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What a Defined Contribution strategy looks like
Converting to a Defined Contribution strategy allows employers to offer more
medical benefits while taking back control over their healthcare costs. As a
result employees have more plans to choose from increasing the likelihood that
they have something that better fits their needs while giving employers peace of
mind that they have a sustainable health plan strategy in place.
How does it work? A Defined Contribution strategy is an
alternative to the defined benefits model, in which an
employer offers a set of benefits committing to pay the
same percentage of them from one year to the next.
Alternatively, the employer defines a flat dollar amount
they’ll contributed to the cost of each employee’s
health plan.
The Problem
For a long time, the only way people could get guaranteed access to
coverage was through their employer. This access was the benefit. But
now, individuals can get guaranteed issue health insurance on their
own, so the benefit offered by employers has changed. The benefit is
no longer access to coverage, but the money to help pay for it.
Let’s make the strategy a reality. An employer client offers two plans
and pays 80 percent of employee-only coverage on the cheapest plan.
Faced with a renewal increase of 20 percent, our client cringes to think
about the changes that will need to be made to the cost structure and
benefit level their employee’s have grown accustomed to.
Our client is paying 80 percent of benefit costs, but employees don’t know what that
dollar figure is. Comparatively, under a Defined Contribution strategy, the benefit
is made explicit as the amount offered. Using this strategy, employers can also
offer far more plans than before, allowing employees to self-select the option that
fits their financial and healthcare needs. Some carriers offer more than 20 plan
options for a group, though our clients typically limit their plan options to four to five.
Let’s compare the status quo with a defined contribution strategy.
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The Status Quo
This graphic shows the employer covering 80 percent of $400 (for example)
worth of benefits. With a flat 20 percent increase, the employer will now pay 80
percent of $480.
There isn’t much choice for the employee—their perspective is “I can take the
benefits, or not.” Inevitably, when plan adjustments are made in response to the
20 percent increase—an increase in payroll deductions, new networks, or fewer
benefits—the employee’s perception of the benefits is that “This plan is worse.”
Employees are unhappy, while the employer is paying 20 percent more and
anxious about meeting employee needs.
vs.
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New Strategy: Defined Contribution
This graphic shows that the employer offers four health plan options and puts
$300 toward the cost of either plan. The offerings span from a more benefits-rich
plan to a more high deductible design.
When it’s time to renew, the employer will face individual renewal rates for each plan
offered. This gives employers the opportunity to explore additional options in place
of plans that are increasing unsustainably in costs. For example, employers may not
want to offer plan 2 or plan 4 to their employees, and may consider other alternatives
that aren’t so costly.
When plans are chosen, the employer can choose to increase the per-employee
contribution—represented as the additional $25 increase to $325—without having to
absorb the entirety of the percentage increase, as before. This decision can be made
based on the company’s budget and ability, not the carrier’s increase.
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The employee perspective here is “What can I get for my $300?” After renewal,
the inquiry is the same—”What can I get for my $325?” For example, the
employee might choose a high deductible health plan and dental insurance,
but waive vision and other ancillary benefits. The employee has a lump sum
with which to shop for benefits, and will contribute through payroll deductions
for any benefit costs over the defined contribution.
Software Necessary
Believe it or not, this isn’t a new idea. You could have been offering your
employees 4-5 health plan options for years. So what’s held you back? Simply
put, you can’t administer something like this with paper forms.
What makes this strategy work is our
ability to administer everything with our
proprietary all-in-one HR technology,
BerniePortal. Employees can easily
view all of their benefit options and
payroll deduction amounts and after
they’ve enrolled, the Employer is able
to download an excel spreadsheet that
automatically populates corresponding
payroll deductions.
A robust HR and benefits administration platform, such as BerniePortal, is
crucial in transitioning to a Defined Contribution strategy. This strategy
cannot be operationally implemented on paper.
Benefits for the Employee:
• More choices: Employees pick from 4-5 plans instead of 1-2.
•
Flexibility in spending: Four options provide a meaningful
benefit to match any budget.
•
Defined contribution: Benefit is in dollar amount, not plan design.
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Benefits for the Employer:
• More choices: Less pressure to choose a plan that meets
everyone’s needs, and the ability to increase ancillary options and offer a more competitive benefits package
• Flexibility in healthcare spending: Budget based on what
you can afford to offer, not what the carrier demands
• Defined contribution: Happier employees due to a more transparent benefit offering.
Results:
Our client incurred just an 8 percent increase on costs using the Defined
Contribution strategy. Perhaps more interesting to them though, was that eighty
percent of employees spent less on their coverage than in prior years by
enrolling in cheaper plan options, signaling they preferred to have more money in
their paycheck than a richer benefit. The employer received the most positive
feedback on their health benefit offering in years, in large part to providing so
many more options.
Want to explore your options?
Visit our website:
For More info Call:
1-800-505-0750
- or-
www.BernardHealth.com
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