Health Insurance and You!

Generally, employers contribute to employee health insurance in one of two ways. With defined benefits – currently the more common approach of the two – employees are guaranteed coverage for a certain, predetermined set of benefits, whether they use that coverage often or not at all. With defined contributions – rarer but becoming more popular – it is the employer’s contribution that is predetermined, and the employee chooses how to spend that finite amount.

For relatively healthy people with no major health events, the two approaches have similar results. The main difference lies in who takes on the risk of high or unexpected medical expenses. When benefits are defined, the employer takes the risk; when contributions are defined, it’s the employees and their families.

In a recent article for Business Week, former director of the Office of Management and Budget and current Citigroup executive Peter Orszag writes that the defined contribution approach is here to stay. He adds that the shift away from defined benefits, already under way by last year, was accelerated by health reform.

Retirees were the first to experience this change. Years ago, retiree health insurance was much like employee coverage with a set of defined benefits. But starting in the 1990s, employers began to limit the total amount they would pay. Retirees who reached this cap were put in the same situation as employees who have exhausted their employer’s contribution.

Consumer-driven health plans, which tend to have high deductibles and be paired with a health savings account, are an early step toward defined contributions for employees, says Mr. Orszag. An important difference, though, is that consumer-driven plans still have a safety net for costly, unexpected medical emergencies. Although most employees have traditional health plans, more and more companies are offering and encouraging consumer-driven options.

So, where does health reform come in? Last year’s overhaul made plans more comprehensive by requiring that they cover certain essential benefits – though a list of those benefits has yet to be finalized. That would add to the risk an employer is taking. Also, Mr. Orszag explains, having direct access to defined-contribution plans through online health insurance exchanges will make consumers more familiar with them, speeding up their adoption nationwide.

Other predictions for the future of health insurance, according to an earlier post on our blog, include an increase in reference-based pricing and the continued creation of accountable-care organizations. What sorts of trends do you expect to see? Do you approve?