Defined Contribution Health Plans – A Growing Market Trend

The overhaul of the U.S. healthcare system has been long overdue. Despite its slow pace, the U.S. healthcare industry is gradually adopting new measures to temper down rapidly escalating healthcare costs, a common concern for individuals, employers, insurers & government. The Affordable Care Act too had been implemented to make health insurance affordable for all and put a check on the rapidly increasing healthcare costs.

The Defined Contribution plans are one such cost-cutting model that can help both employers & insurers reduce their overall health insurance costs. Defined Contribution plans also grant better access and control to employees on their health insurance as it gives them the flexibility to choose health services & wellness programs based on their health profile. Although DC plans give employees more choice & flexibility in plan design, the defined contribution plans are often sensitive to market risks such as inflation.

Employers too benefit from defined contribution model, as they no longer need to identify, select & build benefit portfolios for their employees. Under this model, all employers need to do is to set aside a sum of money or define a percentage of the net costs that they would contribute towards an employee’s health insurance package.

The web-based state health insurance exchanges that are set to launch on January 1, 2014 are one of the primary drivers behind many employers switching to defined contribution models. Small employers offering health insurance to their employees would become eligible for small business tax credits if they purchase insurance from the public exchanges. As DCHPs are the more popular plans that are to be available on the exchanges, small business stand to benefit from offering DCHPs to their employees.

Many U.S. private insurers that operate in multiple U.S. states are planning to launch their own web-based health exchanges. Designed on the same lines as public health insurance exchanges, private exchanges would primarily cater to health insurance needs of groups & employers. Demands of employees and willingness of increasing number of employers to offer defined contribution plans, tax policies, reform regulations etc., all such factors have contributed in their own way to growing popularity of DCHPs in individual markets. Owing to the widespread popularity & associated benefits of the defined contribution plans, insurers are likely to offer wider choices in DCHP models on private exchanges as well than gradually disappearing defined benefits models.

There are some employers that offer both defined benefits & defined contribution plans to their employees but most have discontinued their defined benefits models and have completely switched to defined contribution model. The trend is gaining ground across the entire healthcare arena and is expected to retain its stronghold at least for the next few years.