Much like the shift from employer pension plans to 401(k) retirement plans not so long ago, we are now seeing an accelerating shift in our health care system from a defined benefit model to a defined contribution model with many employers.
This is impacting every facet of the industry including employers, employees, brokers, agents and more. This shift holds great potential for all stakeholders.
Before discussing the impact, it’s important to review the models and how they differ. Defined benefit (DB) represents the traditional, more paternalistic model where an employer offers set health-plan options with a set list of premiums and associated costs. Employees select their plan based on needs and pay accordingly.
Defined contribution (DC) represents a more modern, consumer-directed model. Employers offer eligible employees a set amount of money to select a plan that best fits their medical needs and situation.
The DC model fits the idea that not all employees have the same needs. Those needs can be impacted by life stage, financial situation or specific health care requirements. In our view, a DC model gives more room and flexibility for employees to pick plans that suit those varying needs. We also see the DC model providing greater flexibility, lower costs and less administrative burden for employers.
To understand why this shift is happening now, look back. Following World War II, employers began offering health plans, pensions and other benefits as a way to compete for talent. Those benefits became very popular and viewed as part of a competitive compensation package. Today, many employers struggle with the economic realities of offering those benefits.
The first shift we saw was in the 1970s when employers moved employees from the traditional pension plan to the new 401(k) plan. This helped relieve some economic pressure that traditional benefits placed on employers and shifted the savings responsibility to employees.
We see a “perfect storm” enabling the next shift in benefits. Following the enacting of the Affordable Care Act (ACA) and the growth in robust consumer-directed health care plans (CDHPs) and savings accounts, such as Health Savings Accounts (HSAs), the DC model is gaining ground with many employers. Technology has also sped along the process as DC platforms via private exchanges have become available as well as web-based tools to help employers and employees better utilize the exchanges.
The federal public exchange gave pause to those considering moving employees to exchanges, many are confident in the capabilities of private exchanges. These exchanges operate as private businesses that sell insurance products to consumers via web-based portals. Private exchanges serve as an online marketplace for employers and employees to manage their DC plans.
Well-developed private exchanges offer expanded employee choice, support for decision-making and end-to-end transactional services. They offer a single carrier or multiple carriers, as well as to provide dental, vision and other voluntary benefits. Finally, they are available for both single employer and multi-employer.
Today, private exchanges cover more than 1 million employees and their dependents, according to the Employee Benefit Research Institute. Many large employers are using exchanges and we anticipate more will likely follow suit.
HSAs will undoubtedly play an increasing role in the private exchange marketplace as CDHPs, which HSAs are affiliated with, continue to grow in popularity. There are several reasons why we believe HSAs will be a critical component for DC plans:
• HSAs promote consumerism, a key component to the success of DC plans.
• They allow for customization, so employers and employees have freedom in how much or little to fund their accounts.
• CDHPs with HSAs lower costs. According to the Kaiser Family Foundation, data shows family coverage through CDHPs is some $1,500 less than PPO coverage, while still meeting minimum benefit guidelines under the ACA.
• Finally, HSAs expand choice and access to care.
The shift from DB to DC, as well as the growing awareness and acceptance of consumer-directed health care partnered with HSAs, presents an important opportunity for employers to evaluate their current benefit offerings. The shift is fast-moving and benefit decision-makers would be wise to learn as much as possible to best consider all available options.
Dennis Triplett is the CEO of UMB Healthcare Services.