Health care’s perfect storm
Much like the shift from employer pension plans to the now dominant 401(k) retirement plans that took place 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. We believe this shift holds great potential for all stakeholders.
Setting the Stage
Before we can discuss the impact of this shift, it important that we review each of 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 where an employer offers eligible employees a set amount of money to select a health plan that best fits their medical needs and financial situation.
The DC model is more in line with 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 and life stages. We also see the DC model providing greater flexibility, lower costs and less administrative burden for employers.
Driving the Shift
To understand why this shift is happening now, it is important to look back in our history. Following World War II, employers began offering health plans, as well as pensions and other benefits, as a way to compete for talent. Moving forward those benefits became very popular and viewed as a part of a competitive compensation package. Today, many employers struggle with the economic realities of offering those same benefits.
The first shift we saw in employee benefits was in the 1970s when employers moved employees from the traditional pension plan to the newly developed 401(k) plan. This helped relieve some of the economic pressure that traditional benefits placed on employers and shifted the savings responsibility to employees.
Today we are seeing a “perfect storm” that is enabling the next shift in employee 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 Role of Private Exchanges
While the rollout of the federal public exchange may have given pause to those considering moving their 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 have the flexibility to 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.
Currently private exchanges cover more than 1 million employees and their dependents, according to the Employee Benefit Research Institute. Many large employers are already using exchanges and we anticipate more will likely follow suit in the years to come.
HSAs as the Cornerstone
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 moving forward:
• 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 how little, to fund their accounts.
• CDHPs with HSAs lower costs. According to the Kaiser Family Foundation, data shows that 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.