What is the Road Ahead for Employer Sponsored Health Care?

Friday, August 05, 2011

February 2011, as part of its ongoing research efforts, McKinsey & Company, a global management consulting firm, sponsored a survey of 1,329 US employers in the private section on the impact of health care reform under the Patient Protection and Affordable Care Act (PPACA) of 2010. The conclusion drawn from the survey by McKinsey was that upwards of 30% of employers surveyed would “definitely” or “probably” drop [employee health care] coverage after 2014. McKinsey has come under some rather strong criticisms for their findings in light of other contradictory findings from comparable sources.

While none of us can predict the long term impact of health care reform, history does point to a couple of models. In the 1980’s few observers would have been able to predict that participation in defined contribution plans in the forms of 401(k), 403(b), and 457(b) would have risen to the levels they are today.

Stephanie Costo, an economist in the Bureau of Labor Statistics, authored a report in the Monthly Labor Review for February 2006, in which he demonstrated that participation in defined benefit plans fell from 32% to 19% between 1992 and 2005. At the same time, participation in defined contribution plans rose from 35% to 42%. There are many reasons why defined contribution plans have replaced defined benefit plans as the dominate form of retirement benefits in this country. Defined contribution plans are less expensive, easier to administrator, more portable, and participants generally like them better. Could the legislative and regulatory leaders in 1978 foreseen that their efforts would lead to a significant decline in DB plans over the coming three decades, no!

On December 29, 1973, then President Richard Nixon signed into law the Health Maintenance Organization Act of 1973. The Act, among other things, mandated that employers offer an HMO option to employees if there was a federally approved HMO available in their area. In signing the law, Nixon remarked, “This legislation will enable the Federal Government to help demonstrate the feasibility of the HMO concept over the next concept over the next 5 years.” Following the signing, there were two decades of Federal financial and legislative support whose goals were to make HMO’s the dominate health care delivery system in the nation. Keep in mind, in the 1970’s and early 1980’s there were no PPO’s or POS’s, and the primary reimbursement methodology was traditional fee for service. And for a time HMO’s enjoyed a major role in the US health care system, although artificially induced by the aforementioned Federal financial and legislative support. However, by the 1990’s, HMO fell out of favor with both employers and employees due, in part, to their highly restrictive networks and practices as a referral gatekeeper. Some observers credit the restrictive practices of HMO’s as the driver that lead to PPO’s and POS’s. Who could have foretold that the full faith and weight of the US government would have been insufficient to establish and maintain a health care delivery system?

In the end, both with defined contribution plans vs. defined benefit plans and HMO’s vs. PPO’s; the market delivered what the consumer wanted, although we can argue who the consumer was. The same will be true with health care following the passage of PPACA. Even a Federally mandated health delivery system, whether public, private or some hybrid of the two; must be supported by the marketplace, else consumers will vote with their pocket books and their feet.