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

Original Reporting | By Mike AlbertiMeade Klingensmith |

Other examples

Aon Hewitt’s exchange is not the only one currently in operation, and other benefit firms — including Towers Watson, Aon Hewitt’s main competitor — are preparing to enter the market in the coming months. Some smaller exchanges already exist, such as one run by Bloom Health Corp., which caters to smaller employers and was recently purchased by the insurance giants Wellpoint, BlueCross BlueShield of Michigan, and the Health Care Services Corporation.

“The reality is that health care, retirement, all of the fundamental sources of security are shifting from larger organizations like employers and the government onto individuals.” — Jacob Hacker, Yale University

In its promotional materials, Bloom Health profiles one of its clients — the Orion Corporation of Minnesota — which switched to a defined contribution strategy in May, 2010. According to the white-paper, Orion did not increase its contribution from 2011 to 2012, “in order to control spend[ing], and Bloom Health’s structure will allow employees to make individual adjustments or changes. Moving forward, Orion will evaluate when and where it needs to make changes to its contribution.”

Another exchange, run by a company called Liazon, has been catering to small businesses for five years. Liazon has labeled its exchange “Bright Choices,” but in an interview with Remapping Debate, the company’s co-founder and chief strategy officer, Alan Cohen, agreed that the primary motivation for companies to switch to a defined contribution model is to cut costs and said that many of the company’s clients have increased their contribution at a rate that is slower than the increase in the cost of health insurance over time.

“Their employees are finding plans that are less expensive,” he said, choosing, for example, plans with higher deductibles and lower monthly premiums.

Mike Thompson, a principal in the human resource practice at the benefits consulting giant PriceWaterhouseCoopers, said that the key part of the defined contribution model is that “employees are going to be willing to accept things that maybe they weren’t willing to accept before,” including “narrow networks and higher deductibles.”

When asked to explain how the shift could be billed as a good thing for employees, Thompson said, “Of course employees would prefer that nothing changes, but that’s not an option.”

“If the choice is this or dropping coverage altogether, I think this is the option they’ll prefer,” he said.


What’s next?

According to Jacob Hacker, a professor of political science at Yale University and an expert on the American health care system, if the defined contribution health insurance model were to catch on, it would fit into a larger, historical context.

Déjà vu?

This will not be the first time that a major corporation has openly considered a shift to a defined contribution model of providing health insurance benefits. On December 4, 1999, The Los Angeles Times published an article in which management-level employees of Xerox admitted that the company was planning a move to defined contribution in as a little as five years. Xerox would have given workers $5,000 to $6,000 each year with which they could buy plans in the individual insurance market, according to the article.

Two days later, Xerox employees flooded the company’s benefits department with angry calls about the switch. A company spokeswoman later backpedalled, saying the planned shift was only a “theoretical discussion” and refusing further interviews on the subject because the company “just want[ed] it to go away.” Ultimately, Xerox kept its defined benefit health care plan in place.

“The fundamental thing to recognize is that this is part and parcel of the more general risk shift,” Hacker said. “The reality is that health care, retirement, all of the fundamental sources of security are shifting from larger organizations like employers and the government onto individuals.”

Hacker said that employers have been trying to find ways to shift the cost of providing health insurance for a long time. Indeed, the defined contribution has even been tried before, though employee backlash made it infeasible (see sidebar titled “Déjà vu?”).

If Sears and Darden succeed where others have failed, it could spark a trend that carries over to other companies. “Any time there’s a move like this among market leaders, the potential for a sea change is there,” said Thompson of PriceWaterhouseCoopers.

According to Reinhardt, if that happens, and large numbers of workers are faced with ever-growing health care costs, it could “naturally unravel” the system of health insurance benefits that American workers have been used to for decades.


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