Perspectives

White Paper

Defined Contribution Health Insurance: This Time, It's Really Happening. How Should Payers Respond?

Although still in the early stages, interest in defined contribution (DC) health insurance has grown among carriers, intermediaries and employers. We believe there will be a sharp increase in DC plan adoption over the next few years. Carriers need to begin planning now or risk missing a significant opportunity.

As employer contributions to employee health benefit costs have continued their steep rise (nearly doubling over the past decade), employers have taken a number of steps to rein in healthcare costs:

  • Tweaking plan design and increasing employee cost sharing
  • Adopting self-funded arrangements
  • Launching employee health and wellness programs
  • Adopting high deductible health plans (HDHPs)

Now there is another option for employers to address rising costs:  defined contribution (DC) health plans.  In a defined contribution health plan (similar to a 401(k)), employers make fixed contributions to health accounts that employees tap to purchase health insurance on private exchanges.  Although still in the early stages, interest in DC approaches has grown among insurers, intermediaries, and employers.  We believe there will be a sharp increase in DC plan adoption over the next few years, as:

  • DC plans offer lower and more predictable healthcare costs
  • They reduce the administrative burden on employers
  • Many employees are likely to be enthusiastic about increased plan choice
  • Several Affordable Care Act (ACA) provisions will reduce the moral obligation of employers to maintain traditional group insurance

Several large employers have already adopted DC health plans, providing a potential trigger for wider adoption.  Carriers need to begin planning now for the emergence of DC health plans, or risk missing a significant opportunity:

  • An upfront assessment is critical to pursuing the right strategic path, including market planning, consumer and group need analyses, and channel conflict analysis
  • Solution design and development (even if partnering with vendors), integration with existing systems, testing, and roll-out will all take time
  • Early adopter groups will consider DC plan alternatives in the 2014 renewal cycle
  • Early mover carriers will benefit from the ability to test and evolve solutions over a cycle or two, prior to what we expect will be a meaningful shift during 2015 renewals

Tha balance of this perspective provides a review of:

  • The largest underlying driver of DC plans - the rising cost of providing health benefits
  • A description of DC health insurance mechanics
  • A view on the current market landscape - including the emergencey of single- and multi-carrier exchanges
  • The rationale behind our belief in the growing DC market opportunity
  • Strategic considerations for health payers, including exchange participation and development, channel management, planning, and implementation

Click here to download the full perspective.