What is a Consumer Driven Healthcare Plans or a Defined Contribution Health Plan? You may have seen it in your latest Open Enrollment Handbook or at your renewal in recent years.
Many employers have exhausted plan design changes and can’t afford further health care cost increases. And traditional managed-care plans shield consumers from the true costs of health care. To meet today’s health care demands, health insurers offer several consumer-driven options that encourage members to become better informed and take control of their health care experience.
Defined Contribution Healthcare Plans – Employer Advantages
Employers need a competitive health benefits program to recruit and retain top employees. Defined contribution healthcare plans allow an employer to control its costs on a monthly basis. Additionally, the employer determines which expenses are eligible via the plan document. For expenses that are reimbursed, the employer saves FICA and FUTA taxes and the employees receive the benefit 100% tax-free. Here are three ways employers benefit from the defined contribution:
One Example: The employer covers the cost of an HSA plan for $300 a month. Each employee can elect to enroll into the baseline plan at no cost or pay the difference in premium for a richer option. The employee now has the choice to pick the best fitting plan and the employer is contributing the same $300 regardless of the different plans selected.
- Fixed Liability – With a defined contribution healthcare plan, the employer’s maximum financial exposure is capped at the monthly defined contribution and distributions are only made for approved medical expenses. Additionally, most defined contributions plans have a utilization rate of less than 100%, meaning only a fraction of the total liability will result in an actual expense.
- Plan Design – An employer may wish to provide different benefits for a manager, full-time employee, and part-time employee. With a defined contribution healthcare plan, the employer can customize benefits for an unlimited number of employee classes, and designate which medical expenses the contribution can and cannot be used for. Additionally, the employer can choose to provide the benefit based on many factors: date of hire, full-time status, geography, etc.
- Easy Administration – Defined contribution healthcare plans are extremely flexible, and they allow an employer to provide a quality health benefits program in less than 5 minute per month. Each employer designs its plan with the help of a broker and an administration provider, and can set terms and conditions that meet the businesses’ exact needs. Once the defined contribution plan is set up, employee reimbursement requests (or “claims”) are reviewed and approved by a third party, and tax-free reimbursement is paperless via direct deposit or payroll system, requiring minimal involvement from the employer.
However, it’s not just about the employer. The purpose of offering health benefits is to recruit and retain employees with a competitive benefits package.
Defined Contribution Healthcare Plans – Employee Advantage
Employees win with defined contribution because, rather than having a “one-size-fit-all” group plan that may or may not fit their family’s specific needs, they are able to choose an individual health insurance plan that works best for them, their spouses and their dependents.
- Lower Monthly Premium – Individual health policies in 45 states typically cost less than 1/2 the cost of group coverage, often from the same carrier. With individual policies, premiums cannot increase due to medical conditions.
- More Choice – Each employee may choose the insurance carrier and plan design (covered benefits, deductibles, network, etc.) that best suits his or her needs, and those of any spouses or dependents.
- Portability – With a defined contribution healthcare plan, an employee purchases an individual health insurance plan that is independent of their employment, and is reimbursed for the premium tax-free. Because the individual health plan is purchased independent of employment, the coverage is maintained directly with the insurance company, and the employee retains his or her health insurance when he or she changes jobs, putting them on path to “health insurance for life”.