When certain provisions of the Patient Protection and Affordable Care Act (PPACA) go into effect in 2014, the obstacles early retirees face getting health insurance should diminish—as they will for all Americans purchasing health insurance as individuals. In the meantime, HR benefit managers can build a bridge to 2014 for their early retirees.
First, let’s look at the roadblocks to early retiree health insurance today.
With the trend of employers discontinuing early retiree health benefits, most early retirees are forced to buy insurance on the private individual market—a bleak prospect when insurance carriers routinely charge pre-Medicare retirees from 55 to 64 years of age much higher premiums for far less coverage than younger people, exclude pre-existing conditions, or they decline to cover them.
Until 2014, can early retirees be helped? The answer is yes: by beginning to move them from legacy group plans to "defined contribution health plans" and providing education and tools, HR managers can empower their early retirees to become cost-conscious and careful consumers, changing their mindset from “I don’t know how much my health benefits cost and I don’t care” to “I know how much my health benefits costs and I do care.”
This is good for early retirees, for employers and for solving the largest problem in the American health care system today: costs that are spiraling out of control.
What’s Happening in 2014?
The PPACA-required plans for individuals that will be in place 2014, barring changes in the law, have two essential protections that today are available only to individuals on Medicare: guaranteed issue and stratified plan design.
Guaranteed issue means that everyone is in the same “super group” for actuarial purposes and cannot be denied coverage. Stratified plan design makes it easy for consumers to compare plans side by side, which forces carriers to compete on price and features.
As evidence of how consumers will re-evaluate their plans when given an easy option, a January 2011 survey of 476 retirees who purchased private Medicare plans on Extend Health, the largest private Medicare exchange in the U.S., showed that 73 percent re-evaluated their plans during the 2010 Medicare Annual Enrollment Period (AEP) after viewing side-by-side comparisons on a health insurance exchange. Of those who re-evaluated their plans, 61 percent made a change.
When asked what prompted them to re-evaluate, the top two responses were “I wanted to confirm that I had the best coverage for me” (38 percent of respondents) and “My premiums increased” (37 percent).
In 2014, these same forces will be applied to health insurance for early retirees, giving them for the first time the ability to compare, buy up, buy down and switch plans. These powerful consumer tools will be in the hands of a group of people who, because they must watch costs very closely, are already careful shoppers.
Currently, the trend for employers to discontinue early retiree health benefits is accelerating. To encourage employers to stay in the game, in 2009 the Obama administration created a $5 billion program to provide financial relief to companies that offer early retiree health benefits between now and 2014. This was a stopgap measure—but not a long-term solution.
HRAs and Defined Contribution Health Care
One long-term solution that has been adopted by several large employers, including a multinational Midwestern company with more than 70,000 employees, is employer-sponsored health reimbursement arrangements (HRAs). In October 2010, the company announced to its employees that instead of maintaining legacy group health plans after they retire, it will establish HRAs for retirees and put money into them so that the retirees can purchase health plans in the private marketplace—a solution that can be thought of as a "defined contribution" health care because the employer funds the account but leaves it to individuals to purchase the type and scope of claims coverage that best suits their needs.
Starting in 2014, the advantages of HRAs and defined contribution health care plans over group legacy plans for early retirees are compelling:
• Defined contribution plans relieve employers of the burden of finding a group plan that offers the right benefits for a diverse group of people with vastly different health care needs—and of having to do so year after year.
• They give employers a way to predict and control the future costs of early retiree health benefits so they can offer them indefinitely.
For their part, early retirees gain more control over their health care coverage. Instead of being limited to one or two group plans as options, they can compare many plans from different carriers and choose the one that best fits their needs and budget.
Defined contribution plans have the added benefit of turning early retirees into super consumers of health benefits. Research on the shopping behavior of Extend Health's Medicare customers shows that retirees who buy their own health insurance know much more about what benefits cost than those who do not—even when their insurance premiums and other health care costs are paid for with assistance from their former employers. HR managers will be able to take advantage of the self-interest of their early retirees (and, perhaps eventually, all their employees) by arming them with their own money to purchase cost effective plans and preparing them to leverage their buying power.
Education Is Essential
Open enrollment 2013 will be the first chance to transition early retirees from group plans to the individual insurance market. But transitioning early retirees to HRAs and defined contribution health plans is a big change for people who are not used to making their own health insurance purchases.
Change takes time, and HR managers can help by starting now to:
• Plan HRA contribution levels with their actuaries and consultants.
• Communicate to their early retirees that PPACA that will give them access to individual health insurance plans with guaranteed coverage.
• Educate future early retirees and their company about health insurance exchanges—private exchanges that exist now and the state-run exchanges that will launch in the fall of 2013—to enable early retirees to compare plans from different carriers quickly and easily.
Moreover, HR managers can help early retirees to understand:
• How much their employer pays for their health insurance and how much their premiums increase each year. This is especially important during open enrollment periods and when benefits change.
• That the cost of health insurance premiums is connected to the cost and use of health care services. Factors that tend to increase premiums include overuse or duplication of services, and new and experimental services.
• That the best way to keep health care costs down is to stay healthy, and to back this up by offering wellness programs designed to help early retirees, and all employees, prevent disease and injury.
Best of Both Worlds
In the fall of 2013 (for coverage effective in 2014), early retirees will have access to something Medicare-eligible Americans have enjoyed for 50 years—quality health insurance at a reasonable price. Employers who sponsor early retiree health benefits will have the ability to plan, predict and control their costs. And they’ll be unleashing the most powerful force in the American economy to tackle the problem of rising health care costs—knowledgeable consumers with the ability to buy the coverage that is right for them, and to switch plans should they get an unacceptable rate increase or receive poor service.
HR managers can lead the way by ensuring that their early retirees' transition from passive employees on the company health plan to empowered individual health insurance consumers is a smooth one.
Bryce Williams is CEO of Extend Health, Inc., which operates the largest private Medicare exchange in the country at www.extendhealth.com.
It's Complicated: Coordinating Medicare, Employer Health Plans, SHRM Online Benefits Discipline, April 2011
Group Policies vs. Subsidized Individual Coverage—The Impact of Exchanges, SHRM Online Benefits Discipline, April 2010
Exchanges Will Alter Competition and Choice, HR News, March 2010
Here It Comes: Defined Contribution Health Care, Benefits Quarterly, First Quarter 2011
Funding Retiree Health, SHRM Multimedia
SHRM Online Benefits Discipline
SHRM Online Health Care Reform Resource Page