Big Firms Overhaul Health Coverage


Wall Street Journal

Two big employers are planning a radical change in how they provide health benefits to their workers, giving employees a fixed sum of money and allowing them to choose their medical coverage and insurer from an online marketplace. Anna Mathews has details on Lunch Break. Photo: Getty Images.

Two big employers are planning a radical change in the way they provide health benefits to their workers, giving employees a fixed sum of money and allowing them to choose their medical coverage and insurer from an online marketplace.

Sears Holdings Corp. and Darden Restaurants Inc. say the change isn’t designed to make workers pay a higher share of health-coverage costs. Instead they say it is supposed to put more control over health benefits in the hands of employees.

Darden Restaurants, owner of Red Lobster, is giving staff money and allowing them to choose health coverage. The approach will be closely watched by firms around the U.S. If it eventually takes hold widely, it might parallel the transition from company-provided pensions to 401(k) retirement-savings plans controlled by workers and funded partly by employer contributions.  For employees, the concern will be that they could end up more directly exposed to the upward march of health costs.

“It’s a fundamental change…the employer is saying, ‘Here’s a pot of money, go shop,’ ” said Paul Fronstin, director of health research at the Employee Benefit Research Institute, a nonprofit. The worry for employees is that “the money may not be sufficient and it may not keep up with premium inflation.”

Neither Sears nor Darden would say how much money employees would receive to buy health insurance. Darden says its sum would rise as health-care costs rise. Sears declined to disclose details of its contributions strategy.

Darden did say that employees will pay the same contribution out of their own pockets that they currently do for approximately the same level of coverage. Employees who pick more expensive coverage will pay more from their paychecks to make up the gap.

Those who opt for cheaper insurance, which may involve bigger deductibles or more limited networks of doctors and hospitals, will pay less.

“It puts the choice in the employee’s hands to buy up or buy down,” said Danielle Kirgan, a senior vice president at Darden. The owner of chains including Olive Garden and Red Lobster will let its approximately 45,000 full-time employees choose the new coverage in November, to kick in Jan. 1. Darden says that employees with families to cover will be given more money to buy insurance than employees covering just themselves.


The hope is that insurers will compete more vigorously to get workers to sign up, which will lower overall health-care costs. Darden and Sears are both currently self-insured, meaning that the cost of claims each year comes out of company coffers.

On average, U.S. employers and workers are estimated to spend $15,475 in annual premiums for health insurance this year for a worker with family coverage, according to a survey by the Kaiser Family Foundation and Health Research and Educational Trust.

The average employee pays about 28% of that amount and the employer picks up the balance.

The approach isn’t directly tied to the federal health overhaul law, which largely goes into effect in 2014. That law will make it easier for employers to funnel workers toward purchasing plans in the individual insurance market, perhaps aided by an employer contribution. The exchange used by Sears and Darden still involves employer-backed group plans, not individual insurance, however, so it doesn’t rely on the law’s changes.

Several big benefits consultants and health insurers are betting on the employee-choice model. Major consulting firm Aon Hewitt, a unit of Aon PLC, is behind the insurance exchange that Sears and Darden will use, while rival Towers Watson & Co. in May bought Extend Health Inc., an online marketplace used by employers to hook retirees up with Medicare coverage. It plans to expand the marketplace to include active workers buying individual plans, starting in 2014.

“Within the next two or three years, it’s going to be mainstream,” said Ken Goulet, executive vice president at WellPoint Inc. The insurer will roll out a product next year called Anthem Health Marketplace that lets employers offer a variety of its plans to workers, paired with a fixed contribution. Mr. Goulet said it is close to signing up more than 30 midsize and large employers for early next year, including one with more than 50,000 workers.

Other insurers say big companies will hold back until they see early successes. “There will be a lot of interest in taking a look at those results,” said Yasmine Winkler, chief product and marketing officer at UnitedHealth Group Inc.’s insurance arm, the nation’s largest. But, she said, “The jury’s out” on whether the approach will become widespread.

Though some employers today offer workers more than one health plan design, they don’t provide as many choices as the exchanges will. The Aon Hewitt version will have five different levels of health plan, and five different health insurers. Workers also don’t get the “shopping” experience, where they see the full cost of the plan, and apply their own allotted money to it.

A spokesman for Sears, which will have around 90,000 full-time employees eligible for the new health-benefits program, said the approach “is about increasing associate choice and options for their health care,” and should benefit both the company and its employees.

But some consultants question whether the exchange setups will achieve overall savings for big employers, particularly those who already self-insure to shave costs.

Exchange operators today say they offer employers more predictable costs, as well as potential savings gleaned from workers’ voluntary choice of skinnier coverage and competition among insurers offering plans on the exchanges.

“It drives competition and drives efficiency,” said Ken Sperling, Aon’s national health exchange strategy leader.

Aon’s marketplace is expected to have around 100,000 employees, including Aon’s own, when it launches next year. Bloom Health Corp., which is working with Health Care Service Corp. and Minnesota’s Medica Health Plans, in addition to WellPoint and others, said it also expects to have around 100,000 workers at the beginning of 2013. Other employer-focused exchanges, including ConnectedHealth LLC, of Chicago, also say they are seeing growth.

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