Watch Sears and Darden, Not Obama vs. Romney, for Future of Health Care

by Dan Diamond, California Healthline Contributing Editor

TOPIC ALERT:

Barack Obama might articulate a new health care strategy. Mitt Romney could embrace his Massachusetts health reforms. Who knows? Live, unscripted television is hardly predictable, and Wednesday night's presidential debate could hold revealing moments or, at minimum, a few memorable gaffes.

But somewhere between zero and two debates since 1960 have actually mattered to a presidential race, and this week's debate is unlikely to hold major revelations.

And in the estimation of "Road to Reform," the most earth-shaking news for health wonks this past week won't be on a Colorado debate stage but from the Wall Street Journal front page: a story about two large companies -- Sears Holdings and Darden Restaurants -- that are significantly changing their health benefits model by shifting to "defined contribution." (You can read a summary of the specific changes in California Healthline.)

It's a move that's been a long, long time in coming, but the timing still surprised observers. And it could finally herald a shift of risk from employers to employees.

Defined Contribution Model

Under defined contribution, firms pay a fixed amount into employees' health plans and allow workers to choose their coverage from an online marketplace. That differs from the current model of employer-sponsored health care, which is essentially "defined benefits": Companies choose a set of health-insurance benefits on behalf of their workers.

It's not shocking that companies would shift to a new model; experts have predicted the rise of defined contribution in health care for decades, and the Affordable Care Act's reforms are expected to transform the individual marketplace. For example, new online insurance exchanges are expected to make it easier for individuals to shop for their own health plans, while Medicaid eligibility expansions and the ACA's restrictions on insurers should make it easier for many poor and difficult-to-insure Americans to obtain health coverage.

That combination of changes will likely make firms more comfortable with allowing their employees to navigate the individual market. And post-ACA, more employers have signaled that they planned to adopt defined contribution as a way to cap health spending.

But the growing interest in defined contribution had Paul Fronstin of the Employee Benefit Research Institute wondering this summer, "is it déjà vu all over again?"

About a decade ago, the growing interest in consumer-directed health care led more than 62% of health care leaders to forecast "that employers would move to defined contribution health plans by 2010," according to Fronstin.

That hasn't happened, he notes. While some small firms have adopted the defined contribution model, large employers may have hesitated to shift employees to the individual market out of concern that workers wouldn't be able to secure viable coverage. And while offering health coverage is tremendously expensive for firms, giving up its tax benefits may be a mixed blessing.

However, as former White House budget adviser Peter Orszag writes in Bloomberg, a similar move to defined contribution has already taken place for workers' retirement plans.

"In 1985, a total of 89 of the Fortune 100 companies offered their new hires a traditional defined-benefit pension plan, and just 10 of them offered only a defined-contribution plan," Orszag writes. "Today, only 13 of the Fortune 100 companies offer a traditional defined-benefit plan, and 70 offer only a defined-contribution plan."

What's Next

That shift in pension plans could provide a roadmap for how a move to defined contribution in health care would play out, according to Orszag. Citing an earlier paper by Kenneth Sperling and Oren Shapira, he suggests that employers may redesign their traditional benefits offerings before introducing a hybrid model and then phasing out the defined-benefits model.

Last week's announcement may prompt other firms to follow suit. As far as "Road to Reform" can determine, Sears is the first Fortune 100 firm that's planning to adopt defined contribution for its workers' health plans. And both Sears and Darden are self-insured -- which means the firms pay employees' claims -- a model that's gaining traction among other big companies and could expedite a shift.

But the timing is a bit of a surprise. Like state governors delaying their Medicaid decisions, large firms generally signaled they were waiting until after this November's election to make major benefits changes -- even if those changes were long-rumored. And many employers are still wary of moving away from a decades-old model that workers have come to expect.

"Going to a defined contribution in health care [would be] a radical departure," according to Andrew Webber, CEO of the National Business Coalition on Health, in a story that ran just before Sears and Darden announced their decisions. Giving employees more responsibility seems like a good idea, Webber noted, "but what if [they make] poor decisions as they have with 401(k)s, perhaps?"

Insurers are split, too, over whether we're on the verge of a health benefits transformation. According to Ken Goulet of WellPoint -- which is planning a new online product called Anthem Health Marketplace that will allow workers to shop for coverage online -- defined contribution will be "mainstream" in the next two or three years. But Yasmine Winkler of UnitedHealth Group said that "[t]he jury's out" on whether more employers are ready to follow Sears and Darden's approach.

If you're planning to watch the debate, here's something that only health wonks might pick up on: Paul Ryan's proposal for Medicare -- which would allow seniors to use vouchers to shop for their own plans under a "premium support" model -- isn't so different from Sears and Darden's own announcements.

But some of the same doubts that face direct contribution, such as whether it shifts too much risk and responsibility to individuals, are magnified under Ryan's proposal. Who knows if individuals will be well-prepared to navigate an online marketplace and assess their health risks? We may discover that it's a tall order for healthy 40-year-olds -- and nearly impossible for the nation's seniors.
It's something to ponder between the talking points. Here's what else is happening around the nation.

Here's what else is happening around the nation.

