Most Americans didn’t notice, but two big companies — IBM (IBM) and Time Warner (TWX) — recently changed their healthcare plans for retirees in ways that could become a model for how regular American workers get their healthcare. This could end up being the biggest change to private coverage since firms started offering health care benefits after World War II.
Like General Electric (GE) and other big companies, IBM and Time Warner have decided to stop purchasing health care insurance for retirees, and instead give those former employees yearly stipends they can spend to buy insurance on their own. Media coverage has focused on the idea of moving retirees onto private health care exchanges that offer a range of plans, similar to the way public exchanges set up under Obamacare will offer coverage.
But the more important precedent may be the move away from coverage purchased by the employer, to coverage purchased by workers. IBM and Time Warner retirees will be free to purchase whatever insurance they chose through a private exchange. If the plan they choose costs more than the stipend, they have to come up with the extra money themselves.
Big changes ahead?
For better or worse, the move to this type of arrangement could upend health care as much as the Affordable Care Act, President Obama’s landmark package of reforms. Surveys show that many more firms plan to follow the trend, and the next logical step after that is to move existing workers into similar plans. “The era of employer-paid health coverage may be coming to a close,” John Challenger, CEO of outplacement firm Challenger, Gray and Christmas, said in a statement.
It might sound scary, but if done right, putting more spending decisions in patients’ hands could actually improve the overall health care system. Economists have long pointed out that a huge contributor to the skyrocketing cost of health care in the United States is the fact that the people who get care often aren’t the ones who pay for it. So they have no incentive to economize, which lets providers continually hike costs with few consequences.
Medicare, for instance, covers many services with limited out-of-pocket costs to the patient. Doctors and hospitals often get paid for the amount of tests and other service they provide, rather than getting paid for the quality of care or the ultimate outcome. Under many corporate plans, patients pay a portion of the premium and a deductible, but beyond that, the plan itself often offers umbrella coverage at little or no additional cost. So patients tap as many services as they can, with little concern for the actual cost.
Economists call this type of behavior “inelastic” because changes in the price of the thing being offered — health care — don’t affect demand very much. If prices go up, patients may not even know and will continue to purchase the same stuff anyway. But if people paid for health care with their own money, the theory goes, they’d shop around more, insist on better deals (as they do with most other things), and presumably drive down prices by foregoing nonessential care and opting for cheaper choices whenever possible.
A key element
This concept has been a key element in several proposals for reforming Medicare, which is the single costliest government program and is on a spending trajectory that will bankrupt Washington if costs aren’t reined in. Republican Congressman Paul Ryan, for instance, has been pushing for a “premium support” Medicare program, in which the government would offer seniors fixed payments they can use to buy insurance, rather than a sweeping coverage plan that covers many things regardless of cost.
The need to reform Medicare is a politically fraught problem, with Democrats basically accusing Republicans of threatening to throw seniors under the bus. But Democrats such as Sen. Ron Wyden have also supported a form of premium support, and when Medicare is revamped — which is inevitable if costs keep rising as they have been — it’s likely the program will switch to some form of fixed payments. The real question is whether those payments will be big enough to pay for insurance that covers most things seniors need, or whether it will require large out-of-pocket expenditures.
Companies don’t need to answer to voters the way politicians do, and most try to strike a balance between controlling costs and preventing workers from revolting. Still, the sharply rising cost of health care has become an acute concern at most companies. Virtually every year, companies require workers to shoulder a larger share of premium costs and pay higher deductibles. The percentage of firms that even offer health care coverage has fallen from 66% a decade ago to 57% today, according to the Kaiser Family Foundation.
The advent of Obamacare could further change the way Americans get their healthcare. The employer-based system worked when cost increases were modest and unemployment was low. But as Challenger and many others point out, the cost of health care has become a major burden that puts U.S. companies at a disadvantage in a global economy. Most companies got into the business of providing health care for their workers inadvertently and, increasingly, they’d like to get out.
The moment to do so may finally be arriving.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.