The fundamental driver of this shift is an effort by businesses to reduce their exposure to health-care costs. But the recent health-care reform law may accelerate the shift.
The defined-contribution concept is already familiar to most American workers. Over the past two decades, company retirement programs have moved decisively away from defined-benefit plans, in which workers are paid a given amount of retirement income, and toward defined- contribution, 401(k) plans, in which risks - from fluctuating markets, for example - are borne by workers.
In 1985, 89 Fortune 100 companies offered new hires a traditional defined-benefit pension plan. Today, only 13 do.
The movement toward defined-contribution health plans is in some ways similar, as Kenneth L. Sperling and Oren M. Shapira explained in an article earlier this year. The pension shift occurred in stages: First, the traditional defined-benefit plan was redesigned. Then a hybrid approach (the cash-balance plan) was introduced. Finally, defined-benefit plans were frozen.
The change in health insurance is already well under way for retirees. In the early 1990s, companies began to reevaluate retiree health plans, and some capped the amount they were willing to pay. That effectively created defined-contribution retiree health plans, with the company's contribution set by the cap. Exchanges have been created to allow retirees to use these employer contributions to buy their own insurance.
High deductibles
For current workers, the precursor to defined contribution is the "consumer-driven" health plan. This typically has higher deductibles and co-payments than a traditional plan, and it is often tied to a health savings account. It typically still provides generous insurance for catastrophic cases.
