The Trend
Work force mobility helped build the case for private sector pensions to shift investments risk from the corporate sector to households; healthcare is experiencing a similar shift today. While finance and accounting reform set the climate for the change with pensions from defined benefits to defined contributions, healthcare reform is setting a similar stage opening opportunities for companies to transfer risk to individuals while shaving benefits. However, defined benefits won’t lose to a pure breed of defined contribution approaches where employers give workers a handful of cash to purchase health insurance totally on their own. The future of healthcare defined contributions will be a hybrid approach. Ezekiel Emanuel, in his recent book ‘Reinventing American Health Care’ suggested that “the proportion of private-sector-workers with employer-sponsored insurance by January 1, 2025 will be less than 20% (p.296).” This trend isn’t about to start, it has already started.
Forecasts
Employees won’t be given straight cash, but rather offered a hybrid model where they can choose plans from a company selected private health insurance marketplace. Private exchanges do provide reasonable choices at competitive premiums. On the surface it sounds pretty good. Employees are empowered with more choice and employees pick plans they feel have the most value. But the conversation doesn’t stop there. As we saw with defined benefit (DB) pension plans, mobile workers didn’t prefer traditional benefits, largely because they leverage ‘backloaded’ formulas that don’t easily move between employers and favored long-tenured employees. Turning our focus back to healthcare. Are employees choosing plans that are the best value including plan benefits and network or simply the cheapest? What are the implications does this shift have on individual and household taxes?
The Drive Behind Adoption
What trend will we experience in healthcare regarding defined contributions? First defined contributions need a marketplace for workers to select health insurance in order to be successful. This helps crack open the private exchange market. Second employer benefits of expense management (predictable employee health benefit costs), administration time savings (setup simplicity and decrease necessity of employer resources), and enhanced employee choice (selecting plans and preferred networks) are going to lean employers toward private health exchanges. Third in the technology-rich environment of today this trend is a logical extension of the consumer-directed health care plans such as a health savings accounts (HSA) or flexible spending accounts (FSA).
My Prediction
Employers will have some difficult choices. Large private exchanges like Aon Hewitt, Mercer, Towers Watson, Walgreens, and Wal-Mart are each very distinctive in the type of markets they target (individual, small group, large group, retiree) and their strategies around price, promotion, plan offerings, and distribution channels all vary greatly. Private exchanges that have huge employee numbers will awaken and influence further market consolidation. Defined contribution plans will be mainstream within two-to-three years, with the employees watching the shift from the sideline.
References
ASME. (2013). Top 5 Medical Technology Innovations (Online Image). Retrieved September 10, 2015, from https://www.asme.org/engineering-topics/articles/bioengineering/top-5-medical-technology-innovations