The health insurance industry is transitioning away from defined benefit healthcare and towards defined contribution healthcare. Many experts even say we're approaching the tipping year for defined contribution healthcare. But what do these terms mean and how are they different?
The simplest way to think about it is what the employer is controlling.
With defined benefit healthcare, the employer sets the specific health benefit.
With defined contribution healthcare, the employer sets the specific amount contributed (but doesn't dictate the exact heath benefit).
Defined Benefit Healthcare
Defined benefit healthcare is the traditional way we think about employer health insurance. A company provides its employees with a defined healthcare benefit -- doctor visits, hospitalization, pharmacy and so on -- often at uncertain annual cost.
The benefit is administered through an employer-sponsored group health benefits plan.
Defined benefit and defined contribution healthcare are often compared to retirement benefits. Using this reference, a defined benefit would be a pension-style retirement plan.
Defined Contribution Healthcare
Defined contribution healthcare is a new way to think about employer health insurance. In its purest form, a company provides its employees with a health insurance allowance or "contribution" to spend on their own healthcare -- at an annual cost that the company controls. One common example of defined contribution healthcare you may be familiar with is the health reimbursement arrangement (HRA).
The benefit is administered through a defined contribution software provider and may or may not include a private exchange.
Using the same comparison to retirement benefits, defined contribution healthcare would be the 401(k)-style retirement plan.
Just as there are many variations of defined benefit healthcare (various ways to structure the group health benefits plan), many variations of defined contribution healthcare are popping up because they are an effective way to control cost.
Read more on defined contribution healthcare here:
- Why Use Defined Contribution Software?
- What is a Health Reimbursement Arrangement (HRA)?