The rapid development of private health insurance exchanges over the past two years have helped implant the defined contribution approach in how employers offer coverage to their employees.
The new approach is an alternative to the model used for decades where employers paid a certain percentage of group health care plan premiums, typically 60% to 80% but were largely unshielded from big cost increases in years when group health care premiums soared.
With the advent of private health insurance exchanges, which Accenture P.L.C. projects will have 40 million people enrolled as of 2018, many employers have paired offering employees the ability to choose plans provided through exchanges with another approach: paying a specific amount toward employees' health care premiums with workers paying the rest.
“There is no question that private exchanges are a viable way to introduce a defined contribution approach” to health insurance coverage, said Randy Abbott, a senior consultant at Towers Watson & Co. in Boston.
In addition, the employer premium often will be adjusted depending on the employee's choice of single or family coverage, while some employers tie their contribution to employee income.
“In the private exchange environment, each employee is allocated a set amount of money to spend on the benefit plans that suit their individual and family needs,” said Steve Heckert, vice president of human resources in Clearwater, Florida, for GFI Software, which offers employees a choice of six plans through the Bright Choices exchange.
That last feature has a special relevance to a health care reform law provision that imposes a penalty on employers if the premium employees have to pay for single coverage exceeds 9.5% of their wages.
“The employer wants to make sure that employees won't bump against the 9.5% threshold,” said Sherri Bockhorst, a principal and national practice leader at Buck Consultants L.L.C.'s health exchange solutions division in St. Louis.
Through the defined contribution approach, employers can budget spending on health care programs and be reasonably certain that budget will not be exceeded.
“It comes down to meeting certain budget targets for their health care benefits programs,” said Eric Grossman, a senior partner and exchange business leader with Mercer L.L.C. in Norwalk, Connecticut.
“Employers want their costs to be more predictable,” said Jim Winkler, Aon Hewitt's chief innovation officer for health and benefits in Norwalk, Connecticut.
Such an approach also gives employers some flexibility, Mr. Grossman said. For example, employers may vary their premium contribution by employees' income and behavior, such as whether or not they smoke.
The employer's approach also can provide a greater incentive for employees to choose a less costly health plan. For example, some employers design their programs so employees who do choose a less costly plan can apply the difference to pay for uncovered expenses, such as deductibles.
There are some signs that the defined contribution approach, coupled with exchanges, are helping to hold down cost increases. For example, an Aon Hewitt analysis found that health premiums for the three original employers in its exchange rose by an average of 5.1% in 2014 compared with 2013.
That 5.1% increase is somewhat less than average cost increases of 6% to 7% that Aon Hewitt and others earlier had projected for the large employer market.
Still, as plan costs rises, employers are likely to increase how much they pay toward employees' coverage, consultants say.
Retiree health coverage, though, is another matter.
Among employers that still offer such coverage, many have permanently set how much they will contribute toward retirees' health coverage.
“Many employers have put in a cap” on retiree health coverage, said Aon Hewitt's Mr. Winkler.
“The cap is a way of controlling the liabilities,” said Michael Thompson, a principal at PricewaterhouseCoopers L.L.P. in New York.
When the cap is hit, private health insurance exchanges give retirees more options to which to apply the company's contribution, Mr. Winkler said.