Employer defined contributions

Wage control freezes imposed by the federal government during World War II were the catalyst for employers to begin offering employee health insurance, which is now a common and expected benefit among large-and medium-sized employers. However, healthcare cost inflation has become a progressively challenging issue for employers in an increasingly competitive global economy; a 2014 study reported that U.S. health insurance premiums rose by 60% between 2003 and 2013. In an effort to mitigate rising employee healthcare expenses, many employers have implemented a variety of strategies that include migrating away from traditional high-cost indemnity plans to HMOs and consumer-driven plans. Another common strategy is cost shifting, through which employees assume responsibility for a larger portion of the insurance premium. While cost shifting benefits employers, it shifts the concern to consumers since, over time, the employee share of the premium has typically increased at a rate higher than earnings. In fact, employee premium contributions rose by 93% between 2003 and 2013 while family incomes grew by only 11%.1

Recently, some employers have begun to introduce defined contribution plans. In this model, instead of directly providing insurance benefits, employers offer employees a fixed dollar amount with which to buy insurance through private health insurance exchanges. Employers subsequently benefit from a predictable fixed healthcare expense and the ability to control their rate of cost inflation.

As of June 2014, three million people had purchased health insurance on private exchanges,2 and evidence suggests that defined contribution plans may become more common over the next few years. As a case in point, a December 2014 survey of 446 employers by the Private Exchange Evaluation Collaborative revealed that 47% of employers have implemented or plan to consider utilizing a private exchange for full-time active employees before 2018.3

If not managed properly, defined contribution plans have the potential to become another form of cost shifting that may negatively impact employee health. Clearly, if employer contributions remain fixed over time but the cost of insurance premiums offered on the exchanges increases, employees will get caught in the middle and may become unable to afford health insurance. Alternatively, employees may buy plans with high copays or deductibles beyond what they can afford. If the defined contribution model is to be sustainable, employers cannot just set a contribution and assume that their responsibility is fulfilled. Instead, they need to direct their employees to a well-populated exchange that offers affordable plans.

Exchanges are intended to be competitive marketplaces, and that competition is intended to influence the cost of insurance. Employers will need to ensure that a sufficient number of plans are offered through their exchange to create this competitive environment. They should also consider using their influence to (1) include plans with value-based reimbursement models that motivate providers to manage cost and quality and (2) offer plans with benefit designs that encourage employees to become partners in managing costs. Such incentives might motivate employees and their dependents to seek care consistent with a population health model and to select plans with narrow networks. Collectively, these actions should help modulate the rate of premium inflation, but employers will need to monitor their employee premium costs and related plan designs to ensure their defined contribution health benefit remains affordable for their employees.

To learn more about value-based reimbursement models, read my blog post
"Value-Based Care: Laying the Groundwork for a Shift from Volume to Value."

1S. R. Collins, D.C. Radley, C. Schoen, and S. Beutel, "National Trends in the Cost of Employer Health Insurance Coverage, 2003–2013." The Commonwealth Fund. December 9, 2014. Accessed January 12, 2015.
2"Three Million U.S. Employees Enrolled in Private Health Insurance Exchanges, According to Accenture." June 12, 2014. Accessed January 12, 2015.
3"Private Exchange Employer Survey Findings." Private Exchange Evaluation Collaborative. Accessed January 12, 2015.