Defined Contribution: The New Prepaid Gift Card

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With healthcare costs continuing to rise, a growing trend among many employers is to opt for a set dollar amount per employee rather than offering a certain set of benefit plans. This allows for greater customization on behalf of the employee as well as reduces the risk for unpredictable expenses for the employer. 

The shift from the defined benefit to the defined contribution model marks an increasing preference for consumer-driven healthcare. A recent article, Time for Defined Contribution Health Benefits, from the Society for Human Resource Management outlines the history behind defined contribution as well as some of the benefits it brings to both employers and their employees. 

Defined contribution first arrived in the early 1980’s when it was used in reference to retirement funds in the form of the 401(k) plan. Because of the rising and unpredictable costs already associated with pension plans, employers embraced this as a way to supplement (or outright replace) traditional benefit pension plans. 

With the passage of the Affordable Care Act (ACA), this same concept of consumer-directed employee benefits has gained momentum in relation to healthcare for many of the same reasons including a lack of predictability coupled with rapidly increasing costs. “Employers want to understand and start to predict what their health benefits costs are likely to be,” said John Hennessy, a senior consultant at the Hay Group in Dallas. “They are thinking that the plans and approaches available in the past aren’t going to fit in the future.”

Often referred to as a prepaid benefits card or flex card, employers designate a set amount of money towards each employee’s healthcare costs. The employee can then take this virtual card and shop off a list of health plans pre-selected by the employer, which can be as simple as the multiple options under a Section 125 cafeteria plan. This represents a new style of thinking where the employer partners with the employee on their benefits rather than a take it or leave it approach. This increases both employee confidence and transparency, which are often lacking in the more traditional benefits model. 

This new twist on an old model has led to the rise of healthcare insurance marketplaces, commonly referred to as “exchanges.” While the public exchanges mandated by the federal government are geared towards individuals looking to shop for coverage outside of their employers, many consulting firms in the private sector have been launching private health exchanges separate from that of the federal government. These exchanges accelerate the shift towards healthcare consumerism by offering an online marketplace where employers can browse through a multitude of different defined contribution plans to offer their employees. 

Many believe these virtual healthcare marketplaces are going to be a “game changer” in the employee benefits space leading to lower costs and increased employee satisfaction. 

Read the full article here

 

 

 

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