3 Studies on Defined Contribution Plans

For many employers, traditional group health benefits and their costs are unsustainable. Why? Because, since 1999, group health benefits costs have risen at a rate of 4 times wages (see chart below). As a result, many employers are now considering a switch to defined contribution health plans. Here are 3 studies that forecast the mass adoption of defined contribution plans in the coming years.

#1 - Mercer Study on Defined Contribution Plans

Mercer surveyed more than 2,800 employers for an annual National Survey of Employer-Sponsored Health Plans.  According to the survey:

1. 45% were either using or are considering a defined contribution approach.

2. 20% of companies with 10-499 employees plan to cancel their health plans in 2014.

3. 6% of large employers (companies with 500+ employees) plan to cancel their health plans in 2014.

Some experts argue that it is likely that many small employers (companies with less than 50 employees) will cancel traditional health plans in favor of defined contribution in 2014 because small employers are not subject to a penalty.

Click here to read the full survey release.

#2 - J.D. Power and Associates Study on Defined Contribution Plans

The 2012 Employer Health Plan Study by J.D. Power and Associates indicates that nearly half of employers "definitely will" or "probably will" switch to defined contribution health plans in 2013. The study measures six key factors that affect employer satisfaction with health insurance carriers:

1. employee plan service experience; 

2. account servicing; 

3. program offerings; 

4. benefit design; 

5. problem resolution; and 

6. cost. 

The study found that:

• 47 percent of employers say they "definitely will" or "probably will" switch to a defined contribution model, allowing employees to select the coverage that best fits their needs, while also potentially saving the employer costs.

• 13 percent of fully insured employers and 14 percent of self-funded employers say they "definitely will not" or "probably will not" continue to sponsor employee coverage at all.

Click here to read the full survey release.

#3 - EBRI Study on Defined Contribution Plans

A recent study by the Employee Benefit Research Institute (EBRI) indicates that employers plan to address rising healthcare costs with a defined contribution approach.

The study examined issues related to health insurance exchanges, possible structures of an exchange, funding, as well as the pros, cons, and uncertainties to employers of adopting them. According to the press release, here are some take-aways:

• The combination of insurance market reforms and the embodiment of the exchange structure has brought a renewed focus on limiting employer’s health care cost exposure.

• The key provisions of PPACA influencing these considerations are the number of insurance market reforms such as guaranteed issue, modified community rating, premium and cost sharing subsidies, and increased choice of health plan.

• In the past, employers never moved in the direction of giving workers a defined or fixed contribution to purchase health insurance for a number of reasons: they were hesitant to drop group coverage in favor of offering individual policies, and they were concerned that many employees would not be able to secure coverage in the individual market.

• Employer issues addressed with an exchange/fixed contribution approach include cost certainty, total compensation transparency, uniformity of benefits in multi-state environments, COBRA costs, the looming excise tax on high cost coverage (the so-called “Cadillac tax”) under PPACA, the potential for reduced administrative costs, and higher employee satisfaction.

Click here to read the full survey release. 

Note: This should not be taken as legal or tax advice.