U.S. Companies Shift from Health Care Coverage to Contributions

On a mission to shrink its health care expenses, corporate America favors a solution that looks much like the move from defined benefit to defined contribution pension plans.

“In health care we’ve tied the liability to what the benefits cost, not what the employer or employee can afford,” says Helen Darling, president of the Washington-based National Business Group on Health. The new approach, Darling notes, is for the company to commit a fixed amount to health care — say, $1,000 per employee per year. If workers want something different, they can put their defined contributions toward that coverage, explains the NBGH founder, whose board members include American Express Co., Bank of New York Mellon Corp. and Boeing Co.

“For all employer-sponsored health insurance, health care costs have been an annual wild card on their P&L statements, growing by double digits year-over-year,” says Bryce Williams, San Mateo, California–based managing director of retirement solutions at professional services firm Towers Watson & Co. Running health benefits programs puts U.S. companies at a disadvantage to foreign rivals whose governments manage health care, Williams asserts.

Williams is former CEO and co-founder of San Mateo’s Extend Health, a private health exchange provider that New York–based Towers  Watson acquired last year. Since 2006, for 280 clients, including Chrysler Group, E.I. du Pont de Nemours and Co. and  Wal-Mart Stores, he’s moved 325,000 retirees from employer-sponsored health care to defined-contribution-style exchanges that let those retirees choose their ownproviders. The companies involved have saved more than $1 billion in health care costs during the past five years, Williams estimates. “We turned an open obligation into something fixed,” he says. “It gives CFOs pure health care predictability.” Williams intends to grow his service to include retirees under age 65 and current employees.

Exchanges would have been eliminated if political opponents had succeeded in scuttling the federal Patient Protection and Affordable Care Act of 2010, often called Obamacare. Not until President Barack Obama won reelection in November did those foes back down, giving corporations the assurance they needed to make plans for using the private exchanges described in the new law.

In early February, Fidelity Investments announced a deal with Extend Health whereby Boston-based Fidelity will add retiree health care to its retirement guidance. Retiring participants coming off company-sponsored health plans can access providers to gain coverage “they can afford,” Fidelity said. The two companies will help businesses moving away from employer-sponsored retiree medical insurance communicate the changes and find the right private insurance for their former workers.

The shift to employee-directed health care will be rapid, predicts George Castineiras, Hartford, Connecticut–based senior vice president of total retirement solutions at Prudential Retirement. Big health care benefits providers have been inquiring about how defined contribution practices work in the retirement industry, Castineiras says. Meanwhile, given the U.S. government’s focus on lowering the cost of health care, plan sponsors are asking if there’s a way to have participants set aside income for health coverage as they do for retirement. Castineiras thinks a defined contribution structure to fund health care costs will be widespread within five years.

When it comes to launching health care savings efforts for retirement plan participants, Sears Holdings Corp., based in Hoffman Estates, Illinois, and Darden Restaurants of Orlando, Florida, are leading the way. In January both companies hired human resources consulting firm Aon Hewitt, a subsidiary of London-based Aon, to provide multiple plan choices through private insurance exchanges. Employees don’t receive a lump sum to shop on exchanges, but they can select the plan they want and keep paying their share of premiums through payroll deductions.

“The private exchange [model] looks a lot more like when employers moved to [defined contribution] retirement plans, because companies are defining the contribution and picking the exchange they want too,” says Paul Fronstin, director of the health research program at the  Washington-based Employee Benefit Research Institute. The employer still chooses health providers and employees choose the plan, so it’s not quite a defined contribution approach, Fronstin adds, “but together with Obamacare in 2010, it creates the marketplace alternative to the employer-based system.”