Defined Contribution Health Benefits the Future?
We buy our own car insurance and homeowners insurance but when it comes to healthcare, the majority of us let our employer do the choosing.
That may not be the case in years to come as more companies offer defined contribution health benefits, similar to how they offer 401(K) retirement plans.
“By 2025 the majority of businesses will have gotten out of health insurance,” predicts Rick Lindquist, president of Zane Benefits and co-author of The End of Employer-Provided Health Insurance: Why It’s Good for You, Your Family, and Your Company. “Over the next three years the majority of small businesses will get out.”
Rewind about twenty-five years and employers would balk at the idea of letting employees choose their own retirement investments. That all changed with the entrance of 401 (K) plans, which were cheaper for employers to manage and put employees in the driver seat when it comes to where their money goes.
Now that Obamacare is in year two and the employer mandate kicks in, requiring companies with more than 50 full-time employees to offer health insurance or face a fine, experts are predicting more companies will adopt a defined contribution health benefits model.
“Employers want to be competitive and have an excellent workforce. This helps them offer an important benefit at a more predictable cost,” says Greg Pane, a former state health and Medicaid director. “Employees and consumers may experience increased cost sharing but expanded choice and more personal responsibility for managing their health care.”
With the employer mandate all businesses with more than 50 full-time workers have to provide health insurance or pay a per month so-called ‘employer shared responsibility payment’ on their federal tax return. Small businesses with 50 to 99 full time workers have until 2016. Those with a 100 or more employees will have to start providing health benefits to at least 70% of their full time employees by 2015 and 95% by 2016.
With a defined contribution health benefits plan an employer would give its workers a set amount of money for them to buy health insurance in the private marketplace. Employees would either get a lump sum or be reimbursed each month for the amount spent on premiums. Employees would not only be able to choose a plan that works for them but it should also drive competition which could mean lower premiums. According to Lindquist, companies that offer this model and employees who use it can expect to save 20% to 60% on their annual health insurance costs. In fact Lindquist estimates families of four can save $4,000 to $12,000 a year to access the same doctors and hospitals and use the same prescription medicine.
Currently a whole swath of companies are offering choice when it comes to health insurance. In fact, Zane Benefits’ Lindquist says the company has over 3,000 businesses set up to offer healthcare as a defined contribution.
While it may seem like a no brainer for employees, it’s not something they can take advantage of unless the employer offers it. That’s why Lindquist says it’s important for employees to suggest it to their employer and hopefully get them to listen. It’s not a stretch considering the state of the current healthcare insurance industry and the countless personal bankruptcies that can be squarely blamed on outrageous medical expenses. If the company declines the suggestion, Lindquist says employees should do some comparison shopping on the health exchanges to see if they are over-paying with their company plan. If that turns out to be the case they can ask their employer to drop their coverage and pay them a little bit more to make up for the out of pocket expenses, says Lindquist.
The way healthcare insurance is currently structured employees at all-size companies are being treated like “children,” adds Mitch Rothschild, chief executive of Vitals.com, which matches patients with doctors. That’s because employees are asked to purchase insurance without knowing the price and quality of the plan, let alone if it makes sense for the individual or his or her family. By giving employees the power of choice, he predicts health insurance will start to become simpler and provide workers with more selections. “A healthy 27 year-old and a 55 year-old diabetic are going to want different health plans with different doctors and deductibles,” says Micth. “Why should it be one size fits all as long as the two employees are getting the same amount of money?”