Defined Contributions: The Next Big Wave in Benefits

Defined Contributions: The Next Big Wave in Benefits

For the most part, private and municipal employers define their group benefits package for employees, specifying the carrier, plan type and plan design for participants. But as healthcare costs continue to rise, there’s been an increasing adoption of defined contribution plans for health benefits. 

How do the Plans Work? 

A defined contribution plan is an employer group health plan individually chosen by the employees. With a defined contribution plan, employees have more options in their health plan coverage – and spending decisions– utilizing a fixed amount of funds allocated by the employer.  

Here’s how they work:

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• Employees get an annual tax-free fund they can use on medical expenses, and rollover anything left at the end of the year.
• Employers give employees multiple health plans to choose from.
• The employee decides how to spend their money on medical or other healthcare needs.
• There are no co-pays or other reimbursement issues.

 

A Central Offering of Exchanges 

As healthcare reform continues to roll out in stages, many public and private Exchanges have either already adopted the defined contribution models – or are expecting to – to attract small and large businesses alike.  

If the Exchanges take off, employers may face the challenge of how to offer coverage. The defined contribution model offers a reasonable way for them to continue to offer insurance without increasing their expenses.  

Municipal employers may also feel pressure to adopt this model, particularly as taxpayers put pressure on these organizations not to raise taxes.  

The Pros and Cons

Employees can choose from more selections than typically offered by the employer, with options ranging from low deductible plans to high deductible plans, some coupled with Health Savings Accounts. This way, employees can make individual purchasing decisions based on their own needs and interests. And employers can count on fixed monthly healthcare expenses.  

However, while defined contributions help to cap an employer’s expenses, annual healthcare costs will still likely rise. If the employer’s share stays flat, more and more of the cost will be passed to the employees, eventually eroding their purchasing power and either forcing them to pay more for their benefits, or choose plans with lesser coverage.  

Other potential downsides? 

• Unless the true drivers of healthcare costs are also addressed, the defined contribution model only serves to shift more costs to employees, doing little to benefit the consumer in the long run.
• Large employers may lose negotiating ability if employees purchase individual plans outside of a "group setting."
• Health literacy and employees’ lack of understanding about their benefits remains a key concern so there must be good communication support and resources available to the employees who need help.
• Outside of the Exchanges, employers need to find insurance carriers who are willing to offer multiple plan choices to employees in a defined contribution setting.

Amy Gallagher has over 19 years of healthcare industry experience.  As Vice President at Cornerstone Group, she advises large employers on long-term cost-containment strategies, consumer-driven solutions and results-driven wellness programs. Amy speaks regularly on a variety of healthcare-related topics, is a member of local organizations like the Rhode Island Business Group on Health, HRM-RI, SHRM, WELCOA, and the Rhode Island Business Healthcare Advisory Council, and participates in the Lieutenant Governor’s Health Benefits Exchange work group of the Health Care Reform Commission.

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