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.
Implementation
“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.”