A "perfect storm" of unsustainable costs and new Affordable Care Act (ACA) provisions has experts saying the landscape of employer health insurance is changing. Rapidly. Employers (especially smaller employers) are eager to find ways to offer quality health insurance to employees that both meets the requirements of the ACA and is financially viable to their business.
Health insurance brokers are also eager to find new solutions to bring to clients - to sustain and grow their business in the changing market. The solution to many of these challenges is a defined contribution health plan approach.
Recently, we wrote about how 2014 could be the tipping point for defined contribution. This article looks closer at why there is such a trend toward defined contribution and offers three reasons why defined contribution is about to explode.
Reason #1) Defined Contribution is a Proven Strategy to Manage Costs
One of the primary reasons defined contribution health plans are attractive to employers is because they help employers contend with the rising (and sometimes unpredictable) costs of traditional employer-sponsored health insurance. By offering employees a set dollar amount they can use toward qualified health insurance premiums, employers can more easily predict and control their health care costs from year to year.
Because of these cost management benefits, there are two types of companies emerging as early-adopters of defined contribution health plans:
The first are companies who are not currently offering health benefits, but want to. Many are smaller employers -- they just hired their first full time employees, they've had health insurance in the past but had to cancel it because of cost, or they are small business owners looking for coverage options for their family. Because of the cost controls, defined contribution allows many of these smaller employers to offer health insurance for the first time.
The second group of early adopters are companies who are offering health insurance, but who have already begun to shift a larger share of health care costs to their employees -- they've started providing plans with higher deductibles, they've used an integrated-HRA, or they've reduced or eliminated contributions to family coverage. These companies are already moving in the direction of consumer-driven health plans and defined contribution is the next step.
Reason #2) Defined Contribution Encourages Health Care Consumerism
More and more, health care consumerism and choice is in the spotlight as a way to improve the health care system and keep costs in check. After all, part of the problem with the current health care system is that employees are so far removed from the cost and decision making of their own health care. Likewise, many companies are starting to value health care consumerism.
Defined contribution health plans encourage health care consumerism because employees are given a health care allowance rather than a specific plan (a 'defined benefit'). Employees decide the best way to spend their allowance by choosing a health plan (any health plan) that best fits their needs. Employees are making health care consumer decisions. Employees are empowered to take control of their health care.
Reason #3) Defined Contribution Simplifies Health Benefits Administration
Defined contribution health plans are trending for a third reason -- simplicity of administration. The simplicity means reduced administrative time for the companies that offer them, and HR departments that administer them. Why?
The employer is removed from the actual insurance decisions. Employees are making a direct purchasing decision from the insurance company (through a broker, online exchange, etc). This reduces administration time for the company. The employer provides resources to employees to help them with this process (have a health insurance broker available for consultation, technology, etc.) but the employer gets out of the business of selecting health insurance.
Technology (such as defined contribution software) makes it quick for companies to set up the plan, educate employees about health benefits, and administer the benefits. Many software platforms sync with existing payroll systems and the administration essentially becomes a payroll function.
Will Defined Contribution Health Plans Explode?
With these three reasons (cost controls, health care consumerism, and new technologies) will defined contribution health plans explode in the next few years?
What do you think? Leave a comment below.