Are Defined Contributions a New Direction for Employer-Sponsored Coverage?

Sally Trude, Paul B. Ginsburg

Defined contributions for health benefits have been promoted as a promising solution for employers seeking to address rising health care costs, growing dissatisfaction with managed care, and evolving concerns about employer liability. As enthusiasm for the concept has grown, so has the array of proposed approaches for putting it into practice. Initially termed fixed contributions, the defined-contribution label now also encompasses cash transfers or vouchers paired with reliance on the individual insurance market. More recently, the Internet has emerged as a potential online marketplace for purchasing health insurance under defined-contribution arrangements. This Issue Brief evaluates defined-contribution strategies and assesses their implications for employers, employees, and public policy makers.

Defined Contributions: How Relevant Is the Pension Approach

The renewed interest in applying a defined-contribution model to health benefits draws heavily from the transformation of pension benefits. In the pension context, employers deposit funds into employees' retirement accounts based on earnings (the defined-contribution approach) rather than promising a specific payment level upon retirement (the defined-benefit approach). This shift has improved pension portability for workers who change jobs and transferred investment risk and responsibility from employers to employees.

Building on the growing popularity of defined-contribution pensions, many benefits consultants and employers have been developing parallel strategies for health benefits, hoping to broaden employee choice, rein in costs, and free employers from the administrative burden of managing health plans.

Despite this growing interest, few employers have actually adopted defined contributions for health benefits. In a tight labor market, employers have been cautious about making changes that could be perceived as reducing benefits.

Sources and Further Reading

Kaiser Family Foundation — Employer Health Benefits Survey — Annual data on employer-sponsored health insurance trends.

CMS — Health Insurance Marketplace — Federal marketplace information and enrollment resources.

Health Affairs — Peer-reviewed health policy research and analysis.

Robert Wood Johnson Foundation — Health policy research and programs.

Commonwealth Fund — Research on health care system performance and coverage.