At times, it seems like the future of U.S. health insurance teeters on the not-yet-formed shoulders of public health insurance exchanges – either those run by the states or the federal government.
Health care reform’s Patient Protection and Affordable Care Act (PPACA) has provisions for state based insurance exchanges. If the states drop the ball, there are plans for the federal government to step in with its own version.
Some industry experts view the situation as an opportunity for scoring big on private insurance exchanges.
A recent Issue Brief from the Employee Benefit Research Institute (EBRI) explains why.
A Dash of Defined Contribution
EBRI is feeling dejà vu with the combination of defined contribution and private insurance exchanges.
You probably know what defined contribution is, although it might be within the context of retirement plans instead of health plans.
- Defined contribution retirement plans are savings programs in which your employer contributes a certain amount and invests the funds
- There can be employee contributions taken from your paycheck
- Examples include 401(k) plans and Individual Retirement Accounts (IRAs)
- There is no guaranteed payment amount – the benefit depends on the time you access the account
There is also a plan known as a defined benefit plan. It’s what many call the traditional (although it’s not so traditional anymore) pension plan. The benefit is a fixed amount. I happen to be old enough that I actually have one of those defined benefit plans.
What does this have to do with health plans?
EBRI takes you on a history lesson. That’s where the dejà vu comes in.
Defined Contribution Health Plans
In the early 2000s, employers explored the idea of defined contribution health plans.
- Defined contribution (DC) health plans were an attempt to encourage employees to make their own health care choices
- DC health plans had different designs
For some employers, it was ~
Here’s our contribution for health benefits – you decide what health plan you are going to get with the funds.
Other employers viewed DC health plans as consumer-driven competition among health plans. Employers contributed a fixed amount and employees chose coverage from a private insurance exchange or paid more out of pocket for more costly plans.
Ah, there’s the connection.
As EBRI explains, DC health plans did not really take off.
- At the time, the premiums in the individual market (where you buy insurance yourself) cost more than group plans through an employer
- Employers used health benefits as an incentive for recruiting and retention
- Employers were making the connection between health and productivity
Fast forward to today. How has it changed?
Defined Contribution Redefined
Employers like the idea of a fixed contribution, but if consumer-driven health plans showed them anything, it’s that employees still need support in making good health care choices.
Health reform’s provisions for insurance exchanges allow workers who qualify to receive subsidies for purchasing health insurance through the exchanges.
In 2014, when the PPACA’s insurance exchanges go into effect, only small employers and individuals purchasing their own insurance will have access.
Private Insurance Exchanges
EBRI reports on strategy that combines defined contribution health plans with private insurance exchanges.
While the states and the government figure out how the exchanges work, some industry experts are looking at private insurance exchanges as an alternative.
This is how it works.
- The employer contribute a fixed amount (defined contribution) for employees to purchase insurance
- The employer offers a private exchange with a menu of plans
- Employees use the funds and pick their own plan
EBRI refers to the exchanges as “managed competition.” Sponsors would act as purchasing agents to negotiate with insurers for an array of plans available to the exchange.
The thought is the competition would be healthy (pardon the pun) for everyone.
With PPACA, large employers that do not offer health benefits are subject to a penalty. Those that use a defined contribution strategy for employees to purchase insurance in the public exchange are still subject to a penalty.
The good news, according to EBRI, with a private exchange, large employers would not be penalized as the private exchange is considered a health plan offering.
Will it Work?
Ever since consumer-directed plans were introduced, the hope has been to educate employees on the true cost of health care.
- Prescriptions cost more than a $10 copay
- The portion you pay for coverage is minimal when compared to your employer’s portion
If forced to shop for coverage in an exchange, will employees become better consumers? Or will they go with the cheapest plan and play roulette with their health?
And then who pays for the care that’s not covered under their plan?
Are private health insurance exchanges the answer? I’m not sure I even understand the question any more.
Notice of Disclaimer –Cathy Miller is not an attorney or health care provider and cannot provide legal or health care advice. The information provided is for your general background only, and is not intended to constitute legal or health care advice as to your specific circumstances. We recommend you review legislation with legal counsel and visit your physician for health care issues.