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 and agents. We believe this shift holds great potential for all stakeholders.
Setting the stageBefore we can discuss the impact of this shift, it is important to review each of the models and how they differ. Defined benefit 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 plans, based on needs, and pay accordingly.
Defined contribution 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 stages, finances or specific health care requirements. In our view, a DC model gives more room and flexibility for employees to pick fitting plans. We also see the DC model providing greater flexibility, lower costs and less administrative burden for employers.
Driving the shiftTo 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. Those benefits became very popular and 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 enabling the next shift in employee benefits. With the Affordable Care Act and the growth in robust consumer-directed health care plans and savings accounts, such as health savings accounts, the DC model is gaining ground with many employers. Technology also has sped along the process as DC platforms via private exchanges have become available, along with Web-based tools.
The role of private exchangesWhile 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, and they 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.
Currently, private exchanges cover more than 1 million employees and their dependents, according to the Employee Benefit Research Institute. Many large employers already are using exchanges.
HSAs as the cornerstoneHSAs will undoubtedly play an increasing role in the consumer-directed care marketplace. There are several reasons why:
• 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.
• Consumer-directed health care plans with HSAs lower costs. According to the Kaiser Family Foundation, data shows that family coverage through CDHPs is some $1,500 less than preferred-provider organization coverage, while still meeting minimum benefit guidelines under the ACA.
• HSAs expand choice and access to care. The shift from DB to DC 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 CEO of Kansas City-based UMB Healthcare Services, a division of UMB Financial Corp. He may be reached at dennis.triplett@umb.com.[[In-content Ad]]
