Whether or not they get lost in the alphabet soup of health
care reform, employers are adopting the defined contribution terminology as
shorthand for workplace health insurance arrangements built to give employers
more control over the cost and delivery of health benefits. “DC health plan” is
a pretty good label for this style of health benefits because the arrangements
can closely resemble the relatively well-known concept of the 401(k) plan.
As in the retirement plan space, the specifics of a defined
contribution health plan will vary among employers and providers but the
important principle is creating more levers for the employer to pull on the
pricing and delivery of its health benefits.
It can be predicted the expanding world of DC health plans,
fueled by elements of health care reform, could also represent the stirrings of
a new interest in “cafeteria plans,” through which spending on health benefits
and other employer-sponsored offerings—especially retirement benefits—will be
brought closer together over time.
Defined contribution health arrangements and cafeteria plans
generally allow employers to take a more proactive, top-line strategy view of
benefits spending.
DC Plan Design as
Response to ACA
Forecasting the long-term influence of the ACA on the cost
and delivery of workplace health insurance, let alone employer-spending on
retirement plans, is no simple feat. Four years after the ACA was debated and
signed, many important features of the law have only just been implemented.
Others, including the controversial “employer mandate,” are set to take effect
next year.
But even with many variables yet to play out, certain
consequences of the ACA are already clear. Public and private health care
exchanges are here to stay and it will not be long until more employers decide
to take a defined contribution approach to health benefits, enabled and
accelerated by the existence of online insurance marketplaces.
The public exchanges have already provided health insurance to
many Americans but it is the private health care exchanges being launched by
specialized vendors that will have a truly significant impact on workplace
health insurance—and potentially other benefits as well. According to an
analysis from the Kaiser Family Foundation, a bronze-level plan will cover
approximately 60% of the net cost of health care. Silver plans, by the same
logic, cover 70%, and gold and platinum plans cover 80% and 90%, respectively.
Under current timetables, most Americans will be required to have at least a
bronze-level plan by the end of 2015 and employers have a list of
responsibilities to make sure their workers have access to affordable care.
The evolution in health benefits delivery will also be
propelled by recordkeeping and communications technologies developed to
administer defined contribution retirement plans, making it even likelier that
DC health benefits could soon become the rule.
On the matter of linking retirement and health spending
through a unified defined contribution system; the legal framework is already
set up for the most part, vis-à-vis 26 U.S.C. Section 125. While the 401(k)
really took off in the years after its introduction into U.S. law, cafeteria
plans generally did not. Linking complex benefits programs together takes
substantial technological sophistication, so for a long time providers
struggled to create efficient cafeteria plan arrangements.
A Bronze or a Gold
Plan?
An important consideration in the defined contribution
health plan conversation is how the shift to a DC arrangement will be marketed
to and understood by employees. It is a similar challenge to the hurdle facing
employers who freeze or terminate a defined benefit (DB) pension plan and
replace it with a 401(k).
As employees are forced to take on more risk and
responsibility, it is not hard to see how they could perceive the change to a
defined contribution health plan as a rollback on benefits offerings.
One way to avoid this is for the employer to use the defined
contribution arrangement to put a control on the corporate outlay for health
benefits. Consider an employer that today has a generous gold plan, for which
it covers nearly the entire annual premium for employees. Rather than actually
decrease health benefits spending, many employers would be happy to just freeze
the spending level or even slow down the future premium increases.
In this situation, the employer can move employees to an
exchange that includes a gold plan or a comparable offering then provide a
stipend that is sufficient to purchase the desired level of coverage. This
minimizes the shock of the change for employees while also giving the employer
far more control over health benefits spending, both now and in the future.
The employer can continue to increase the annual stipend
payment to employees as the gold plan costs go up, if it so chooses or it can
cap spending.
DC Health Means DC
Challenges
It is hard to predict the influence that shifting to a
defined contribution health benefits model may have on other offerings at a
given company, particularly the retirement plan. Some paternalistic companies
could shift dollars saved on health benefits toward the retirement plan,
perhaps in the form of a more generous match, but it will depend on the
employer. Both experts acknowledge, however, that the conversation is an
important part of bringing health and retirement concerns closer together.
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