As we move into the new era of health insurance under the Affordable Care Act, there is a lot of uncertainty for employers. You’re trying to understand the government’s implementation of the Act, and to a certain extent this requires a crystal ball that you probably don’t have.
Delivery of health insurance benefits is changing, and that means employers need to open their minds to new ways of providing this valuable benefit to employees.
There’s been a fair amount of discussion about employers pushing their participants into the new state or federal marketplaces, but the current available guidance indicates at this point that the marketplaces are not far enough along to be considered viable alternatives by most companies.
However, one approach that more and more employers will likely be considering is the so-called “private exchange” model, in which the employer pays a fixed amount, and the employees use the money to buy or help pay for health insurance that best fits that employee’s needs. It’s similar to the government-run marketplaces, but provided by private employers through private insurance carriers.
The upside for employers is simple – they get to fix their monthly healthcare costs and reduce compliance risk (while continuing to reap tax benefits for providing employer-provided insurance). For employees, there’s some upside as well, because they make their own choices regarding their healthcare, and can pick a plan that best suits their needs. However, this is obviously a double-edged sword. For employees, more choice translates to more responsibility, and that can be challenging.
The health insurance industry started down this path a few years ago with the introduction of “consumer-driven” health plans. But those plan offerings don’t always control costs in a way that is truly beneficial for plan sponsors. A defined contribution model seems to hold more promise for employers.
It’s helpful to look at the adoption of defined benefit plans for retirement. In the mid-80s, 89 of the Fortune 100 offered a defined benefit plan; over the last three decades, just about every company has gotten out of this business, and today, just 13 of the Fortune 100 offer defined benefit pension contributions. The retirement market has completely shifted to the defined contribution model.
Since the new rules require new ways of thinking and of doing business, and since private exchanges are gaining momentum heading into 2014, this option is likely to be part of the solution for many plan sponsors in the months and years ahead.