The Truven Health Blog

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By Truven Staff

Defined Contribution Plans – More Choices and More Risk for Employees

Mike Taylor imageThe recent announcement by Walgreens of its intention to move its employees to a private exchange may be evidence of a trend for large employers. Moving employees to a private exchange is a big step – companies have been moving retirees to this type of plan for years, but not many have offered this option to their active employees. Most large employers provide health insurance to their active employees today, but that may change. Plans in which the employer provides a fixed dollar amount for insurance and the employee picks the plan and pays the rest of the cost are called “defined contribution” plans.

Defined contribution plans should cause employees to take more “ownership” in their healthcare choices. Employees have generally had insurance options, but the options were provided by the employer. It’s fairly easy for an employee to pick from relatively few plans. In this new approach, employees are likely to have many more options from which to choose. Employees will need to understand the types of plans being offered, and which plan best fits their needs. They will need to assess the financial implications of their plan choice, and understand which doctors and hospitals are in the network they are choosing.

This move to exchanges might lead to employees developing a better understanding of how their plan works, and how expensive healthcare in the U.S. has become. Ideally, with employees understanding the cost of care, they will not only engage in more healthy lifestyles but also ask more questions about the need for certain services and procedures, thereby trimming their individual costs and in aggregate pushing overall costs down. Employees cannot be expected to make clinical decisions such as which blood test or x-ray is needed, but they should be expected to ask appropriate questions. They should want to know:
  • Why do I need this test?
  • What is the risk of having (or not having) the test?
  • How will the test result change my treatment?
  • How much will the test cost?
  • Where is the best location to have the test done?
  • Does my doctor own the testing equipment for the test being recommended?
Asking these questions will help employees become more educated about healthcare choices and hopefully lead to better healthcare decisions for them. That is good, but let’s recognize the extent of the financial risk being shifted over to employees. Should the employer subsidy become a fixed amount, and if healthcare costs increase over the years, the employee will shoulder a growing proportion of the cost burden.

The benefit of a defined contribution plan for employers is they can “cap” their costs; for employees, the question is whether they will also benefit. The answer is, “It depends…..”

Michael L. Taylor, MD FACP
Chief Medical Officer
Categories: Employer