New law could shift employee health benefits to private market
The Supreme Court’s endorsement of the federal healthcare law this week could spur more employers across the nation to relinquish their long-standing role as chief healthcare buyer for their workers.
This shift has already begun among some big employers shedding their role in providing retiree health benefits, and experts say the court’s decision this week could eventually lead companies to pursue a similar approach with current workers.
With the Affordable Care Act still on track to offer numerous new benefits, such as guaranteed coverage for all adults starting in 2014, some companies may want to stop providing health coverage and instead give workers money to buy their own.
One of the more popular ideas being discussed is to give workers a lump sum, or defined contribution, and then let them use that money to buy their own individual health plan.
The approach resembles existing 401(k) retirement plans in which employers put a fixed amount of tax-deferred dollars into employees’ retirement accounts and leave it to the workers to manage the money. In the case of health benefits, employers gain more control over their spending and avoid the hassle of picking plans for their workforce.
The idea comes at a time when employers are eager for new options as medical costs and insurance premiums keep climbing. The average family premium for employer coverage in the U.S. has increased 113% in the last decade, according to the Kaiser Family Foundation.
Big companies are unlikely to give up their conventional healthcare role in the near term. And even smaller firms, especially in technology, may want to keep benefits in-house to compete for the best talent. But experts say companies in retail, hospitality and other service sectors with lots of lower-wage workers may find this alternative appealing.
“Some companies will look for new approaches like defined contributions, vouchers and exchanges,” said David Lansky, chief executive of the Pacific Business Group on Health. “Maybe that all gets a boost now.”
One upshot is that workers could shop for plans that best suit their needs in terms of doctors and benefits, rather than relying on what their employers pick. They also get to take their policies with them if they leave their jobs. But a downside is they could be exposed to rising premiums in the private market beyond the fixed subsidy from their employer.
“Just because you have guaranteed coverage doesn’t mean it will be affordable,” said Sima Reid, an insurance broker in Lakewood, who works with small and mid-size employers.
Extend Health, a San Mateo-based company, has already helped 40 companies in the Fortune 500 make this switch on retiree health plans, and it said many of those clients are interested in doing the same for current workers. Aon Hewitt, a major benefits consultant, is launching a private health exchange this fall aimed at employers with more than 5,000 workers.
“Large employers tend to be fairly conservative and take more incremental changes,” said Marian Mulkey, director of the California HealthCare Foundation’s health reform initiative. “But faced with escalating healthcare costs, employers no doubt will continue to monitor their options.”
Hundreds of small and mid-size businesses have been experimenting with this approach in recent years, but experts say problems in the individual insurance market have prevented it from spreading.
One of the biggest obstacles has been the lack of guaranteed coverage for workers in the private market. The Affordable Care Act requires insurers to accept all applicants regardless of their medical history starting in 2014. Leading up to that, the law provided funds so states could provide high-risk pools that could cover people who were previously uninsurable.
The federal law will also establish minimum standards for individual coverage, and state-run exchanges will make it easier for workers to comparison shop for policies.
“This market is really going to grow,” said Bryce Williams, chief executive of Extend Health, which was acquired in May by Towers Watson for $435 million. Before the federal law, “it was a show stopper in the individual market. But now that market is about to be perfected.”
In retiree health plans, Williams said, his corporate customers have typically saved 15% to 25% from what they previously spent, and he expects employers could achieve similar savings by switching to a defined contribution plan for current workers. He said less than 3% of retirees he works with end up being negatively affected by higher costs.
At Aon Hewitt’s private exchange, participating companies will give workers a fixed amount, akin to a gift card or store credit, that can be used to buy a health policy offered by one of many insurers. Aon’s exchange is modeled after the government exchanges, and health plans will be categorized as gold, silver, bronze or platinum based on how generous their benefits are.
“We don’t see this as an abandonment of workers or a lack of paternalism,” said Ken Sperling, Aon Hewitt’s national health exchange strategy leader. “Anything new like this starts small and gains momentum.”
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