think people are going to have to spend more time understanding their options," says Paul Fronstin, an economist with the Employee Benefit Research Institute. "There are all kinds of dimensions of information you'll be provided, potentially."
Mark Pauly, a University of Pennsylvania health economist, agrees. He says there's an "enormous amount of inertia" among consumers when it comes to shopping for the right insurance plan.
"Life's too short to spend all your time worrying about health insurance," he says.
Despite the possible downsides, insurers say defined contribution plans are becoming more common. WellPoint Chief Financial Officer Wayne DeVeydt says he expects interest in the plans to pick up in the coming years.
"Right now employers are really trying to understand what the health care landscape will look like," he says.
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