A holistic approach to small business benefit plans

An earlier version of this article was published in 2011

An introduction to consumer-driven defined contribution health plans

Surprisingly little of substance has changed in the world of small business health plans since I published the first edition of “Small Business Guide to Employee Benefits” in 1987. At that time – almost 25 years ago – it was clear that employee-directed flexible benefit plans would continue to gain popularity even though I had no idea of the slow pace of that trend. A defined contribution approach. much like a 401(k) retirement plan, was viewed as smart strategy compared to the older defined benefit approach for the majority of employers of all sizes. It was also clear that medical inflation was outpacing other business costs and eventually employer health plans would need to pare back in order to survive. We were already using the term “health care crisis” to describe the difficulties in changing the system. We said that, in theory, we wished to reduce health care expenses but did not wish to risk any reduction in the top-rate care that we treasured for ourselves.

The economics and politics of health cost reduction

Economists and politicians seem to argue that health costs can be controlled in two ways: 1) putting less money into the system (cut employer and government funding), and 2) paying less money out of the system (squeeze medical service providers and insurance companies and make the claims payment process difficult). This is true because the two amounts are directly linked over the long-term – now both by law and market forces. Our national approach to health care reform attempts to utilize both methods of cost control.

For small business owners, however, only the first approach works. This is because a smaller purchaser of health care does not exercise enough control over market to influence costs and ultimately cannot impact insurance rates of the cost of employee medical expenses. This means that the only way to control health costs is simply to pay less into the health plan. But how? This is certainly one of those oversimplified statements that is harder to implement in real life.

A defined benefit consumer-driven health plan is simply a long name for the strategy that allows an employer to elect to pay less into the health system.  In paying less into the system, we know that ultimately the amount paid out in care will be less. It is important for employers to acknowledge (and for employees to recognize) that by reducing health plan costs, we are also reducing the medical benefits available. The effect is that sooner or later someone does not have all of the medical benefits that would have been available without a cost reduction effort. Employers and government are careful to avoid assuming responsibility or liability for this risk, thereby spawning the emergence of consumer-driven health care choices. For purposes of simplicity, this article refers to these types of defined contribution consumer-driven health plans as “modern plans”.

 The first crucial step

The primary responsibility of the employer in a modern health plan is to decide on the level of contribution. This is designated in a flat dollar amount or based on some formula that may account for position, salary, longevity family coverage status or location. With only a few exceptions, discrimination in employer funding for health benefits is allowed and, in fact, is the norm in most larger organizations. Small employers may choose a “one size fits all” approach simply because it is easier than dealing with the employee feedback about a tiered benefit plan.

Benefits of an insurance exchange

Virtually all health insurance is priced, applied for and issued through the use of online technologies. The term “insurance exchange” has come to refer to the various public and private systems that combine a variety of online services to consumers and small businesses. These are just in their infancy stage but by 2014 these online exchanges will likely dominate the health insurance market.

The benefits are likely to be similar to those enjoyed by other online financial service transactions including convenience, security, speed and efficiency. But also like the online transactions in other industries, professional personal service is not expected to be among the advantages.

 

 

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  1. Pingback: Tony Novak CPA | Novak’s small business health plan bibliography

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