Employers should understand whether a defined contribution (DC) health benefit arrangement will help them achieve their goals.
In an article from Towers Watson, Randall K. Abbott, leader and senior strategist, Health and Group Benefits, North America, contends four factors have converged to bring the DC approach to the forefront: growth of the private exchange model for the delivery of health benefits; employers’ ongoing concern as health benefit costs continue to rise; the idea of de-risking health benefits; and the 2018 excise tax on high-cost health plans.
With a DC health benefit arrangement, the employer contributes a fixed amount to the cost of employees’ benefits, and the employee is responsible for the difference between what the employer gives him or her and the total health care costs incurred.
For smaller plans, private exchanges are not an option because they do not have the scale to have access to these offerings, according to Bill Heestand, president of The Heestand Company in Portland, Oregon. Most of Heestand’s clients have fewer than 200 employees. Health reimbursement arrangements (HRAs) and flexible spending accounts (FSAs) are often used for a DC health benefits arrangement. The main objective is to control health benefits cost.
Heestand explains to PLANSPONSOR that an employer’s richest health plan offering may have a $1,000 deductible and the leanest may have a $4,000 deductible. The employer may decide that it doesn’t want an employee to have to pay more than a $1,000 deductible, so it designs an HRA plan that covers the difference between $1,000 and $4,000. He says this is a common plan design for smaller employers. Heestand notes that the frequency at which employees reach their deductible in health plans is relatively rare, and that is why the DC health benefit arrangement saves the employer money.
Employers may also decide they are going to give employees a set amount per year to use against premiums. In this way, employers can control their rate of escalation of health costs, explains Cameron Congdon, a senior consultant with Towers Watson in Boston. For example, an employer may decide to give only 5% more to employees in subsequent years. Employers may also decide not to increase the amount they contribute to employee benefit costs, or may decide to only periodically evaluate the subsidy they offer, the Towers Watson article notes.
For larger employers—Towers Watson clients generally have 1,000 employees or more—the connection between the DC health benefit arrangement and private exchanges is new, Congdon tells PLANSPONSOR. One appeal of private exchanges is they offer more choice in plan designs and costs so employees can optimize their benefits for their particular situations, he says. By offering a set amount toward premium costs, employers can encourage employees to choose lower cost plans, Heestand adds.
Congdon says some employers think a DC health arrangement will help them avoid being subject to the excise tax on high-cost health plans starting in 2018 dictated by the Patient Protection and Affordable Care Act (ACA); however, this will only work if they succeed in getting employees to choose low-cost plans. Both the employer and employee shares of the premium cost are included in the excise tax calculation. “If the employer gives employees $10,000 and everyone chooses a $15,000 plan, $15,000 is considered for the excise tax, but if employees decide they can’t handle more cost and they buy down, less costs are subject to the excise tax calculation,” he explains. The employer may have the objective of encouraging employees to buy down, but there’s no guarantee they will do this, he warns.
According to the Towers Watson article, a DC arrangement does not address the idea of de-risking health benefits.While the employer may cap its premium subsidy for a given year, a self-funded plan sponsor will absorb unanticipated risk if claims and expenses exceed expectations by year-end. Some self-funded employers have considered returning to an insured plan to transfer risk to an insurance carrier, but this approach results in higher costs due to health care reform levies on insured plans and the added costs associated with switching from a more efficient self-funded plan to an insured approach, including insurer risk charges, premium taxes, state mandates and the like. See “Self-Funding Health Benefits Another Cost-Saving Strategy.”
According to Congdon, to employers, health benefit risk may be the volatility of cost increases each year; DC arrangements do de-risk the rate of escalation costs. “But costs go up by whatever they do, so employers are really just shifting risk to employees,” he says.