Defined Care
Introducing the term for the emerging health care system of the 21 st century
By Clive Riddle, President, MCOL
March 2000

We have seen the future, and its name is “Defined Care.”

Just as the term “managed care” was coined two decades ago as an umbrella description for HMOs, PPOs and other related entities, Defined Care describes the emerging environment in which health, dental, vision and related benefits will be purchased and care will be delivered in the 21 st century --- an environment in which employers and other traditional purchasers of care provide an allowance, called Defined Contributions, that empowers consumers to purchase and select their benefit options.

How does Defined Care work?

Assume an employer is willing to spend $5,000 per year on an employee's medical, dental, and vision benefit package. This amount becomes the Defined Contribution. Then, like a 401(k) pension program, the employee has $5,000 to spend each year for his or her benefits, and selects from a wide menu of HMOs, PPOs, medical spending accounts, traditional benefit plans, and other arrangements. The burden of responsibility for being knowledgeable about plan features and selection shifts to the employee. To make informed choices and receive the best value possible, the employee needs the costs defined, the benefit features defined, and how care will be delivered defined. Plan, provider and patient behavior all undergo change, as the employees become empowered consumers.

With Defined Care, boundaries are defined that consumers operate within.

With Defined Care, the boundaries of care are defined as opposed to managed. With defined boundaries comes responsibility. With consumers more responsible for their own care, consumers then become part of the management as opposed to the managed. With Defined Care, expectations can be defined. Under managed care, expectations have to be managed. With the consumer more empowered, informed and enabled, roles and requirements change accordingly.

How does one define “Defined Care?” Defined Care is a system with:

• Defined Contributions : Employers, government, unions or others that arrange for benefit coverage (the Contributor) make defined contributions for each employee or other applicable consumer.
• Benefit Menu : The Contributor arranges for a menu of available benefit options that the consumer can select from.
• Consumer Purchasing : Consumers are empowered to make their own purchase decisions using their defined contribution allowance, plus supplemental consumer payments when their defined contribution doesn't cover all the costs.
• Purchasing Administrator : a third party organization, or the Contributor may perform the administration of the consumer purchasing system. These functions include employee contribution accounting, arranging and negotiating the options to be available in the menu, and processing of benefit selection choices.
• Benefit Options : the benefit options can involve HMOs, PPOs, medical spending accounts, traditional benefit plans or other programs arranged by the Purchasing Administrator. These plans typically will still involve open enrollment group policies being issued to the Contributor or the Purchasing Administrator.
• Benefit Prices : the Purchasing Administrator negotiates the prices to be charged by applicable benefit plans, and sets the parameters for medical spending accounts and other direct spending arrangements. The consumer pays for the entire negotiated price of the benefit using their defined contribution allowance, plus supplemental consumer payments if the defined contribution doesn't cover all the costs.
• Opt-out : consumers can choose to not spend their defined contribution allowance on a specific benefit at all, such as health benefits if they are receiving health coverage through their spouse or other means.
• Up-front Information : Consumers require concise, well-defined information regarding the available benefits, options and coverages, as well as regarding how care will be delivered under these options.
• Internet enabled: The Internet is the vehicle to-- deliver the depth of information needed for consumers to make selections; allow consumers to monitor and use their benefit options; and provide tools that allow consumers to be more involved in their own personal care.
• Engaged Consumers: Consumers will be much more engaged in seeking value from benefit options and in working with their providers and plans to achieve effective outcomes.
• Service Oriented Plans: Consumer selection and retention will weigh much more heavily toward plan success. Consumers more clearly move to the forefront, ahead of employers, as the most important audience to plans. Plans will need to make the defined rules of coverage more clear, and become simpler to use and understand, in order to compete in the marketplace.
• Provider/Patient Partnerships: Empowered consumers can play a much more proactive role in forging partnerships with their selected providers in order to receive the most effective care for their desired outcome. Providers and Plans will be even more motivated to provide tools that engaged consumers can use to improve their outcomes and help manage costs more effectively.

Why will Defined Care become pre-dominant?

With the continued onslaught of managed care backlash, the recent sharp upswing in premium rates, and the heightened level of health care as a national policy and political issue, the stage has already been set for some significant changes to occur. The only question is what the change will be. Defined contributions are already catching hold with employer and media interest because:

a) Health plan and health care costs are again sharply on the rise even with managed care plans;

b) Employees are still not involved enough in addressing costs;

c) Employers would like to distance themselves more from the benefit decision process, both due to managed care backlash and the managed care liability cases weaving their way through the courts;

d) One way of quieting employee unrest tied to managed care backlash is to involve them more in the decision;

e) Recent trends including a resurgence in PPO popularity, HMO coverage increases, and loosening of HMO cost controls will only push costs even higher;

f) Employers are running out of other ideas.

Defined Care does not replace managed care

Managed care remains a key component within Defined Care. HMO and PPO plans will be offered in a Defined Care environment, and the bulk of consumers will most likely continue to select various forms of managed care plans. But managed care will change and adapt under Defined Care systems. Group HMOs might possibly be best suited to deliver Defined Care value as they are a truly integrated delivery system that that can adapt to changes required of both plans and providers to best compete in a Defined Care environment. IPA, POS and PPO plans most likely will continue to blur over time, as HMOs loosen certain aspects of cost control. Managed care plans will evolve to provide more easily defined rules of coverage, usage, and a wider range of proactive patient programs and tools including preventive care and disease management. Complicated and ambiguous aspects of plan coverage and usages that require significant management will be difficult to maintain in the Defined Care marketplace. 

