More employers are dropping their group health plans (a defined benefit strategy) and transitioning employees to individual coverage. But employers are still looking for ways to contribute to employees' healthcare costs and they are doing this with a defined contribution strategy.
Let's look at examples illustrating how a defined benefit strategy works, compared to a "pure" defined contribution strategy.
Example - Defined Benefit Strategy
With a defined benefit strategy, the employer defines the exact benefit.
For example, ABC Veterinarian Clinic offers Plans X. Plan X costs employees $44.00 per pay period, and includes a certain network of doctors and specific deductible, co-insurance, and co-pay amounts.
Or, perhaps ABC Veterinarian Clinic offers two Plans - Plan X and Plan Y. Plan X is a low deductible plan and costs employees $44.00 per pay period. Plan Y is a high-deductible HSA-qualified plan and costs $28.00 per pay period.
In either example, ABC Veterinarian Clinic is saying here is the plan (or plans) and the cost. Here are the doctors and what you'll pay. Take it or leave it.
With a defined benefit strategy, when healthcare costs increase 15-20% next year, ABC Veterinarian Clinic has to make some tough decisions. Do we increase cost sharing? Do we reduce benefits? Do employees perceive a reduction in benefits? No matter which way you slice it, it's perceived as a negative.
Example - "Pure" Defined Contribution Strategy
With a "pure" defined contribution strategy, employers define the amount to offer employees -- unrelated to the actual health insurance benefit.
For example, ABC Veterinarian Clinic offers employees $250 per month. Employees pick whatever option they want. Rather than one or two (or even five) plans to choose from, employees select from any individual or family plan. They can work with a Broker to help understand their options, and/or use their state's Marketplace. Eligible employees (based on income) can access the premium tax credits.
With a defined contribution strategy, ABC Veterinarian Clinic decides if and when to change their contribution amount. For example, if ABC Veterinarian Clinic raises its monthly $250 contribution to $260 (a 4% increase), the perception among employees is very positive. Compare this to a 15-20% increase with a defined benefit strategy, where the clinic has no control over the cost increase, and employee perception is negative.
The Bottom Line
For employers, a big advantage of defined contribution is cost savings and control. But even more important is that this change toward defined contribution is great for employees - the healthcare consumers.
The shift toward defined contribution is empowering employers to feel good about canceling group health insurance and about letting employees choose their own health insurance.
Do you agree or disagree?
For a more detailed look at these two strategies, see: Defined Benefit vs. Defined Contribution Healthcare - What's the Difference?
