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AOL Founder Champions a Revolution

Steve Case's new venture bets big on defined-contribution plans that reduce employer costs upfront, but could raise new problems for large companies.

February 21, 2006
Related Topics: Benefit Design and Communication, Health and Wellness, Compensation
The last time Steve Case launched a business, he created AOL, and, in the process, helped to transform the way people communicate and share information. Now he is turning his attention to the health care industry in hopes of effecting radical changes in how people meet their health needs.

    The means to this end is Revolution--a portfolio of 12 companies, ranging from luxury resorts to boutique insurers, which cost a hefty quarter-billion dollars to assemble. The thrust of the business is the health care division, Revolution Health Group.

    Revolution Health consists of multiple parts, including ConnectYourCare, a company that provides ancillary support for employers who offer health spending accounts; InterFit Health, a company that develops low-cost clinics in retail locations, like Wal-Mart and Sam’s Club; MyDNA Media, a Web site that offers medical news; and 1-800-Schedule, a search engine that allows consumers to find doctors and schedule appointments. Revolution Health recently launched a Web portal that links to each of its companies.

    While all of these services are aimed at a society that’s on a fast track toward consumer-driven health care, one of the trends that Case and Revolution Health are banking on is of particular interest to employers: the defined-contribution health care plan. This approach is already entrenched in the world of retirement benefits, where 401(k) plans have eclipsed defined-benefit programs. It could also surface in health care as employers look for ways to tame runaway costs. And although the approach might sound like the employer-sponsored high-deductible/HSA plans that large companies are beginning to offer to employees, it’s a very large step beyond that.

    Revolution believes it has secured a first-mover advantage in the defined-contribution health care world by acquiring a controlling stake in ExtendBenefits, a pioneer in providing defined-contribution health benefits for employers. This health-benefits structure could be tantalizing for companies because it gives them increased financial control, enhances predictability and lowers costs, says Bryce Williams, president and CEO of ExtendBenefits.

    Finding a way to alleviate health benefit expenses will be pivotal for business survival, he explains. "The high cost of health care is rattling the very foundation of business models in corporate America," Williams says, citing GM and Ford as examples of companies that are being overwhelmed by expenses.

    In a defined-contribution model for health care, companies designate a specific amount of money for the health care expenses of an employee during the year. Workers then select an insurance plan from the individual benefits market and use this tax-free allowance to pay for premiums. The idea, as with other consumer-driven models, is that unnecessary health care expenditures are curbed because employees are responsible for certain out-of-pocket minimums.

    By forgoing traditional group-sponsored plans, not only would companies limit their financial liability, but they would also push workers to become more cost-conscious--effectively transforming employees into consumers and driving down the overall cost of health care, Williams says.

    ExtendBenefits has enticed 50 corporations, including big employers like AutoNation, Continental Airlines and the PGA Tour, to test the waters. So far, however, large clients are using the defined-contribution model for particular purposes, not as primary health care coverage for their mainstream workforces. The PGA Tour, for example, extends its defined-contribution program to some 200 of its independent contractors, says Marilyn Compton, director of treasury. Meanwhile, Continental Airlines uses defined-contribution plans to cover employees during the six-month waiting period before becoming eligible for group-sponsored health insurance.

Potential Stumbling Blocks
    Large companies may be reluctant to offer defined-contribution health benefits to the workforce at large because such plans funnel employees into the individual insurance market. That will save companies money relative to group-sponsored plans, but could also open up a Pandora’s box of other issues.

    Unlike traditional group-sponsored plans, where everybody is guaranteed acceptance, applicants in the individual benefits market are carefully screened as part of risk-control measures that indemnity companies adhere to. Applicants who are poor health risks are generally turned down for coverage, which means that some employees would have no coverage unless there was an alternate safety net in place, says Tod Zacharias, president of HumanaOne, the individual insurance arm of Humana.

    Risk-control practices in the individual market could create difficulties even for those employees who qualify for insurance. Certain workers could have a tough time affording their policies because the price tag varies drastically depending on the age and health of an applicant, says Sara Collins, a researcher at the Commonwealth Fund, a think tank.

    The variance in coverage and in price of policies from the individual market could potentially raise issues of inequity in the workplace--something that big employers are careful to avoid, says Susan Nash, partner at Chicago law firm McDermott Will & Emery. Employees who are young and healthy would be able to make their tax-free allowance go a lot further than older workers with health conditions because they would most likely be offered the most affordable policies, setting the stage for potential discord, she explains.

