In a move that should not be surprising to anyone who has followed the evolution of employer-sponsored health benefits, two large employers, Sears Holdings Corp. and Darden Restaurants, have announced a change to a defined contribution approach to health benefits.
Under this new approach, both employers will provide their employees with a lump sum of cash that those employees can use to purchase one of several available health insurance plans. The companies will offer five health insurance plan options through a private health insurance exchange offered by benefit consultants Aon Hewitt. Aon Hewitt’s own employees will also be shopping for health insurance through the exchange.
For these employers, this type of defined contribution approach turns health benefits into a more predictable and controllable expense. In fact, this type of exchange-based, defined contribution approach has been used successfully by many employers to manage health insurance benefits for their pre-Medicare eligible retirees. However, from an active employee standpoint, the closest comparison is the shift from defined benefit pension plans with their unpredictable funding requirements to the more budget-friendly 401(k) plan that allows employers to determine how much retirement funding they will provide to employees.
Although this move by Sears and Darden appears to be unrelated to health care reform, it would be wrong to assume that health care reform played no part in this shift. If nothing else, health care reform has introduced the concept of health insurance exchanges into the consciousness and conversation of average American consumers, making the shift to an exchange-based defined contribution approach more understandable and acceptable to more people.
As a result, employers may find employees to be more open to such a change. The J.D. Power and Associates 2012 U.S. Member Health Plan Study released in March found that 39% of the surveyed individuals who are covered by an employer-sponsored health plan are open to shopping for insurance on any type of health insurance exchange and 41% would be open to using a private health insurance exchange. This openness could also be a reflection of low satisfaction with available health insurance options among employees. As Rick Millard, senior director of the healthcare practice at J.D. Power and Associates said when the survey was released, “Satisfaction among some health plan members may be low enough that an alternative, direct retail model could become more attractive than traditional wholesale purchasing by employers.”
As for employers exploring the possibility of doing something similar to Sears and Darden, there are a few private exchange options available and more are expected to be coming online in the coming months. In addition to Aon Hewitt’s exchange, Buck Consultants has a private exchange for retiree health benefits that it is transitioning for use for active employees, while Towers Watson has acquired Extend Health, an exchange that also made its mark by helping employers to offer a defined contribution approach to their retiree health benefits. In addition, health insurers, including United Healthcare, and other players are gearing up to launch private exchanges.
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