"Defined Contribution Plans"


"Defined Contribution Plans"

Could these recent innovations in health insurance bring more patients and better margins to your practice?

Gil Weber, MBA

Reprinted with permission of the publisher.
HMP Communications, Derm Practice
Winter 2004 -- Pages: 6 - 7

Several years of double-digit increases in health insurance premiums have many employers wondering how -- or even if -- they can afford to continue providing benefits. Some of the increased costs have been passed to employees in the form of reduced benefits and/or larger payroll deductions. And most employees now have fewer plan options than before.

As patients gradually lose control of their healthcare options and benefits, physicians are suffering a collateral reduction in cash flow as those patients are forced to go without care or to go elsewhere for it. It's an extremely worrisome set of issues that conclusively demonstrate we've come to the end to a decade of relatively flat health insurance premium costs. But an innovative insurance option called the Defined Contribution Plan (DCP) is creating new choices for employers and patients and, perhaps, new opportunities for dermatologists to improve practice financial performance.

Defined Contribution Plans: The Basics

DCPs are designed to force fundamental change into the psyche of the insured public by turning patients from entitlement consumers into benefits shoppers. DCPs typically involve some combination of the following (abridged) list of characteristics.

1. Employers fund individual accounts that pay employee expenses to a certain dollar threshold. After that, the employee pays until reaching a second threshold. From that point, the employer pays for services.

2. The employee's share of service costs and monthly premiums depend on the threshold (trigger) points and co-payments or deductibles. If the employee is willing to bear more of the risk -- i.e., accept a lower initial threshold point and bet that she won t need much care exceeding that threshold -- her monthly premiums will be less.

3. In some cases, plans arrange deals for certain services with select providers who agree to give preferred rates. Any employee taking advantage of these arrangements would have fewer dollars deducted from his medical account than if he went elsewhere. But the choice to go elsewhere is always the employee's.

The New Game in Town

Unlike traditional managed care, where patients are directed into or financially motivated to use limited panels, DCPs allow them essentially unlimited provider choice. Of course, there's a tradeoff.

Where under traditional managed care a patient's financial obligation for any service is limited to co-payments or (often nominal) deductibles -- essentially no-brainer decisions -- these DCPs shift a significant portion of the financial decision-making responsibility from employers to employees.

Good News for Patients

By opting for a DCP, there can be significant benefits for employees. In addition to expanded provider choice, patients can enjoy tax savings and, perhaps most significantly, the flexibility to allocate exactly how, when, and where their healthcare dollars will be spent. They do this by "shopping" for their healthcare services and spending-down their accounts as they see fit.

For example, a patient who while in a HMO had no coverage for cosmetic skin resurfacing might, in a DCP, elect to spend part of his discretionary healthcare services fund on that service. And that patient could also decide whether to price-shop for the cheapest offering in town or, instead, do some research and then select from among the community's "gurus." The cost-benefit decision becomes the patient's.

Good News for Physicians

DCPs offer some significant potential benefits to physicians. Patients who previously could see a physician only if he or she were on an approved panel instead can see any provider of their choice. So dermatologists could have access to a much larger pool of potential patients. Seeing any of those previously inaccessible patients would, of course, add to the practice's revenue.

And, happily, these patients likely would be seen at rates set by the doctor, not by a for-profit health plan or a third-party administrator. Assuming the physician priced appropriately (competitively) to attract patients and did not blunder into pricing wars, those DCP patient visits should generate improved margins compared to traditional managed care plans where the payers have an absolute stranglehold on fees.

Will Defined Contribution Plans Become Popular with Employers and Employees?

Nationally known consulting firm KMPG asked 14,000 employees at Fortune 1000 companies the following questions: What if you were able to select from any health plan being offered in your area, at the cost you choose, using both your employer contributions and the personal contributions you make, instead of having your employer select plan options for you? How interested would you be in this concept as a replacement for your current healthcare selection options from your employer?

Twenty-five percent were "extremely interested," 19 percent were "very interested," and 29 percent were "somewhat interested." (A New Direction for Employer-Based Health Benefits, KMPG, LLP, publication 99-12-05, November 1999.)

And benefits consultants Booz-Allen & Hamilton surveyed Fortune magazine's "100 Best Companies to Work For" and reported that, "…all but a few were anticipating a shift to defined-contribution systems, which would save them millions of dollars in administrative costs by taking them out of the selection and retailing process."

One of the report s authors opined, "We believe the move to defined-contribution health plans is no more than three to five years away. Within 10 years, the defined contribution system will be as common in healthcare as it is in retirement planning." (When Consumers Rule: The Next Revolution in U.S. Health Care, Lathrop P, Ahlquist G, and Knott D, Booz-Allen & Hamilton, Strategy and Business, March 2, 2000.)

New Challenges

DCPs will present new marketing challenges to physicians. With each patient responsible for every dollar deducted from his medical spending account (and responsible for the out-of-pocket amounts between his plan's financial trigger points), some will certainly price-shop for the cheapest deal in town. You can't worry about those patients, and you probably don't want them anyway. But financially savvy patients will look more closely at overall value and quality rather than simply at what's cheapest or on special in the local newspaper.

Given patients' flexibility to spend medical accounts at their discretion, this could mean dermatologists may provide increased numbers of previously non-covered (but now patient-elected) services. And they could experience increased sales for skin care products and other items dispensed by the practice. (Note: many dermatologists are finding that a well-managed and properly promoted skin care products dispensary is a key stimulus to increasing the number of cosmetic procedures.)

Ultimately, growing a practice based in part on these new health plan variants will come down to providing a compelling answer to the patient s most basic question: What's in it for me?

Present your practice, your staff, and yourself in a way that demonstrates clearly superior patient care and customer service. Whether you do that face to face, on the telephone, on a practice website, in a newsletter, or in office handouts, say it loud and say it proud, and believe in yourself.

Blessing or Curse?

DCPs could turn out to be a blessing or a curse for dermatologists. On one hand, they could return a portion of skin care services to payment levels corresponding more to their actual cost and worth and reduce the number of patients seen under marginal or money-losing managed care plans. On the other hand, in a mad scramble to capture patients, we could also see that recovered portion of the business slide into a death spiral of ever deeper, irrational discounting.

DCPs will present physicians with an opportunity to differentiate quality to consumers who will be forced to think about the value of every dollar spent. If dermatologists can successfully communicate the over-riding worth of quality and service, there is opportunity to profit from this change in the way healthcare services are purchased and delivered. On the other hand, if they cannot, then this growing slice of the third-party market could end up as yet another low or no profit disappointment.

Gil Weber, a nationally recognized author, lecturer, and practice management consultant to the physician and managed care communities, has served as managed care director for the American Academy of Ophthalmology.

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