Pure Defined Contribution Health Models - A Win-Win-Win Solution

Written by: Christina Merhar
Originally published on October 30, 2013. Last updated November 25, 2013.

For decades, the norm in the U.S. has been that health insurance is purchased and offered in a certain way -- by our employer. And yet, many industry experts agree that health benefits are shifting away from a defined benefit health model (employer-provided health insurance) to a defined contribution health model.

Win Win Win Defined Contribution Health Model

With the purest form of defined contribution, employers offer employees a health insurance allowance as the benefits package. Employees purchase an individual policy of their choice, often with the help of a health insurance broker, and are reimbursed by the employer.

With a pure defined contribution health model, the employer gets out of the business of purchasing and offering health insurance. This is a significant change for employers, employees, and health insurance brokers.

While change can be hard, the good news is that with a pure defined contribution health model there are big wins for employers, employees, and health insurance brokers. 

Pure Defined Contribution Health Model - A Win for Employers

Employers need a competitive health benefits program to recruit and retain top employees. A defined contribution health model allows an employer to control its costs on a monthly basis by setting monthly health insurance allowances. Here are the top two wins for employers.

  1. Controllable Costs – Employers fix their costs by utilizing a pure defined contribution model. There are no minimum or maximum contribution requirements, and employers can vary employee contributions based on job criteria. 

  2. More Time for Meaningful Work – A defined contribution health model allows an employer to provide a quality health benefits program in less than 5 minute per month. Administering the health benefits program becomes a payroll function and requires minimal involvement from the employer. There are no annual renewals, and employees maintain the direct relationship with the insurance company. 

Pure Defined Contribution Health Model - A Win for Employees

Employees win with defined contribution because, rather than having a “one-size-fit-all” group plan that may or may not fit their family’s specific needs, they are able to choose an individual health insurance plan that works best for their family. Here are the top two wins for employees.

  1. Lower Costs – In today's workforce it's not just the employer who pays part of the premium cost -- it's employees too (especially for family coverage). Individual health plans costs 20-30% less than traditional group plans and new tax credits are available to qualifying employees to lower their out-of-pocket costs even more.

  2. Choice of Plan – With their defined contribution allowance, each employee may choose the health plan that best fits their personal needs. This can be a plan from any insurance carrier and any type of plan coverage (deductibles, network, etc.). Employees can keep their doctor and preferred medical centers. The plan is portable and theirs to keep if they leave the company.

Defined Contribution Health Model - A Win for Brokers

For health insurance brokers, a defined contribution health plan offering provides a solution to increase individual health insurance policy sales and retain clients who are canceling group health insurance. Here are the top two wins for health insurance brokers, specifically how brokers are utilizing defined contribution to help grow their insurance business:

  1. A New Solution for Small Businesses Without Health Insurance – Over 2.3 million small businesses don't offer health insurance in the US. However, the majority of small businesses want to offer health insurance to recruit and retain the top employees. And, many who don't offer health insurance are shopping. Before defined contribution, there was little a broker could do to help companies that couldn’t afford to offer group health insurance. By offering a defined contribution solution, brokers have another tool to help small businesses provide health insurance.

  2. Increased Individual Health Insurance Sales – With a defined contribution health plan, brokers become a “401k-like” advisor for individual health insurance, and help employees pick the best health insurance plan for their family. As a result, brokers everywhere are dusting off their once-ignored individual product lines to meet the demands that defined contribution health plans are generating. Defined contribution health plans become a lead generation tool for individual health insurance sales. 

Originally published on October 30, 2013. Last updated November 25, 2013.


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