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How Businesses Are 401 (k)-ifying Employee Healthcare

As the government prepares to open the doors on its health care exchanges for individuals, businesses are increasingly adopting the same strategy, transitioning to private exchanges that allow their employees to pick specific coverage. This is not necessarily great news for those employees.

Here’s how these new exchanges work, according to The Wall Street Journal. Instead of offering employees a set coverage plan or a choice between a few pre-selected plans, employers would offer employees a defined amount to spend in a private exchange that offers a range of coverage options at varying premium levels. Pick a health plan, add some dental, maybe get vision if you want. If the employee wants to spend more than he or she is allotted, the employee makes up the difference. In some cases, if employees spend less, they are allowed to keep some of the money. (This is different than a health savings account, which is money used to pay medical costs.)

It’s important to note that this change is not due to the Affordable Care Act (Obamacare); rather, it’s an attempt to address rising health care costs, one of the same things Obamacare set out to conquer. While group plans afford employers discounts because they occur in bulk, it also means that as costs haveskyrocketed over the past few decades, those per-employee costs have become an increasing burden on employers — and one out of their control. With these private exchanges, employers can allot a set amount of money annually, choosing to raise or lower it for employees as desired. Ergo: better cost management.

And probably lower costs, too. The Journal notes that workers in one large exchange have ended up choosing low-cost, high-deductible plans.

In an exchange run by Liazon Corp. that has around 60,000 people enrolled, about 75% of the workers have chosen less-expensive plans, accepting bigger deductibles and other out-of-pocket charges, as well as smaller choices of health-care providers and restrictions such as primary-care gatekeepers.

Which is, to some extent, how these new plans start to look like a previous shift in benefits provided to employees: retirement. American employers have moved en masse away from pension plans — long-term commitments to retired employees — and toward defined contribution plans like 401(k)s. The 401(k) allows the employee to decide how to invest a fixed set of money — but it also imposes a much larger risk on the retirees.

That’s echoed here. Employees choose riskier coverage in an effort to extend the amount of money they’re given. Usually that bet pays off, as is the nature of insurance. Sometimes, though, it doesn’t.

And the ability of employers to fine-tune coverage costs annually may make the tool a budget line item too irresistible not to tamper with. One expert noted that rising health care costs could make that temptation greater.

[W]orkers could be squeezed by the fixed-sum approach if the dollars allotted each year don’t keep up with the rising cost of coverage. “Is the defined contribution going to increase with premiums, and how much is it going to go up? It is a question,” said Paul Fronstin, director of health research at the nonprofit Employee Benefit Research Institute.

So far, operators of the exchanges have seen employers provide increases in line with rising costs. Though, the Journal notes, those costs have been “rising at a relatively slow rate” over the past two years.

The alternative for employees is to drop out of employer-provided coverage plans and join the individual exchanges being set up under Obamacare and coming online next month. But there, too, they may see higher costs over the short-term, according to National Journal. Which also echoes changes in retirement. The government-run option there, of course, is Social Security — a system that remains stable but for which long-term prospects are strained.

On the whole corporate healthcare spending has not been a roadblock to profitability. Below, a graph comparing corporate after-tax profits (blue) with pension and insurance spending (red) over the last two decades, via the Federal Reserve. Draw what conclusions you will.

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