Selling defined contribution health plans: benefit-cutting vouchers in “employee choice” clothes

Oct. 24, 2012 — In late September, the Wall Street Journal reported that two large corporations — Sears Holding Corp. and Darden Restaurants Inc. — will soon dramatically change the way that they provide health insurance to their employees.

Beginning next month, Sears and Darden — the latter of which owns several restaurant chains, including Olive Garden and Red Lobster — will cease to offer defined benefits in which the employer, as part of its compensation package, provides employees with a set of health insurance benefits and continues to offer those benefits even when the employer’s costs for insurance rises.  Instead, they will implement a defined contribution model, in which the companies will offer employees a fixed annual sum — like a voucher — that they can use to buy insurance for themselves and their families.

Although proponents of the defined contribution model promote it as serving the interests of employees, the results of Remapping Debate’s inquiries make clear that the central motivation is to shift the risk of rising health insurance costs from employers to employees.

Though Sears and Darden are the only large companies that have announced such a change as of yet, many observers believe that if the new model catches on, it could have huge implications for the health insurance system in the United States, and represent an end to the multi-generational compact between management and labor.

Looking out for the interests of their workers?

In order to justify the change to employees and to the public, promoters of defined contribution plans have launched a large-scale marketing campaign, the central claim of which is that a defined contribution model will benefit workers by giving them more “choice” of insurance plans and “empowering” them to make their own health care decisions. Both Sears and Darden claim that offering their employees greater choice is the primary reason for changing their model.

According to numerous health care experts, economists, and even some in the consulting industry itself, however, that rhetoric belies the true motivation behind the shift: reducing the company’s exposure to ever-rising health insurance costs by shifting those costs directly onto employees, who will be forced to either pay more out of pocket for the same level of insurance or pay the same amount for less robust coverage.

“Employers have been trying to cope with rising premiums for years by shifting costs onto their employees,” said Kathleen Stoll, the director of health policy at Families USA, a patient and consumer advocacy group. “This is really just one more strategy for doing that.”

Expanding choice or cutting costs?

The employees of Sears and Darden will not be using their defined contributions to “shop” for insurance in the broad individual market. Both companies will be participating in a so-called “private exchange” run by the benefits consulting giant Aon Hewitt, in which multiple insurance companies will offer multiple group plans, and employees will choose among the “menus” of plans offered. At the inception of the voucher system, employees won’t have to pay more than they do now to continue their current level of benefits (though they would have to pay more out-of-pocket for the premiums associated with the relatively high-benefit options).

Thereafter, the costs of a selected plan to an employee may rise faster than any increase in the size of the voucher the employer provides, and the elements of what a plan “buys” for an employee may be reduced.

These “private exchanges” — which share some similarities to the public state exchanges prescribed by the Affordable Care Act and are being marketed using some of the same rhetoric — are an essential part of the marketing strategy, according to patient advocates.

“These exchanges will let the employer create this menu of plans, which will allow them to say to their employees, ‘Look at all the choices we’re giving you,’” said Carmen Balber, the director of the Washington, D.C. office of the advocacy group Consumer Watchdog.

Indeed, Sears and Darden have been using that same rhetoric. Though Sears did not respond to requests to comment further for this article, a spokesperson told the Wall Street Journal that the shift “is about increasing associate choice and options for health care.” Ron DeFeo, a spokesperson for Darden Restaurants, told Remapping Debate that the company was responding to a perceived desire on the part of its employees for “more choice and more options.”