The development of 401(k) plans over the last quarter century—and efforts to overcome worker inertia with default enrollment, diversification and contribution escalation—offer lessons that can be applied to the design of “consumer-driven” health benefit plans, explains a new study by the not-for-profit Employee Benefit Research Institute (EBRI).
“Defined contribution retirement plans have evolved from the employer making all decisions to workers making most of the decisions through their own initiative,” says the study, Lessons from the Evolution of 401(k) Retirement Plans for Increased Consumerism in Health Care: An Application of Behavioral Research, published in the August 2008 EBRI Issue Brief. “Health plan design is following a similar path as the focus on consumerism grows,” the study found.
Consumer-driven health plans (CDHPs) are a way to help control total health care spending through increased consumer engagement, typically by combining a high-deductible plan with tax-preferred savings accounts to help participants pay out-of-pocket medical costs.
According to the EBRI study, efforts to make workers more involved in and responsible for their health benefits and health care have run into the same problems that surrounded the growth of 401(k) plans: workers tend to delay or be disengaged from retirement and health care decisions, which they view as complex and difficult. The result is often non-action, or off-hand decisions that are not in the employee's long-term interests.
Consumer-Driven Health Plans Continue To Grow
As health care costs continue to rise, more U.S. employers are looking to consumer-driven health plans (CDHPs) and employee wellness programs to help keep costs under control, a national survey by consultancy United Benefit Advisors reveals.
CDHPs increased by 43 percent from 2007 to 2008 and now comprise nearly 13 percent of all plans offered by U.S. employers. The percentage of U.S. employees enrolled in these plans nearly doubled, from 6 percent in 2007 to 11.2 percent in 2008.
Preferred provider organizations (PPOs) continue to dominate the market, representing 54 percent of plans offered by employers and 62.7 percent of employees enrolled. But health maintenance organization (HMO) participation continues to slip and now represents just 21.3 percent of plans offered, with 13.3 percent of employees enrolled.
On the Down Side
As the EBRI study notes:
• Increased choice can have negative consequences. With 401(k) retirement plans, increasing investment options is not always better. Many workers feel overwhelmed by too many options and find it difficult to make appropriate choices. (Others, however, welcome the ability to tailor their investment plan to their needs; one size does not fit all.)
• When faced with making complex decisions, many resort to oversimplifying the decision by reducing it to one important factor they can understand—short-term out-of-pocket costs, even when it results in much higher long-term costs.
• Financial incentives might help, but not as much as might be expected. Despite the tax-favored status of contributions and the existence of employer matching contributions, a significant portion of eligible workers do not contribute to 401(k) plans. Similarly, a significant percentage (42 percent) of workers covered by a high-deductible health plan and eligible to fund a health savings account (HSA) with tax-deferred contributions chose not to do so.
• Even when workers are “educated,” most fail to act on their knowledge. The heavy investment that many employers have made in retirement education and information programs often fails to produce the desired results.
• Many individuals remain disengaged from matters they do not have to address immediately, and when they do act it is often too late.
Overcoming These Challenges
Employers can help to overcome employee confusion and inertia with effective retirement and health plan design, the study suggests. Specifically:
• Good default choices improve outcomes. Default choices in 401(k) plans have gone a long way toward improving the decisions that workers make. Automatic enrollment and contribution-escalation plans have in effect made retirement plan savers out of employees who had not been previously motivated by financial incentives or education. Similarly, well-designed health plan default choices can improve employees' health plan decisions. For workers automatically enrolled in a CDHP, consider automatically funding an HSA (via payroll deductions) to cover future costs. Workers can also be automatically enrolled in wellness and disease management programs.
• Packaging decisions together improves outcomes. Many retirement plans, even those without automatic enrollment, bundle savings and investment decisions (workers sign a card indicating their acceptance of the "default" savings rate and investment selection). Health care decisions likewise can be simplified by bundling what would otherwise be multiple decisions. If HSA funding were bundled with enrollment in a high-deductible plan, more people would take advantage of it and benefit from the tax-preferential treatment of HSA contributions. Similarly, selection of a high-deductible plan could be bundled with a wellness program or assignment of a health coach who would conduct a risk assessment and implement a course of action.
• Simplified communications improves outcomes. Large, complex choices can be packaged to help decision makers focus on a more manageable subset of alternatives. Information packets accompanying retirement and health plan choices are often voluminous with ominous disclosures. To simplify matters, when there are numerous funds available in a retirement plan, sponsors will often categorize them by asset class or label a subset of the funds “core” and segregating the others into increasingly specialized “tiers,” suggesting that only the most sophisticated investors would be interested in the highest, most specialized tier. Similar approaches could be taken with communications regarding health care plan choices.
• Requiring active decisions improves outcomes. In one retirement plan studied by researchers, requiring workers to indicate whether they accept or decline a particular offering (failure to respond was not permitted) resulted in an increased acceptance (plan participation) rate of up to 28 percentage points. “Required” active decision making in the health care domain could have similar positive effects, upping participation by those who have good intentions with respect to funding an HSA or participating in a company-sponsored wellness program but just never get around to doing so.
Given the impressive preliminary results in improving retirement plan participation and savings levels, the study concludes, designing health benefit programs with a view toward overcoming negative behavioral tendencies is likely to prove worthwhile.
HSAs: A Profit-Sharing Model for Employer Contributions, SHRM Online Benefits Discipline, December 2004
Stephen Miller is an online editor/manager for SHRM.