Selling defined contribution health plans: benefit-cutting vouchers in “employee choice” clothes

Original Reporting | By Mike AlbertiMeade Klingensmith |

A profound lack of control

Uwe Reinhardt, a professor of economics and public affairs at Princeton University, scoffs at employer claims that workers were being given “control.” He said that the marketing rhetoric claiming that employees will gain choice and empowerment is “disingenuous.”

“When they say ‘choice’ what they mean is that, yes, you have greater flexibility and more plan options, but fewer and fewer of them are going to be affordable to you,” said Michael Gusmano of New York Medical College. “What they’re really doing is restricting choice.”

“Corporations can spend billions of dollars on marketing and benefit consultants, so of course they wouldn’t say that this is an age of austerity and we’re going to ram this down your throat,” he said. “You find some mellow way to say it, in this case ‘choice.’”

Gusmano of New York Medical College found the advertising ironic. “When they say ‘choice’ what they mean is that, yes, you have greater flexibility and more plan options, but fewer and fewer of them are going to be affordable to you,” he said. “What they’re really doing is restricting choice.”

Indeed, even Aon Hewitt’s own promotional documents reveal that providing choice is not the primary motivation behind switching to a defined contribution model.

“Subsidies may be set to increase at a compensation rate of trend (2% or 3%) versus a traditional health care rate trend (7% or 10%),” says Aon Hewitt’s brief on “corporate exchanges.”

Nevertheless, DeFeo, the spokesperson for Darden, insisted that the company was planning to increase its contribution at the same rate at which health insurance premiums rise. That would mean the company was not planning to leverage the principle advantage that Aon Hewitt, the exhange manager it has selected, says a defined contribution model offers: “jumping off the health care trend curve [to] create significant cost savings and increased shareholder value.” Sears has not promised to increase its contribution as the same rate as the rise in health insurance premiums.

401(k)s – A Valid Comparison? 

The strongest advocates of defined contribution health care benefits for active employees often compare it to the shift from defined benefit pensions to defined contribution retirement plans – most notably the rise of the 401(k). Over the last thirty years, 401(k) retirement savings accounts – plans in which employees voluntarily contribute pre-tax money from their paycheck into a fund and, depending on the program, employers match a portion of the employee’s contribution – have overtaken defined benefit pensions as the primary instrument for retirement savings in the United States. In a 2011 article for Benefits Quarterly, Ken Sperling, Aon Hewitt’s national health exchange strategy leader and a co-author wrote: “Certainly the movement toward [defined contribution] retirement plans has resulted in more predictable cost for employers and more choice and control by employees. Can’t this be applied to health care?”

Were 401(k)s the win-win solution that Shapira and Sperling suggest? In 1983, 62 percent of workers were covered solely by a defined benefit pension while 12 percent were covered solely by a 401(k). By 2010, these numbers had reversed. 19 percent of workers only had defined benefit pensions and 68 percent only had 401(k)s. This shift corresponds with a marked decline in employee confidence that they will have enough money to live comfortably through their retirement years. In 2012, only 52 percent of Americans expressed such confidence, compared with 73 percent in 1993.

Americans have good reason to be worried. In 2010, 75 percent of Americans had less than $30,000 saved for retirement. Experts believe that in order to maintain living standards in retirement, people require 85 percent of their working income every year. Assuming that one lives 20 years after retirement, a retirement fund of $30,000 would only be enough to maintain the living standards of a household with a pre-retirement income of about $1,800. Additionally, according to data from the Center for Retirement Research at Boston College, households whose heads have a defined benefit pension are in a far more secure position going into retirement than those with only a 401(k).

Labor and consumer advocates agree that the comparison between 401(k)s and defined benefit health care is valid in ways that should concern American workers. Mark Dudzic, the national coordinator for the Labor Campaign for Single Payer, told Remapping Debate that in both cases “it’s a transfer of risk from the employer to the employee, and it allows much more flexibility for the employer and a lot less security for the employee.”

Jacob Hacker, a professor of political science at Yale University, agreed, and added that “employers have been trying to figure out how to make a similar switch in health care for years.”

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