Pick your plan: the defined contribution model of health insurance

As employers continue to implement the Affordable Care Act, some are choosing a different model of providing employee health insurance: defined contributions.

While employers have historically offered group health plans, the new online marketplace that’s central to Obamacare is prompting some businesses to rethink that model. Some are moving toward giving employees a chunk of money—a “defined contribution”—and allowing those employees to then shop independently for health coverage.

There are a couple different means of arranging a defined contribution model, including simply paying out a lump sum and setting up a private health insurance exchange for the company.

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Though it won’t be advantageous for every employer to switch to defined contributions, in lieu of traditional group health insurance, some have found that the new model has certain cost and employee satisfaction benefits.

Impetus

Obamacare hasn’t done away with employer-sponsored health plans, so it’s reasonable to wonder why employers are eschewing those voluntarily.

One reason is the ACA health care mandate: Employers with over 50 employees are now required to offer health insurance if they don’t want to pay a $2000 per worker penalty. For those businesses that previously lacked coverage, there’s no attachment to a group health plan, so many are considering defined contributions as one means of meeting the mandate.

On the other hand, many employers that already offered health insurance have a clear reason for switching to defined contributions: 59 percent of companies surveyed by The Prudential Insurance Companies of America cited cost savings as a major factor in their decision.

The reasoning behind this is that many employer plans actually offer more health coverage than employees need. By allowing employees a wider choice between plans, as those employees shop in an online marketplace, employers expect that many will choose less comprehensive and costly plans.

Finally, workers’ desire for autonomy and choice is a key factor in the rise of defined contribution models. According to Prudential’s survey, 40 percent of employers felt that it was important to increase workers’ ability to allocate their benefit dollars as they saw fit.