Defined Care will take time to emerge as the pre-dominant system

Five to ten years is the going prediction. Former Aetna CEO Richard Huber was recently quoted in the Wall Street Journal: “In five or ten years most of our business will have moved toward the ‘defined contributions' model.” Ron Winslow And Carol Gentry, staff reporters of the Wall Street Journal, state in their recent Wall Street Journal article, Companies Consider Letting Employees Handle Their Health-Benefits Decisions , “Still, most people see only a gradual transition to greater consumer control -- perhaps over the next decade -- as policy makers, the market and employees themselves get used to the idea. One major hurdle is the tax code. Many experts believe that shifting the tax deduction for medical costs to employees from employers is a prerequisite for a fully consumer-driven system.” David Knott, Vice President with Booz-Allen & Hamilton's Health and Insurance Group, and co-author of an upcoming article, When Consumers Rule: The Next Revolution in U.S. Healthcare in the publication, Strategy & Business states, “We believe the move to defined-contribution health plans is no more than three to five years away. Within ten years, the defined-contribution system will be as common in healthcare as it is in retirement planning.” 

Defined Care is not a policy or a reform proposal

“Creationism” is not required; Defined Care does not need the benefit of a pronouncement on high to “let there be Defined Care.” Rather, Defined Care already exists, as a product of marketplace evolution and marketplace forces. Granted, the impact of Defined Care can be further accelerated, stifled or shifted by future legislative and regulatory actions, such as tax code changes. But even in the absence of such, Defined Care will still continue to emerge and further evolve. 

Information tools for the consumer are essential

Availability and access to relevant information is critical to the success of Defined Care. The Internet is the enabling medium. Employers and Purchasing Administrators in successful Defined Care arrangements will enter into Internet partnerships with various applicable e-health portals and other sites that can deliver needed content and tools regarding relevant plans, providers and care. As the reach of the Internet continues to expand with consumers over time, the medium will help further fuel the growth of Defined Care.

As with any system, Defined Care has its drawbacks.

· Defined Care causes consumers to select benefit options largely for financial reasons. Bruce C. Vladeck, former HCFA Administrator, in 1997 warns of the need to protect Medicare beneficiaries “from the economic coercion that comes from defined contribution plans.”

· Defined Care is not a reform proposal, and as such does not address fundamental problems with the American health care and health coverage system, including the uninsured and the voluntary insurance market.

· Depending on how Defined Care is specifically structured for a company, it may be viewed as a benefit takeaway to save employer costs and get the employer out of the benefits business, and not as an enhancement. "In this tight labor market, many employers are reluctant to upset workers with bad news about their medical benefits," states Blaine Bos, a consultant with William M. Mercer, Incorporated.

· If employers do not increase defined contributions to keep pace with marketplace costs, employees will be forced to bear a larger and larger share of the cost.

· Employers might not supply adequate information or support for employees to make the reasonable decisions. Kenneth Abramowitz, Analyst, Sanford C. Bernstein and noted speaker warns “Some employers are using the ‘Yellow Pages' approach to purchasing health care, telling an employee: Here's $5,000 and the Yellow Pages. You figure it out.”

Defined contributions for health and other benefits are not a brand new concept.

Defined contributions are receiving considerable recent attention as companies such as Xerox have just switched to a defined contribution system. But as noted in the Internet article listing below, a number of health plan defined contribution articles started appearing in 1996. What's more, the previously mentioned Wall Street Journal article, Companies Consider Letting Employees Handle Their Health-Benefits Decisions noted “a similar movement fizzled once before, says Charles Blanksteen..…As a consultant in the 1980s, he designed defined-contribution systems for several companies. But health care costs rose faster than company contributions and became too much to bear for lower-income employees, who eventually dropped their insurance. At that point, Mr. Blanksteen says, ‘The companies blinked -- and had to pony up more money.' ”

An opportunity for a fresh start

With the continued negative press and backlash surrounding the term managed care, Defined Care offers an opportunity for a new terminology that all existing players can embrace- an HMO can be a Defined Care plan, a medical group can be a Defined Care provider, an employer can offer Defined Care arrangements to their employees. Defined Care doesn't “throw the baby out with the bath water”. Managed care plans that adapt will still exist and flourish in this new environment, but under the larger umbrella of a new name- Defined Care.

About the Author

Clive Riddle is founder and president of MCOL, a five-year-old health care Internet company that has set the standard for delivering business to business managed care knowledge resources. Mr. Riddle is a frequent speaker and author on health care, managed care and Internet related issues. A 20-year plus veteran of the healthcare and managed care industry, Riddle has held a variety of high-level leadership positions including 12 years as Chief Executive Officer of Tenet Healthcare's managed care organization in California. MCOL company information can be found at their web site: www.mcol.com . Additional information regarding Defined Care can be found at a new public web site established by MCOL at www.definedcare.com .

Related Internet articles: Health benefit and managed care defined contributions

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