    Liability is another factor that may give pause to large companies. The individual market provides a broad array of choices in carriers and coverage options, which can yield competitive prices but also makes it more complex for employees to select a policy that is appropriate for them.

    Making a mistake in the choice of policy could have costly consequences. For instance, many of the policies in the individual health benefits market do not cover maternity costs, so if an employee were to become pregnant she would have to pay the associated health care expenses out of her own pocket.

    "It has not happened, but a creative plaintiff could potentially claim that he can’t pay for a particular health event because he was not given the proper educational support to buy an adequate policy," Nash says.

    Besides the tangible issues, large companies also would be making a huge break with tradition, notes Greg Scandlen, founder of the Consumers for Health Care Choices newsletter. Certain companies may have a tough time departing from the conventional group-sponsored plans that provide greater control over the choices that workers make. "Many employers take on a paternal role with employees and think that they won’t be able to figure things out on their own," Scandlen says.

Manifest destiny?
    In spite of the hurdles, Case and members of his board of directors--including former U.S. Secretary of State Colin Powell; Carly Fiorina, ex-CEO of Hewlett-Packard; and Steve Wiggins, former chief executive of Oxford Health Plans--are firmly placing their chips on the consumer-oriented arena.

    There is an aggressive expansion plan in the works for ExtendBenefits. The company’s sales and support staff, currently numbering 175, is slated to double every six months, Williams says. In addition, the company has hired Jo Ann Blackford, a veteran from Hewitt Associates with 23 years of experience in the health care industry, as vice president of sales.

    ExtendBenefits is also drawing a lot of attention through its new relationship with Sam’s Club. In early January, the company joined forces with the large retailer to sell defined-contribution health care policies to small-business clients. Eventually, however, ExtendBenefits hopes that defined-contribution health plans will be ubiquitous among small and large employers.

    The company is steadfast in its belief that corporate America is on the verge of a dramatic change in health plan design and that it is only a matter of time before a new model is adopted. "Today, we are in the same place with health care that we were at with retirement benefits 20 years ago," Blackford says.

    The key to ExtendBenefits’ future success lies in getting its message out and educating clients, she says. The company works individually with its clients to develop analytical evaluations that quantify the financial benefits of implementing defined-contribution health care programs.

    Blackford estimates that companies can shed 20 percent to 50 percent of existing costs, depending on the workforce demographics, because defined-contribution plans funnel workers into the individual health insurance market.

    There, prices can be more competitive, depending on the age, health and needs of the buyer. The average price for insurance in the individual market is $2,268 for singles and $4,424 for families, according to a study by America’s Health Insurance Plans, a trade group.

    Besides explaining why the defined-contribution model makes good financial sense for employers, ExtendBenefits goes to great lengths to ease employers’ concerns about their employees’ ability to get coverage in the individual insurance market.

    If companies are concerned about whether their employees could find coverage in the individual market, ExtendBenefits explains that that 88 percent of people applying for individual health plans are offered coverage, and of those that are accepted into the programs, 77 percent are offered the standard competitive rates, Blackford says.

    A typical policy from one of ExtendBenefits’ carriers has monthly premiums of $166, a deductible of $1,500 for an individual and $3,000 for a family. The out-of-pocket limits that range from $6,000 per individual for preferred providers and $16,000 for a family for in-network and out-of-network pro­viders. The lifetime maximum benefit is $6 million.

    While ExtendBenefits’ plan premiums are on the low end, the deductibles and out-of-pocket expenses tend to be much costlier than the average group-sponsored plan, a fact that could have financial implications for enrollees, says a researcher at the Kaiser Family Foundation.

    In its pitch to employers, ExtendBenefits also addresses the issue of how to deal with employees who do not qualify for coverage. One alternative, Blackford explains, is to roll them into a conventional group-sponsored program. Another is to refer them to state-sponsored high-risk pools--health plans that are available to individuals who are not part of a group-sponsored plan and who do not qualify for the individual health care insurance. These plans, offered in about 30 states, provide benefits that are in line with the conventional group plans--but at a much higher price.

    ExtendBenefits tries to quell worries over liability issues by highlighting its support staff. The company spends a great deal of time educating and helping employees purchase a policy that makes the most sense for them, with licensed advisers offering consultation around the clock, the company says.

    In spite of all its efforts and comprehensive client support, ExtendBenefits faces a difficult battle: Of the 178 million people insured, about 90 percent are covered by group plans from employers.

Workforce Management, February 13, 2006, p. 51-53 -- Subscribe Now!


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