Small and medium sized employers are rapidly switching employees from group health insurance (a defined benefit) to a healthcare allowance to spend on individual health insurance (a defined contribution). There are three big reasons for the switch to individual health insurance and defined contribution.
#1) Saves Employees and the Employer on Health Insurance Costs
One of the primary reasons small employers are switching to individual health insurance and defined contribution is that individual health insurance costs up to 60% less than traditional group health insurance. See this state by state comparison of rates.
On top of this, most employees are eligible for a premium tax credit to lower what they pay for individual health insurance. A recent analysis found that those who are eligible for a premium tax credit pay, on average, only $82/month for a Marketplace health plan.
According to the Kaiser Family Foundation's annual survey, the average cost to cover a single employee in 2013 with group health insurance was $490/month, with the employer paying $402/month and the employee paying $88/month.
A cost analysis makes the decision clear for small employers. A $200/month contribution toward a defined contribution plan goes further than a $200/month contribution toward group health insurance coverage. But cost isn't the only reason small employers are switching.
#2) Allows Employees a Full Choice of Health Insurance Plans
Second, individual health insurance and defined contribution allows employees more choice and control over their healthcare.
Employees are given the opportunity to purchase any health insurance plan, from any carrier, and receive reimbursement for qualified premiums - up to the amount of their defined contribution allowance.
Employees want choice and the ability to personalize their health benefits. A recent employee health benefits survey found that 78% of employees want a greater variety of benefits to choose from and 80% would value benefits customized to individual circumstances and age.
#3) Provides Employees with Better, More Flexible Health Insurance Options
Third, individual health insurance and defined contribution provides employees with better, more flexible health insurance options. The coverage is portable and all employees (regardless of health conditions) are able to purchase an individual health insurance policy that is equal or better for them than existing group health insurance options.
Because of these three reasons, it's estimated that 60% of small employers will abandon group health insurance in favor of individual health insurance and defined contribution by 2017. What do you think?
- Why are Small Businesses Still Offering Group Health Insurance?