subject: The State Of Defined Contribution Health Plans [print this page] The present US healthcare system is ruled by "Defined Benefit" plans, but over the next few years, Defined Contribution Health Plans (DCHPs) are likely to become a more preferred retirement plan among the two - for both health insurers and consumers. A defined contribution model is a relatively more viable & sustainable model for employers seeking to provide health insurance for their employees.
Before stepping into DCHPs, let"s revisit the primary differences between Defined Benefits & Defined Contribution plans. Under defined benefits retirement plan, companies identify a set of plans that are offered to employees. In defined contribution plans, instead of selecting benefits, employers set aside a certain amount or percentage of money, as a plan cost-sharing amount. DCHPs grant employees better control over their health insurance and more freedom to choose from the available benefits or plans.
The industry level shift from defined benefit plans to defined contribution plans has been happening at a gradual yet consistent pace. While one of the primary forces behind such a paradigm shift is reduced associated costs with DCHP plans, the Affordable Care Act too, has galvanized many healthcare companies to consider switching to Defined Contribution Health Plans. And the trend is catching up fast across the entire nation.
Towers Watson, a global professional services companies released a report in 2011 that tracked the popularity of retirement plans type among Fortune 100 companies in 2011. Interestingly, 70 of the 100 companies surveyed in 2011, sponsored only Defined Contribution plans. In 1985, only 10 of the Fortune 100 companies provided defined contribution plans to their employees.
Less than 1/3 of all companies surveyed provide Defined Benefit plans to their employees, a significant drop from the 1985 figures, when 90 of the Fortune 100 companies offered Defined Benefit (DB) plans to their employees.
If small businesses chose to retain their DB plans, they may be required to shift to the DCHP models, once the state exchanges come into operation from January 2014, as the employer sponsored coverage available on exchanges would be designed on DCHP models. State exchanges may further lead to increased adoption of DCHP pension plans by employers.
Of course, a lot of this shift would depend on whether switching to Defined Contribution Health Plans would help in containing insurance costs for insurers & carriers. Escalating healthcare costs has been the primary reason for hikes in premium rates which results in making health insurance unaffordable for the uninsured citizens.
For now, most U.S. employers are shifting to DCHPs with some of the select few still offering Defined Benefits plans. While it may take the healthcare industry some more years to fully appreciate the impact of shifting to Defined Contribution Health Plan models, the rapidly growing trend is catching up fast among employers.
