Will Employer Health Insurance Go the Way of Pensions?

doctor's office patient
doctor's office patient

For years, employers have been getting out of the pension business. With old-style pensions giving way to 401(k) plans, most workers are now responsible for making their own investment decisions for their retirement.

Now it appears that companies may start doing the same thing with their health insurance benefits. The resulting shift could leave employees with a lot more work to do to manage their health costs.

A recent report from the Employee Benefit Research Institute shows that fewer than half of the employers it surveyed are certain about their plans to continue offering traditional health benefits to their workers. A substantial portion of the remainder expects to seriously consider moving to what is called a "defined-contribution" strategy for health benefits.

"Defined contribution" is a fancy term for employers putting in a specific upfront dollar amount toward benefits. 401(k)s are defined-contribution plans because they don't guarantee a certain benefit during retirement; rather, the company promises to make employer contributions that may or may not grow over time.

With health care, define contribution means giving employees a certain dollar amount with which they can buy health insurance. When employers first looked at the idea around 10 years ago, individual health insurance was difficult to obtain. With the passage of health-care reform laws, however, private health insurance exchanges could make the individual insurance market more of a viable option, and companies are again looking at whether fixed-dollar contributions toward health insurance make sense.

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Winners and Losers

Defined-contribution health plans have the potential to be a win-win scenario for employers and workers. For employers, advantages include more predictable costs, less administrative hassle in negotiating for and managing group coverage, and uniformity of benefits across different locations.

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Workers, on the other hand, get the flexibility of choosing their own plan, giving them more incentive to shop for cost-savings and to tailor insurance policies to their needs, rather than picking a cookie-cutter policy. Yet with individual health insurance still difficult to get in most states, whether or not that works depends on whether the Affordable Care Act actually succeeds in building markets for competitively priced policies for individuals to select.

If employers do pursue defined-contribution health plans, workers will need to demand that employers actually contribute. If employers back away from health-care expenditures the same way they took away 401(k)-matching temporarily during the recession, then workers will be in much worse shape than they are today. That makes it critical that you keep your eyes open at work to possible changes in the near future.

Motley Fool contributor Dan Caplinger proudly relies on his wife for health insurance. You can follow him on Twitter @DanCaplinger.