New Hope for Controlling Health-Care Costs

Defined-contribution health plans promise to restrain the soaring costs of health benefits by turning employees into smart consumers.

CFOs are fed up with health-care costs. Not only are those expenses rising at a disturbing rate, but they're also becoming increasingly unpredictable and difficult to budget.

A survey of 434 large companies released earlier this year by Washington, D.C.-based human capital consulting firm Watson Wyatt Worldwide and the Washington Business Group on Health (WBGH) paints a bleak picture. Nearly half of respondents saw

their health-care budgets blown away by steeper-than-expected increases last year. The median anticipated cost increase for 2003 over 2002 was 15 percent. Only about one-third of respondents declared themselves willing or able to absorb the increases.

"The CFO is looking for predictability in operating costs, and health care's variability creates a frustrating situation," says Maureen Cotter, global director of Watson Wyatt Worldwide's group and health care practice. No wonder, then, that many CFOs are turning to an option that promises to bring stability to health-care costs and, in the process, turn employees into fully engaged and savvy consumers of medical goods and services. It's called the defined-contribution health-care plan.

Defined-contribution plans vary in structure, but the general premise is that they require sponsors to contribute regular fixed-dollar amounts to a health reimbursement arrangement (HRA) -- a benefit account that employees use to pay for routine medical expenses. Most plans combine an HRA with a high-deductible catastrophic insurance plan. Employees manage their own HRA and can carry forward any funds remaining in the account at year-end.

The movement toward defined-contribution health benefits accelerated last year when the IRS ruled that employee medical care expense reimbursements under an HRA are excluded from gross income. In a recent study of 500 companies conducted by Lincolnshire, Ill-based Hewitt Associates, 46 percent of respondents said they are interested in offering a defined-contribution plan to replace or supplement traditional health benefit programs.