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Small Business Employee Benefits and HR Blog

4 Ways Pure Defined Contribution Will Radically Alter Health Insurance

Industry experts and economists agree that defined contribution healthcare is on the rise. Not only on the rise, but that defined contribution healthcare is the future of how employers will offer health benefits (source). It's also a radical change in how employers and employees purchase health insurance.defined contribution altering health insurance

Here are four ways pure defined contribution will radically alter health insurance - in a good way.

1. Defined Contribution will transform how employers purchase health benefits

Defined contribution healthcare transforms how employers purchase health benefits.

With traditional small business health insurance, the employer purchases a small group health insurance plan (or plans). The cost is typically split between the employer and employees.

With pure defined contribution, the employer sponsors a reimbursement plan and provides employees a monthly healthcare allowance. Instead of focusing their health benefit dollars on a particular plan or carrier, employers focus on the money and support they give employees to help them get individual health insurance.

This is a radical change because defined contribution removes the employer from selecting and purchasing the actual health insurance, and allows the employer to get out of the health insurance business.

2. Defined Contribution will transform how individuals purchase health insurance  

Defined contribution healthcare transforms how individuals purchase health insurance.

With traditional small business health insurance, the employee is offered one (or a few) health plans to purchase through their employer. Employees and families of small employers usually have limited plan choices. Of employers offering a group health plan with fewer than 200 workers, 86% only offer one (1) plan.

With pure defined contribution, employees shop for an individual/family health plan through a health insurance broker, through their state's online health insurance exchange, or through a private exchange or website. Employees can use their defined contribution allowance to be reimbursed for their health insurance premium, up to the amount in their employer-funded balance. Eligible employees and their families can access the health insurance tax credits.

This is a radical change because employees can select and purchase any plan, from any carrier, with any type of coverage. And, with new changes brought on by health reform (guaranteed-issue, tax credits, etc), individual health insurance is better for employees and employers.

3. Defined Contribution will be a “disruptive innovation”

Defined contribution healthcare is disruptive to the current small group health insurance industry because it is a simple business solution that is relentlessly moving up in the small business health insurance market. It's competing with the giant - group health insurance. 

Employers, especially smaller and nonprofit employers, are adopting defined contribution healthcare because they want to offer health benefits, but they need more cost effective and simpler health insurance solutions. The "perfect storm" of unsustainable costs and new Affordable Care Act (ACA) provisions has experts saying the landscape of employer health insurance is shifting away from group health insurance (a "defined benefit") to defined contribution.

This is a radical change, but not an unfamiliar change. The shift is often compared to the shift in retirement benefits from defined benefits (pensions) to defined contribution (401(k)s). After realizing the savings associated with moving away from defined benefit retirement plans, many businesses are also applying this model to their health insurance benefit programs.

See: Three Reasons "Pure" Defined Contribution Health Plans are About to Explode

4. Consumers will take a driver's seat in their own health insurance

Defined contribution healthcare transforms the employee's (consumer's) role in the selection and purchase of health insurance.

With group health insurance, the employer picks a one-size-fits-all group health insurance plan for employees. In many cases, employees have no idea what their health insurance plan is or what it covers. As a result, most employees are scared of health insurance, and don't understand the basics about their coverage such as their deductible, network of providers, copays, and co-insurance. We talk a lot on this blog about how group health insurance is broken - with the biggest symptom being cost.

With defined contribution healthcare, and individual health insurance, employees take a driver's seat with health insurance. It brings the consumer back to the product.

This is a radical change for employees who may not be familiar with how health insurance really works, or how to make smart consumer health insurance decisions. But the good news is that with changes made by the Affordable Care Act, buying individual health insurance is becoming more transparent and in the coming years it will be mainstream for employees to purchase health insurance on their own - just like car insurance.

What other ways is defined contribution altering health insurance? Leave a comment or question below.