Private Health Insurance Exchanges and Defined Contribution Health Plans: Is It Déjà Vu All Over Again?

Abstract:     
This paper examines issues related to private health insurance exchanges, possible structures of an exchange, funding, as well as the pros, cons, and uncertainties to employers of adopting them. A summary of recent surveys on employer attitudes are examined, as are some changes that employers have made to other benefits that might serve as historical precedents for a move to some type of defined contribution health benefits approach. The combination of insurance market reforms and the embodiment of the exchange structure in the Patient Protection and Affordable Care Act (PPACA) has brought a renewed focus on limiting employer’s health care cost exposure. The key provisions of PPACA influencing these considerations are not the availability of exchanges per se, but a number of insurance market reforms that are combined with the exchanges, such as guaranteed issue, modified community rating, premium and cost sharing subsidies, and increased choice of health plan. Following the growth of defined contribution (DC) retirement benefits, DC health benefits were seen as promising tools to help control employer benefit costs by capping the employer’s per-worker insurance contribution and engaging workers in their health care choices. Employers never moved in the direction of giving workers a defined or fixed contribution to purchase health insurance for a number of reasons: They were hesitant to drop group coverage in favor of offering individual policies, and they were concerned that many employees would not be able to secure coverage in the individual market. Employer issues addressed with an exchange/fixed contribution approach include cost certainty, total compensation transparency, uniformity of benefits in multi-state environments, COBRA costs, the looming excise tax on high cost coverage (the so-called “Cadillac tax”) under PPACA, the potential for reduced administrative costs, and higher employee satisfaction. Employer issues that need to be addressed in adopting a private exchange/fixed contribution approach include plan design, implications of adverse selection, setting the level of fixed contribution, the amount of plan choice, and geographic cost variation. Issues not addressed by an exchange/fixed contribution approach include worker preference of, and satisfaction with, employment-based coverage, group purchasing efficiencies, the role of employer as advocate in coverage disputes, delivery innovation and health care quality, and health literacy issues.

Number of Pages in PDF File: 24

Keywords: Defined contribution health plans, Employment-based benefits, Health care attitudes and opinions, Health care costs, Health care reform, Health insurance attitudes and opinions, Health insurance coverage, Health insurance exchange, Managed competition, Retiree health benefits

JEL Classification: I1, I10, I11, I18, J32

Accepted Paper Series