Defined contribution health plans are consumer-oriented programs that allow employees to be more involved in their health care choices. There is no standard definition for a defined contribution health care plan. They can take many forms and are often called consumer driven or self-directed health care plans. What they all hold in common is that the employees are responsible for selecting a health care plan and making financial payments. This type of plan provides a set financial framework that clearly establishes how much an employer will contribute to employee benefits.

These types of plans can benefit both employers and employees. They help employers to keep the rate of increasing expenditures in health care costs closer to the rate of inflation. For employees, they can provide greater flexibility and control in choosing how their employer-allotted health care funds are used. While defined contribution health benefits place greater control into the hands of the employee, it also distances the employer from the risks of choosing the right, or wrong, health care plan.

History

Defined contribution health plans are the latest and greatest solution for many employers seeking to control their escalating health care costs. As health care costs continued to inflate during the late 90s, employers were forced to respond by passing these costs on to employees. This occurred in the form of higher premiums, co-payments, and deductibles. Until that point, most employer-sponsored health care programs were defined benefit plans that clearly stated what specific benefits would be covered and what the employee's share would be. As the costs of indemnity plans became too expensive for most employees, and as employers heard increased complaints about managed care providers, the defined contribution plan became a popular alternative after 2000.

How Defined Contribution Plans Work

These plans are different for every employer, but are comprised of certain key components.

First, an employer pays a fixed amount towards health care coverage for each employee. This is the defined part of defined contribution. The employer then provides employees with multiple health care plans to choose from. The deductible, co-payment amount, plan style, premium, and coverage may vary widely between the numerous plans offered. It is up to the employee to decide which plan will best suit his or her needs.

The employer pays a portion of the premium, their defined contribution, directly to the health care provider, but, if the plan costs more than the employer's defined contribution, the employee must pay the difference. If it costs less, the employee sees the difference added to their paycheck. Employees may also elect not to have any coverage, and receive their defined contribution in the form of cash.

Alternatively, an employer may choose to provide an annual tax-free health fund. For the sake of discussion, let's say this amount is $1,500. The employee would be able to spend that money on any medical expenses or doctors that they choose. After this money is used, the employee may then have a high deductible of $1,500 that must be paid for further treatment. Once the employee has paid this, then company coverage will kick back in to cover the remaining payments. These types of defined contribution plans frequently include catastrophic coverage to guard against unforeseen emergencies.

As health care and drug costs continue to escalate, there is no easy solution to these issues. Unless major reforms to our current health care system takes place, employers will continue to seek complex solutions to the economic challenge of providing health insurance.