Defined Contribution?

The Defined Contribution (DC) approach to employer paid health coverage has been getting lots of press lately. DC allows an employer to have greater control over health insurance contributions by setting a fixed dollar amount that will be applied against employee premiums. (Example: $300 per month) By using this approach, the employer innoculates themselves against unexpected premium increases and gains greater budgetary control.


Ideally, a Health Insurance Exchange would facilitate this approach by allowing plan participants to select plans that make the most of employer contributions using online comparison tools. If an employee chooses a plan whose premium exceeds the employer’s DC allowance, the excess premium would be deducted from an employees pay on a pre-tax basis. DC contributions operate much like current Sec.125 Cafeteria plan contributions.


Proponents of exchanges have touted this approach as a boon for employers and a compelling reason why exchanges will reinvent the employer paid health insurance market. Granted, many employers have been using a DC approach for years but exchanges will bring the concept to a new level of operation and acceptance.


Beware the dark side.


Defined Contribution may control employer’s premium expense but it does nothing to control premiums. If employers elect to limit their contributions in the face of rising premiums, employees are left to shoulder the increases. This may seem obvious, but it never seems to be discussed in the glowing presentations of the DC approach. If employees are faced with rising premiums and a fixed employer contribution they’ll be forced into an annual downgrading of benefits in order to meet their budgetary constraints. Eventually, employees may drop coverage because they just can’t handle the annual increases. That may not be an entirely rational response, but it’s an entirely human one.


How do we correct this flaw with DC? Employers should review their contribution levels annually and make reasonable adjustments. Even though their costs are fixed, they should continue to seek out cost saving alternatives as a service to their employees. And, employers should support legislation aimed at actually reducing the cost of medical care and bringing down premiums.


Defined Contribution is a tool that’s only useful in the context of a greater solution.


JL Sugden