Following the conversion of most employment-based retirement plans from defined benefit to defined contribution, employers began to examine whether the same approach might work for health care coverage. Not much progress was made initially, but in the last two years there has been a great upsurge in interest in the concept, which is facilitated by the parallel development of the concept of a private health exchange, limited to a single or small group of employers, and enhanced by tools that help employees purchase and understand their coverage. A report from the Employee Benefit Research Institute looks at these trends and issues associated with them. (EBRI Report) The authors first note that a decade ago there was quite a stir about defined contribution for health plans but it never went anywhere. This time may be different because the cost pressures on employers are even greater, there is a more viable individual market (and employers could strike deals with insurers about the kind of individual plans they will offer) and the private exchange notion offers better tools for helping employees make choices.
The advantage to employers from a defined contribution is obvious–it creates a known, capped cost; one that can be further controlled by limiting growth from year-to-year in the contributed amount to the growth of inflation or some marker other than general health inflation. Employees may be benefited, either by an exchange that creates competition among insurers or by being able to choose plans that more appropriately fit their life stage and health needs. A number of vendors offer tools that facilitate wise employee choices and help them manage their ongoing health care utilization and spending. In theory, employees having a capped amount to spend without dipping into their own pockets should force greater health plan competition and lower prices. It might facilitate the use of more limited, and less expensive networks, and even force providers to become more reasonable in their pricing. Many design and operational issues, however, will have to be dealt with by employers, particularly if they want to avoid significant employee dissatisfaction, so defined contribution may move more slowly than people currently anticipate.