by Ron Goldstein, CLU
Healthcare reform is accelerating a seismic shift in our industry, one that has profound implications for insurance brokers and others who serve as expert health benefit plan navigators for their clients.
This radical transformation is the move away from a defined benefit to a defined contribution model. While the descriptions differ by just a single word, the essential meanings behind each couldn’t be more dissimilar. The pendulum swing from one to the other represents a massive recalibration that is redefining the way employers — particularly small businesses with 50 or fewer workers — are approaching their health plans. It’s a fundamental reshaping of our industry that’s happening right before our eyes, one that poses both challenges and compelling opportunities.
Thanks, in large part, to the Affordable Care Act (ACA), “defined contribution” has emerged as one of the hottest buzzwords in the health benefits industry. But defined contribution isn’t new. It’s actually been around for years in the retirement realm. Spurred by the Revenue Act of 1978, many American companies began eliminating traditional pensions (defined benefit plans) in favor of the now commonplace 401(k) and similar retirement savings programs we see today. This change occurred, in large part, because companies could not keep up with the ever-increasing expenses to sustain defined benefit plans.
Defined contribution is no stranger to our healthcare industry, either. The model has been used successfully for years by private health insurance exchanges. However, the momentum shaping the current transition is very new. Today in the U.S., employersponsored health insurance remains the most common form of coverage. But that is changing quickly if the latest industry data is any indicator. For example, 47% of employers have already moved or begun moving to a defined contribution plan, and more than 62% expect to do so within the next few years, according to an April 2014 study by Prudential Insurance.
Like the titanic shift from company- based pensions to 401(k) that began several decades ago, the age of defined healthcare contribution appears to be at hand.
What is Defined Contribution, and Why Now?
Generally speaking, defined contribution enables employers to offer their workers a selection of health benefits while controlling costs. If you’re not already familiar with the model, here’s how it works. In defined contribution, an employer provides a fixed dollar amount or percentage to each employee to spend on healthcare. Workers then use this contribution and apply it to the health plan and benefits they like best from the options available to them. If employees wish to upgrade their plan or add other benefits like life insurance that go beyond the employer contribution, they simply pay the difference to do so.
The primary advantages of this model are twofold. First, it allows employers to stabilize or even reduce healthcare expenses by establishing a set cost that can be built into an annual budget. At the same time, employees get the advantage of more choices and the opportunity to shop for coverage that works best for them. This structure also alleviates surprises on both sides – each knows exactly what they’re going to pay each month.
So why is the defined contribution concept gaining so much traction now? There are continuing economic challenges around ever-rising healthcare costs, for one. The increasing visibility and technological efficacy of online marketplaces is another.
Perhaps the biggest catalyst, though, is the implementation of ACA. Along with new requirements and mandates, the health reform law has put a brighter-than-ever spotlight on two things. First is the creation of government- run exchanges, which have been grabbing media headlines for months (though often for the wrong reasons).
A second is the national elevation of healthcare exchanges as insurance plan marketplaces where people can shop for coverage that works for their needs and pocketbooks. While the notion has certainly been around for years beginning with private exchanges, healthcare reform has generated massive exposure that has brought the concept to the public fore like never before.
As a result of these and other factors, businesses are taking a hard look at their health benefit models to determine how to adapt and compete in today’s dramatically changed health care environment. This is especially true for small companies in the U.S. with 50 or fewer people, a business segment that employs more than 55% of all workers nationwide based on U.S. Census Bureau numbers.
Recruiting and retaining good people is the lifeblood of every company, small businesses included, and health benefit programs are often a crucial part of a compensation package. Yet the costs for traditional employer-sponsored plans continue to escalate exponentially, and many small businesses simply can’t afford to keep up, in turn putting pressure on their abilities to attract and keep the best workers.
Defined contribution offers businesses an attractive, affordable alternative. Along with providing much more cost certainty, this type of plan offers employees more choices and options at group coverage pricing that’s often much more competitive (and benefits rich) than what can be purchased individually.
What Does the Move to Defined Contribution Mean for Brokers?
For brokers and other health insurance plan navigators, the industry’s rapid movement away from defined benefit and to defined contribution platforms may be a bit unsettling to some. But the reality is that traditional company-backed plans are being swept away by a wave of new offerings driven by ACA and marketplace conditions. Added to this is the rapid proliferation of online marketplaces and services which might seem to threaten the conventional role of brokers.
The good news is that this couldn’t be further from the truth. With the tide shifting quickly toward defined contribution healthcare models, brokers who are at the industry forefront are well-poised for success today and in the future. Let’s look at a few of the reasons why.
• For decades in this country brokers have played an important role in helping businesses find affordable health coverage for their workers and dependents. For small employers, in particular, brokers provide valuable services that are otherwise unaffordable, not easily handled in-house, or both. These include obtaining prices for coverage, explaining benefits to employees, problem solving for owners or management and much more.
• With most traditional defined employee benefits plans, though, brokers can do relatively little to help businesses that are unable to afford group health insurance. Companies can buy in at the minimum level or they can’t. Defined contribution plans change this equation. Along with better controlling their monthly cost exposure, businesses can buy into a broader range of plan options, and they can do so while still capturing the tax advantages associated with traditional employersponsored health insurance programs.
• Additionally, the emergence of defined contribution plans actually elevates a broker’s role and significance. In essence, health benefit plan brokers are evolving to function in many ways like a financial services advisor does for retirement plans. They not only serve as management consultants, but they are also invaluable as frontline experts who can roll up their sleeves and help employees select the right plan and the right price from an expanded variety of available choices.
• Another advantage is the opportunity for increasing voluntary healthcare sales. That’s because defined contribution plans can be used to reimburse voluntary products such as dental, vision and chiropractic. This can translate into big business for brokers. For 2013, annual voluntary health product sales were up 13% to $2.6 billion, according to national data from Eastbridge Consulting Group’s annual U.S. Worksite/Voluntary Sales Report. This is an attractive growth trend likely to continue in the coming years, especially with the emergence of defined contribution as a dominant model.
A Coming of Age
With a hardy push from Healthcare Reform, America now sits on the precipice of a massive transition to defined contribution. The full implementation of ACA expected in 2015 will only add further fuel to this rapid pace of change. As health insurance experts for business clients, brokers and agents can and should be leading players in helping employers and employees navigate through this major benefits model shift. For those working with small group clients, connecting and partnering with defined contribution providers is a key step to stay ahead of the game. The age of defined contribution may have arrived, but one thing remains the same. Companies will continue to look to their brokers as their most trusted health insurance plan advisors. q
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Ron Goldstein, CLU, created and manages America’s longest-standing, state-approved exchange, California- Choice®. He also serves as president and CEO of Orange, Calif.-based CHOICE Administrators, which provides health insurance options and provider access to small businesses and their employees. For additional information, visit www.calchoice.com.