Reducing healthcare costs is the age-old question that plan sponsors have been seeking the answer to. Are defined contribution (DC) benefits the answer?

At the recent Human Resources Professionals Association conference in Toronto, Michael Trowell, assistant vice-president of Comprehensive Benefits Solutions Ltd., gave insight into just where this area of the market is headed because, he says, there is no doubt that the concept of DC benefits is gaining momentum.

DB benefits
Traditionally, employee benefits plans are of the defined benefit type. These plans define the benefits covered and the maximums, and provide for coverage of catastrophic and non-catastrophic events. However, these plans are also subject to renewal increases (Trowell says premiums for healthcare and dental are doubling every five years), industry trends and rising costs, which plan sponsors have little control over.

DC benefits
DC benefits, on the other hand, define the amount of money allocated to the program—not the coverage. The most popular vehicle for this is a healthcare spending account (HCSA), and the Canada Revenue Agency determines what can be claimed under these accounts.

Trowell argues that DC benefits encourage consumerism. “It makes people decide how they want to spend their money and gives them more responsibility,” he says.

For employers, he says it reduces risk because you know what your contributions will be in advance and can budget for them. However, this type of arrangement isn’t appropriate for large, uncertain claims, which could be catastrophic—out-of-country coverage, for example—or drug coverage.

What to shift
Vision care, paramedical services and possibly even dental coverage are items that would work as DC benefits. Most already have a limit on them and, in the case of paramedical services, these are starting to be significant cost drivers in benefits plans.

“Chances are, if you have vision care in your plan, [members] are using it and likely maxing out,” he explains. With DC benefits, employers could eliminate the maxing-out issue; however, employers have to be better about how they spend the money on the whole. “You have to look at where your costs are today and where they are going in the future,” he says.

One concern that would need to be addressed is family versus single coverage for your DC benefits. It could get complicated with family coverage as it may appear “unfair” to employees who are single and don’t get that extra amount in their HCSAs, or vice versa if everyone gets the same.

“Is now the time for change? No,” he says. “The time for change depends on your organization. The time to start asking yourself the preliminary questions is now, however.”

But, before you make changes, find out if your employees want it. “This concept is not for everyone,” warns Trowell.

Have a town hall, survey employees, have focus groups—be specific, have incentives for employees to participate, ask the right questions, and show cause and effect in the survey. “And, if you are going to ask for opinion, be committed to making changes if required,” he says.

With DC benefits, once people understand them and how to make claims, the concept isn’t complex. The key to getting the message right is continual communication—not unlike most changes that impact employees.

Trowell points out that there is often reduced administration and that HCSAs can work for companies of all sizes. “It’s not a reflection of the company’s HR knowledge and expertise and resources.”

He admits this is not what has traditionally been done with HCSAs. Generally, they are an add-on to traditional benefits plans to cover out-of-pocket expenses or part of a flexible benefits package. “But, is this the best way to use them? Rethink the HCSA and you can use it in the future.”

Copyright © 2020 Transcontinental Media G.P. Originally published on

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Don Scott:

Another wacko idea that will take us back decades. Desptite the inaccurate claim, there is no valid evidence that people misuse medical services by seeking unnecessary care. Health care is generally accessed when needed – consumerism has no part in it. You don’t decide to have cancer, break a leg or have a heart attack. Applying DC practices, as opposed to insured services, would be a disaster for anyone facing a catastrophic event – they will simply not have enough saved in their DC account – just like most people with only a DC pension have inadequate pension income to maintain 50 to 60% of pre-retirement income.
Another bad idea from the finance industry.

Friday, February 04 at 4:27 pm | Reply

Bob T:

Sorry, Don but you are right and wrong. Catastrophic costs are currently picked up by government programs and to some degree access is limited due to costs, see waiting in the emergency rooms as an example.

On the other hand, fees/expenses/costs charged for other health services are vey expensive and a growing out of control cost and while I may need the services, they often do not have to cost as much as are paid n our current system.

People are being charged $200 or $300 for reading glasses when a $5 to $10 pair will work. No one cares about the $200 pair because it is paid by the employer’s plan. There are paramedical practitioners who are charging $40 and some charging $100 for the same service, depending on the coverage the individual has not the service being provided.

So going to a DC process could end up delivering far more value for the money being spent, the alternative may be to eliminate the DB type plans altogether leaving us with no coverage at all.

Monday, February 07 at 4:15 pm | Reply

Bob Morel:

Establishing HCSA accounts in lieu of defined benefits makes all the sense in the world and US based companies are moving to this structure as we speak. Why should a benefits plan be identical for every employee and family regardless of their health status?That kind of simple planning has been around for 30 years and assumes that employees and their families are incapable of deciding what is best for them. Provide consumer-driven choice with catastrophic stop-loss. Our studies indicate this works far better!
Better health care cost management and healthier and happier employees and family members.

Sunday, February 13 at 4:37 pm | Reply

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