Puget Sound Automobile Dealers Association

Keith Robertson, a health benefits consultant with ClearPoint, wrote the following article on defined contribution medical plans for the Fall 2009 issue of the Puget Sound Dealer. In the article, Keith argues that car dealerships will transition to defined contribution medical plans in the same way many companies once shifted from pension plans to 401k retirement plans. He uses one of his own clients, Brien Motors, as a case study to illustrate how effective defined contribution medical plans can be.

Defined Contribution Health Benefits: Is this the future?

By Keith Robertson

As costs rise, group medical insurance becomes increasingly unsustainable for many companies. In 1998, the average cost of health insurance for a single employee was $183 per month; today it is $392. Thirty years ago, companies struggled to control the costs of another employee benefit -- pensions. They solved this problem by fixing their costs or “defining their contribution” through 401(k) plans. A similar approach to health benefits is gaining acceptance among companies.

History of Defined Contribution

As retirees began to live longer, pension plans became more costly. Companies were unwilling to commit to an unpredictable, ever-increasing future expense. In 1978, the creation of the 401(k) allowed businesses to control their retirement costs. Companies and employees could now contribute to a personal retirement fund. Companies defined their contributions, and employees drew on their funds during retirement. The 401(k) enabled companies to control their pension liability by only making contributions while their employees were still working.

The dilemma of traditional group medical plans

Under a traditional medical plan, employees receive guaranteed levels of coverage, regardless of the cost to the company. Insurance carriers charge premiums based on demographics, employees health, geography and industry. Although the average cost of coverage is $392, any single company may pay even more. Like employers with pension plans who unsuccessfully tried to foresee the cost of increasing life expectancy, companies typically cannot predict their employees’ health. As a result, companies offering defined benefit group medical plans are saddled with a long-term, unknown, financial liability.

Defined contribution approach controls costs

A defined contribution approach to health benefits is gaining market acceptance. Rock Peterson of Brien Motors recently implemented a defined contribution plan for his Everett auto dealership because, under the previous group medical plan, “we didn’t have a way to control our costs in the long run.” The new plan “makes our costs predictable, relieves us of burdensome carrier requirements, and gives employees the flexibility to choose an individual health insurance plan that is best suited to their needs,” says Peterson. A defined contribution approach combines a company allowance for medical expenses with the individual health insurance market.

Medical Expense Allowances

Some tax-advantaged benefit plans, such as Health Reimbursement Arrangements (HRAs), can be used to reimburse employees for medical expenses, including individual health insurance premiums. In these arrangements, the health plan offered employees is simply a medical allowance that employees use for their personal medical expenses. This is a defined contribution solution because companies set their costs, regardless of the medical expenses incurred by employees. If employees want insurance, they may use their medical allowances to purchase individual health insurance coverage.

Individual Health Insurance

The individual health insurance market is much more dynamic than that for group medical insurance. In Washington, there are more than 40 individual health insurance policy options, ranging from very rich comprehensive coverage to very affordable catastrophic coverage. Because of this diversity of products, most people are able to find policies that fit their needs for comparable or less cost.

Case Study

An auto dealership with three locations in Western Washington and 90 employees adopted this defined contribution model. The company had offered employees a group medical program, but the costs had become too high for both the company and the employees. Although the company contributed $300 per employee per month for health coverage, each employee was required to pay $200 per month to participate, due to the group plan’s high cost. As a result, only 55 people were enrolled. Also, few dependent children were covered, due to the high costs. Participation dipped below the required 75% enrollment level and the dealership was not renewed.

Solution

The company implemented a defined contribution plan. The company hired a private vendor for administration and provides each employee a monthly medical expense allowance of $250. Employees can use these funds to be reimbursed for individual health insurance policies or to pay directly for medical expenses.

The results of the change were beneficial for both the auto dealership and its employees.

• Continuation of health benefits: All eligible employees were able to retain access to health benefits they otherwise would have lost.
• Increased insurance coverage: The number of individuals with health insurance increased from 55 to 80. Employees who could not afford to participate in the group plan were able to purchase individual insurance, and most employees could find a policy for less than the company’s $250 monthly contribution.
• More dependent children insured: Using individual policies, employees can cover a child with the most comprehensive medical policy on the market for approximately $130 per month. As a result, many employees were able to afford insurance for their children for the first time.
• No renewals: Since moving to the defined contribution plan, the company has not undergone a health insurance renewal. On an annual basis, the company simply decides if it wants to adjust its allowance for employees.
• Greater Employee Choice: People are diverse and given the opportunity to choose from an array of options, their choices reflect that diversity.

Medical Underwriting

Occasionally an employee will not qualify for an individual policy due to a pre-existing condition. These individuals are then enrolled on a richer plan through the Washington High Risk Pool and their higher medical costs no longer affect the premiums of the larger population.

Conclusion

As the cost of traditional health plans continues to increase, so does interest in defined contribution solutions. Not all companies will make this transition just as many large employers still offer defined benefit pension plans. However, defined contribution health benefits have the potential to gain the same acceptance as the 401(k).

Is a defined contribution approach right for you? We recommend you check with your attorney, as well as your management team and key employees before adopting this strategy. This type of plan might help you control health benefit expenses. If you would like more information, without obligation, about this innovative health benefits approach, please contact Keith Robertson at ClearPoint (800) 410-6571.

The above article reports how two Puget Sound dealers are dealing with rising health benefit costs. PSADA does not have an opinion on the contents of this article. Inclusion of this topic in this magazine is not an endorsement or a recommendation from PSADA. As always, PSADA reports new ideas, innovative operating approaches dealers use to solve problems, articles on new laws, and other stimulating and interesting ideas. It is PSADA’s job to report what’s new and then let you be the judge as to what works best for you and your unique business.