What are the basics of defined contribution health insurance?

The term “defined contribution” basically describes a variety of ways that employers can use to provide employees with health benefits.

According to E. Thomas Garman, distinguished fellow in the Association for Financial Counseling and Planning Education, a nonprofit organization dedicated to improving personal management education, and the American Council on Consumer Interests, a nonprofit organization that provides research-based information on topics of consumer interest, the defined contribution option offers workers more choice.

Garman claims, “It’s especially good for young workers who don’t make many claims. Let’s say the employer contributes $2,500 annually toward its worker’s health insurance. A 24-year-old in good health can shop around and probably find suitable coverage around $1,000 a year.”

The best advantage that defined contribution health insurance provides is the control you have over your own health care. With this, you can decide which benefits you need and how much you’re going to pay for them.

However, with this freedom come responsibilities. You will be responsible for comparing plans, making the final decision, filling out all of the necessary paperwork and making sure that the premiums are paid on time.

Once you researched potential insurers, you must compare costs. The cheapest plan might not provide the best coverage. Other than your financial status, you should also base your decision on other factors like how much coverage you are going to need.

Before signing a contract with health insurance companies, this is the work employers usually do. Deborah Chollet, a senior fellow researching the individual health insurance market fore Mathematica Policy Research, a Washington D.C., think thank, says, “There is no such thing as an average premium in the individual market”.   

If you are unsure about what this term means, always know that you are free to contact your insurer for further information. Keep in mind that the defined contribution idea is troublesome and raises questions that no one has yet answered. This idea sustains of employers simply adding to their worker’s paychecks to purchase health insurance and their employees spending the money wisely.

Dr. Harvey S. Frey, director of the Health Administration Responsibility Project in California claims, “What forces, if any, will guarantee that [the employer’s money] is used to buy health insurance rather than a large-screen TV? Will this result in an increase in the number of those voluntarily uninsured? How will they be handled when they or their families need medical care?”