Most large employers are sticking with the status quo in employee health care benefits until the full ramifications of the new health care reform law are known, but two major companies are taking a big step toward defining a new model.
Sears Holding Corp. and Darden Restaurants Inc. announced in late September that they are implementing defined-contribution programs for employee health benefits, giving employees a fixed sum of money and allowing them to choose their medical coverage and insurer from a private online marketplace. The move is similar to companies that replaced pension plans with 401(k) contributions, allowing employees to choose their own investments.
Darden Restaurants, owner of chains including Olive Garden and Red Lobster, will let its approximately 45,000 full-time employees choose their health coverage for 2013, and Sears will make the program available to about 90,000 full-time employees, according to the Wall Street Journal. Neither company would disclose the size of its contribution to the employees’ health insurance purchase.
The employees of the two corporations will choose among plans designed by Aon Hewitt, one of several companies currently developing private health care exchanges, which are similar in concept to the public online exchanges under development by the states under the Patient Protection and Affordable Care Act (PPACA).
According to Steven Clark, senior counsel for Aon Hewitt, their exchange currently targets large employers with more than 5,000 insured lives who typically have been self-insured. Employees will be able to select among plans from nine carriers, each offering varying levels of coverage and cost.
“The employer no longer has the obligation to design its own plan,” Clark says. “If they are willing to give that up, they give employees access to a greater number of carriers. By having a choice of carriers, we bring competition into the mix, and hopefully that will contribute to keeping prices down.” Clark says self- insured employers also benefit by transferring the risk from themselves to the insurance company.
Initially, the private exchanges will offer group health insurance, but they are expected to evolve to offer individual coverage once the mandates of the PPACA take effect in 2014.
“A goal of a lot of our clients is to get out of the self-insured business and into a defined-contribution approach,” Clark says. “The long-term goal may be individual coverage. There may be a transition where initially the exchange provides group coverage, but down the road, after 2014, it may shift to an individual coverage model. The employer will provide a dollar amount, and the employee will have access to individual plans on the exchange. If you are going to move to a defined-contribution approach, this is the first step to doing that.”
However, transitioning the private exchanges from offering group coverage to individual coverage will require a change in the regulations governing the PPACA’s employer mandate. Under current rules, starting in 2014 an employer who gave employees a subsidy to buy individual coverage would be subject to a $2,000 per employee penalty. Changing that to allow defined-contribution plans only makes sense, Clark argues.
“It seems that the law was intended for employers to subsidize coverage,” he says. “We hope the rules will change in the future so as long as the employer contributes an amount so the employee can buy coverage that is affordable and provides the minimum benefit, the employer could avoid the penalty.”