Emergence of the 401(k) health plan?

401(k) healthcare

401(K) 2012

The idea that health insurance might follow the trajectory of retirement finance, with employer-covered insurance moving toward a defined contribution, 401(k)-style approach, rather than the current, defined benefit, Pension-like approach is one I have written about before.

In today’s news (WSJ) is an article describing how a handful of employers are transforming the way they offer healthcare for their employees. Instead of the employer selecting the insurance plans, and offering them to the employee, these employers are apparently giving their employees a fixed sum of money and letting them select their own choice of insurance plan (from a predefined set of choices). In other words, these employers are moving from a defined benefit approach  to a defined contribution approach, just as pensions moved a few decades ago from defined benefits (pensions) to defined contributions (401(k)’s).

The article explains that, if employees choose a plan with greater benefits they have to contribute extra money themselves, whereas if they choose a plan with lesser benefits, they contribute less.

There are a lot of profound implications of this trend, should it become widespread, some of which I dealt with in my prior post.

It’s interesting to see this early indicator getting picked up in the mainstream media. The article (entitled “Big Firms Overhaul Health Coverage“, behind a paywall) describes how Sears Holdings and Darden Restaurants are making this change to the way they offer healthcare coverage.

Defined contribution healthcare

A few interesting factoids from the article:

  • The companies explain these changes are “supposed to put more control over health benefits in the hands of employees” (see my most recent post on the rise of consumer driven healthcare).
  • These companies are quite large. Darden (owner of chains including Red Lobster and Olive Garden) “will let its approximately 45,000 full time employees choose the coverage in November”. Sears “will have 90,000 full time employees eligible for the new health-benefits program”.
  • “Within the next two or three years, its going to be mainstream” says a representative of WellPoint, talking about this new approach.
  • The article mentions several insurers developing “marketplaces” that would be suitable for this new approach to defined contribution healthcare coverage.

This is an emerging trend that will be interesting to watch.

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