Big Firms Overhaul Health Coverage,” shouted the headline on the front page of the September 26 Wall Street Journal.

The nation’s leading business newspaper was reporting on recent announcements by two major U.S. employers that could foretell a revolution in employee health benefits.

Sears Holdings Corporation and Darden Restaurants Inc. are planning what the Journal calls “a radical change in the way they provide health benefits to their workers.” Sears, with some 90,000 full-time employees, and Darden, owner of restaurants like Olive Garden and Red Lobster, with about 45,000 workers, have made arrangements to refer their employees to a private sector health insurance exchange which will offer competing health insurance plans.

Operated by Aon Hewitt, the private insurance exchange will offer several employer-supported group health plans with varying annual premiums, deductibles and co-pays. Workers will be able to navigate among the different plan choices via a website much as consumers do today on Orbitz to make travel arrangements. Read more.

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A “401(k)” for Health Benefits?

Mon Oct 8, 2012

Big Firms Overhaul Health Coverage,” shouted the headline on the front page of the September 26 Wall Street Journal.

The nation’s leading business newspaper was reporting on recent announcements by two major U.S. employers that could foretell a revolution in employee health benefits.

Sears Holdings Corporation and Darden Restaurants Inc. are planning what the Journal calls “a radical change in the way they provide health benefits to their workers.” Sears, with some 90,000 full-time employees, and Darden, owner of restaurants like Olive Garden and Red Lobster, with about 45,000 workers, have made arrangements to refer their employees to a private sector health insurance exchange which will offer competing health insurance plans.

Operated by Aon Hewitt, the private insurance exchange will offer several employer-supported group health plans with varying annual premiums, deductibles and co-pays. Workers will be able to navigate among the different plan choices via a website much as consumers do today on Orbitz to make travel arrangements.

But what really makes this interesting is that Sears and Darden will give eligible employees a fixed amount of money that the employee can then use to help pay the costs of the selected health plans. In other words, both major companies have switched from a “defined benefit” employee health plan model to a “defined contribution” health plan model.

And this is what makes this announcement potentially revolutionary—Sears and Darden in some ways are creating a “401(k)”-type plan for health benefits. Like the 401(k) retirement plan concept, employees will receive a fixed employer payment and then take responsibility for selecting among available options in designing their personal household benefits plan. In other words, employees and their families will manage their own health insurance benefits.

The advantage for the employer is obvious: cost predictability of employee health benefits. For the employee the presumed benefit is choice: flexibility to design coverages—and costs—to suit their particular family, age and health situations.

To be sure, some will worry whether the employer contribution will be sufficient to enable families to afford the health coverage they need. There will also be concerns about whether the fixed dollar contribution may rise and fall with company fortunes. In any event in 2014 a provision in the healthcare reform law will become effective that will limit employee premium costs and specify the minimum value of health coverage that employers must offer.

It’s not clear as yet whether other employers will trend in the direction of defined contribution health benefits. Recent data suggest that health savings accounts and high-deductible health plans are growing in popularity among employers and workers.

What is perfectly clear, however, is that large, medium and small employers in the U.S. will closely watch the experience of pioneers Sears and Darden in stepping into what could become a new world of employee health benefits.

The message to American workers and their families is also crystal clear: As long as health costs continue to skyrocket employers will explore the idea of a “401(k)” for health benefits.