Economist Peter Orszag, the former Director of the Office of Management and Budget, writes in Bloomberg Businessweek that, over the next decade, defined contribution health plans will gradually take over the health insurance market. On Fox Business News, they recently were called, “The ‘Next Big Thing’ in Health Benefits.”
Yet in our recent online survey of benefit decision makers at Michigan companies, more than 40% of respondents whose companies had defined benefit plans were not familiar with how defined contribution plans worked.
Since these plans are just beginning to gain traction, many employers are still unsure about some basic concepts and how the plans might benefit their businesses. Here’s the first of our two-part primer on this important topic to help you get up to speed.
What is a defined contribution health plan?
Under a defined contribution plan, an employer provides employees with a fixed dollar amount for them to then purchase individual or group-sponsored health coverage to fit the health needs and budget of the employee. Depending on the option an employer chooses, employees can do this on open healthcare exchanges or from a set of employer-defined options on a private health insurance exchange. Some employers also provide information, tools and guidance to help employees make their coverage purchase decisions.
This sounds a lot like 401 (k)-type plans
Yes, the two are quite similar in the sense is that the employer’s role is to contribute a defined amount of funds, whether to an employee’s retirement or healthcare plan. According to some experts, defined contribution plans could easily follow in the footsteps of 401(k)s, which supplanted private pensions and changed retirement planning almost 25 years ago. As the Employee Benefits Research Institute (EBRI) says in its new report, they could be “Déjà vu All Over Again.”
Why would our company want this kind of plan?
For employers, the major benefit is cost predictability and control. For employees, it’s increased choice of health insurance plans, personalization of benefits and the ability to take control over their health benefit decisions. Companies also appreciate being able to reduce their administrative burden with these plans. With GlidePath, for example, you deposit pre-tax dollars for each employee into an account, select the benefit design options you want to offer, then let GlidePath take care of the rest.
Our next blog post will examine why defined contribution plans are now getting so much attention and how to determine whether they are right for your company.
Rising benefit costs is a challenge for all companies. GlidePath, a new solution from Blue Cross Blue Shield of Michigan and Blue Care Network, offers your mid-size company an innovative way to manage spending and risk. It can transform the way you finance your company’s health insurance coverage. With GlidePath’s defined-contribution solution, you can determine your company’s health benefit budget and simplify the administrative work that goes along with offering health benefits.