Defined Contribution Health Plans: Shifting tide in DCHP trends

In the traditional defined-benefits model, employers offer a standard set of health plans and coverage to their employees and take up the responsibility for paying for the coverage and managing risks. This model has become a source of drain on company resources and has resulted in consistent rise in healthcare costs for companies. One side effect of this model is that due to high insurance management costs, many employers have ceased to offer health coverage to their employees.

Sensitized about growing healthcare costs and employees' health needs, some employers are contemplating shifting their health coverage model from defined benefits to defined contribution model. So, instead of designing a model with pre-defined benefits, employers set aside a specific amount for each employee, which can be used to purchase insurance by the employee. The defined-contribution model allows companies and employees added flexibility and access to choices at lower healthcare costs. Employers are thus able to cap their healthcare costs and increase their control over their firm's healthcare expenses.

Healthcare reforms introduced by the Affordable Care Act of 2010 further galvanized employers to shift to defined contribution models. Healthcare reforms have particularly targeted the escalating healthcare expenses and have introduced numerous measures to contain these rising costs especially for individuals and small businesses that are unable to afford the high rate of premiums. Midsized employers may also decide to avail of the public health insurance exchanges for reducing their net costs to company by discontinuing employee-sponsored coverage and driving their employees to pick insurance off the public health exchanges.

In the face of such market trends, commercial payers are likely to adopt alternatives such as  private exchanges and defined contribution models in answer to public health insurance exchanges. Through private exchanges, payers are aiming to retain their strong foothold  in the group insurance markets.

There is a lot of curiosity and interest among the employer and group markets on private health exchanges; however for the success of private exchanges, insurers would need to address some key concerns. Most employers are unclear on the differences between defined-benefits and defined contribution models and are concerned about the administrative rearrangements and tax implications of shifting to a defined contribution model. Moreover, health insurance still forms a crucial section of employee benefit package and employers worry that shifting to defined contribution model may impact their talent acquisition results. The uncertainty revolving around the public health exchanges and the unfamiliarity with private exchanges' operations etc. is a common concern across group markets.

If the private exchanges manage to acknowledge and address these key concerns of group markets, private exchanges may be able to maintain their strong position in the employer markets irrespective of whether the public exchanges roll out or not. With two years lead in exchange implementation vis-a-vis state exchanges, private health insurance exchanges have an open ground to experiment and position themselves as market leaders in group insurance markets.