While there is a lot of political commotion over the Affordable Care Act (ACA), the reality is that it is almost certainly here to stay and human resources professionals and benefits managers must move forward accordingly.
Of course, exactly how things will unfold remains very much a mystery. The ACA places more responsibility on employees, but how will they respond? And, following that, how will employers equip employees to make smart decisions? This is a time of great transition, and it’s just beginning.
Fortunately, for private exchanges there is a model for a major transition from a defined benefit to a defined contribution. The shift to defined contribution retirement benefits began almost 35 years ago and today has become the norm for both employers and for employees.
Undeniably, the employer’s motive in both circumstances was (and is) long-term cost containment by maintaining a consistent and predictable benefit spend. The upshot is that employees have more freedom of choice. However, that isn’t necessarily a good thing if they aren’t given guidance on how best to exercise that freedom. They need to be taught how to use choice to their greatest benefit.
Let’s look at a brief history of the transition for retirement plans. With defined benefit pension plans, the employer makes the decision, similar to what we’re used to with health benefits. All employees have to do is decide whether or not to participate, and if they do, it’s by the employer’s rules. There isn’t any opportunity for customizing the plan to their particular needs or desires.
And then came the Revenue Act of 1978 that established 401(k)’s, under which employees are not taxed on the portion of income they elect to receive as deferred compensation rather than as direct cash payments. The law establishing defined contribution retirement plans went into effect in 1980 and, over time, led to the wide growth of mutual funds. One of the upsides for employees was cost transparency. Previously, brokers were paid on commission. Today, they are typically paid by flat fee.
This is a model that has worked for both employers and employees, and they are comfortable with it. It is very likely where we’re headed with health insurance plans.
Importantly, the transition to defined contribution retirement plans was not necessarily easy and did not happen overnight. It took at least 10 years before there was wide adoption. This graph (from the Employee Benefit Research Institute) demonstrates that it took until 1989 before there was equilibrium between defined contribution and defined benefit plan.
As the public health insurance marketplaces and private exchanges become more mainstream, healthcare can be expected to mimic the history of retirement benefits. Right now, we’re well to the left of the defined benefit and defined contribution intersection as demonstrated in the above graph.
Here’s why I expect this to follow a similar path. Today, with traditional healthcare benefits, the employee has two or three options. The decisions on what those options are made by the employer with little or no employee input. When you transition to a defined contribution model, the employee will potentially have 10 or more options. That sounds great, but it will require education and decision support tools. With a defined contribution model, employees are now going to want to do a lot more research on their own; or, more likely, they will have to do more research in order to make smart decisions. Educating oneself on this admittedly complex field will take time, and it’s reasonable to expect employees to proceed slowly. It will also require smart technology-driven support tools in order for an employee to make an intelligent decision for his or her situation.
This migration will take time, but it is inevitable. Just like it was with retirement benefits.
- Five things employees need to know now about PPACA
- Defining health exchanges: public vs. private
- The rise of private exchanges
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