Administration Actions

  • The Obama administration is urging states to participate in the Medicaid expansion, telling them they would miss out on federal money if they delay. In a letter to the states, the administration wrote that while states can opt in -- or opt out -- of the expansion at any time, waiting could mean that states receive a smaller share of federal money (Pear, New York Times, 10/2).
  • Last week, HHS announced the distribution of an additional $224 million in establishment grants to five states and the District of Columbia to create health insurance exchanges under the Affordable Care Act (Baker, "Healthwatch," The Hill, 9/27). With the new round of grants, 34 states have received a total of $2.2 billion in funding to help them establish a state-based exchange (Daly, Modern Healthcare, 9/27).
  • Last week marked the implementation of an ACA provision that requires insurers to provide members with an easy-to-understand summary of benefits and out-of-pocket costs of their health plans (Zigmond, Modern Healthcare, 9/24). The summaries now are available for consumers in the individual health insurance market and will be made available to those in group health plans during their next open enrollment period (Morgan/Humer, Reuters, 9/24).
  • HHS Secretary Kathleen Sebelius recently announced nearly $10 million in grants through the ACA to boost the number of mental health care providers who serve rural areas and work with military personnel, veterans and families. Under the Mental and Behavioral Health Education and Training grant program, three-year grants totaling $9.8 million will be made available to 24 graduate social work and psychology schools and programs (United Press International, 9/25).
  • The Obama administration is preparing to release new data showing that a federal demonstration program that provides bonus payments to Medicare Advantage plans has helped raise quality. The ACA authorized bonus payments to MA plans that receive a quality score of at least four stars on a five-star scale. The administration says that enrollment in the plans is growing and that quality is improving (Norman, Politico, 9/25).

Election Watch

  • In commentaries published online in the New England Journal of Medicine last week, Republican presidential nominee Mitt Romney and President Obama described their health care platforms and their visions for the future of the U.S. health care system. Romney repeated his pledge to repeal the ACA and replace it with "common-sense, patient-centered reforms suited to the challenges we face." Obama said if he is re-elected he would "keep Medicare and Medicaid strong" (Peck, MedPage Today, 9/26).
  • If Republican presidential nominee Mitt Romney wins the election in November, a range of potential health policy changes could become law and affect insurers' revenue. As part of their campaign, Romney and his running mate -- Rep. Paul Ryan (R-Wis.) -- have pledged to repeal the ACA, which could have important repercussions throughout the insurance industry. For example, repealing the ACA would eliminate some provisions that the insurance industry dislikes, including additional taxes on carriers (Radnofsky, Wall Street Journal, 9/25).

Measuring Public Opinion

  • Less than half of a group of medical students who responded to a survey about the ACA understood the law's basic components, according to a new survey published in the Archives of Internal Medicine. Although most of the respondents oppose the ACA or have no opinion about it, a broad majority -- 69% -- agreed that physicians are professionally obligated to play a role in the law's implementation (Seaman, Reuters, 9/25).

In the States

  • At least 36 states are unprepared or unwilling to set up health insurance exchanges established by the ACA, according to a new report from PricewaterhouseCooper's Health Research Institute. The deadline for states to submit their exchange plans to HHS is Nov. 16. The exchanges will fall under the federal government's purview if states do not implement them (Somashekhar, Washington Post, 10/2).
  • In a letter to President Obama last week, Republican Governors Association Chair and Virginia Gov. Bob McDonnell demanded more details about the implementation of the ACA. The latest letter reaffirmed the RGA's opposition to the ACA, stating that the group believes that the health reform law will "destroy the private insurance market," and it sought responses to a list of 27 questions on the insurance exchanges, subsidies and the Medicaid expansion (Viebeck, "Healthwatch," The Hill, 9/28).
  • Some states are questioning HHS' allowance for how flexible states can be in developing eligibility levels for Medicaid under the ACA's expansion. Recently, an official from the New Mexico Department of Human Services asked whether states would be allowed to expand their Medicaid programs to residents whose incomes are up to 100% of the federal poverty level and place the remainder of newly eligible residents -- from 101% to 138% of the FPL -- in the law's insurance exchange (Lubell, American Medical News, 10/1).
  • Although Louisiana Gov. Bobby Jindal's (R) administration has decided to opt out of the Medicaid expansion, New Orleans officials say they are looking at strategies that might allow the city to move forward on its own (Alpert, New Orleans Times-Picayune, 9/26).
  • Last week, South Dakota Gov. Dennis Daugaard (R) announced that the state will not operate its own health insurance exchange under the ACA (Brokaw, AP/Atlanta Journal-Constitution, 9/26).

On the Hill

  • In a recent letter to HHS Secretary Kathleen Sebelius, Senate Finance Committee ranking member Orrin Hatch (R-Utah) wrote that the Obama administration has not provided states with enough information to decide whether they will establish their own insurance exchanges or let the federal government take on the responsibility. He wrote, "The President promised 'an unmatched level of transparency, participation, and accountability' ... yet the details ... have been hidden from the public and the very people who are required to implement" the ACA (Baker, "Healthwatch," The Hill, 9/25).
  • Last week, House Ways and Means Committee Republicans cited a recent Health Care Cost Institute report -- which found health care costs increased last year -- as evidence that the ACA "has failed to deliver." The report found that per capita health care spending among U.S. adults under age 65 with employer-sponsored health insurance increased by 4.6% in 2011, up from a 3.8% increase in 2010 (Baker, "Healthwatch," The Hill, 9/25).

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