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Health Reform: Mixed Impact on Retiree Benefits, Study Finds

By Stephen Miller  12/28/2009
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Health care reform legislation pending in Congress in early 2010 would have a mixed impact on retiree health benefits, according to a study published by the not-for-profit Employee Benefit Research Institute (EBRI). In the short term, some provisions of the legislation could help bolster early retiree coverage, while over the long term other provisions could create significant incentives for employers to drop retiree coverage.

The study, in the January 2010 EBRI Issue Brief, assesses the impact on retiree health benefits of two major health reform bills that Congress must reconcile—The Affordable Health Care for America Act (H.R. 3962), which passed the House, and The Patient Protection and Affordable Care Act (H.R. 3590), which passed the Senate in the early hours of Dec. 24, 2009.

As EBRI's study notes:

Private-sector retiree health benefits have been eroding since the mid-1990s, a downward trend driven by accounting rule changes that negatively affected the financial statements of employers’ offering the benefit and ever-growing health care costs.

Among private- and public-sector employers that continue offering retiree health benefits, more are increasing retiree premiums and cost sharing, and workers are finding it harder to qualify for a subsidized retiree health benefit.

Assessing the impact of current health care legislation on retiree coverage, the study draws distinctions between the short term and long term.

Short term. Reinsurance provisions in the bills would help shore up early retiree coverage.

Long term. New subsidies for individuals enrolling for coverage through insurance exchanges, the maintenance-of-effort provision affecting early retiree benefits, increases in the cost of providing drug benefits to retirees, and enhanced Medicare Part D coverage would create significant incentives for employers to drop coverage for early retirees and drug coverage for Medicare-eligible retirees.

Here are details of some specific points in the study:

Reinsurance Program for Early Retirees

Proposed legislation includes a provision to create a temporary reinsurance program for employers providing health benefits to retirees over age 55 and not yet eligible for Medicare. Given the temporary nature of the program, it is intended to provide employers an incentive to maintain benefits until the health insurance exchange is fully operational. At that point, employers would have less incentive to provide health benefits to early retirees, and retirees will have less need for former employers to maintain a program.

Medicare Drug Benefits

Initially, the House-passed bill would reduce the coverage gap (the so-called “doughnut hole”) for individuals in the Medicare Part D program by $500 and eliminate it by 2019. The Senate bill would also reduce the coverage gap by $500 but does not call for eliminating it, though recent reports suggest that Senate leaders would like to eliminate it in the House-Senate conference. Both would provide a 50 percent discount to brand-name drug coverage in the coverage gap. These provisions increase the value of the Medicare Part D drug program to Medicare-eligible beneficiaries relative to drug benefits provided by employers.

Tax Treatment of Employer Rx Subsidies

The Medicare Modernization Act provides subsidies to employers that continue to offer prescription drug coverage through a retiree health benefits program. This subsidy is currently not counted as taxable income to the employer receiving it. The House and Senate bills would in effect repeal this tax exclusion (see Employers, Unions Warn Against Taxing Medicare Drug Subsidy in Retiree Health Programs).

This could have two effects: The real cost of providing retiree health benefits to Medicare-eligible retirees would increase, and an employer’s accounting liability would increase immediately. The increase in the cost of retiree drug benefits could cause employers to re-evaluate the subsidy, compared with other available options. Moving retirees to Medicare Part D might become even more attractive to employers if the coverage gap is reduced or eliminated.

Post-Retirement Benefit Changes

With some exceptions, the House-passed legislation would prohibit employers from changing the benefits offered to retirees and their beneficiaries once a person has retired. This provision could have a number of effects:

More employers might move toward capping their contributions.

Employers that want to maintain retiree health benefits might react by cutting the health benefits of active workers.

Employers might eliminate retiree health benefits to avoid being locked into providing a permanent benefit, or they might drop benefits if they think there is no need to provide them.

In the conclusion to the study, Paul Fronstin, director of the EBRI Health Research and Education Program and author of the study, writes:

“Current legislative proposals will increase the cost to employers of offering retiree health benefits. If these proposals pass … private-sector employment-based retiree health benefits are practically certain to decline: They will be less valuable to retirees in the future, and employers will find they are not as necessary to offer in the future, dramatically reducing the number of retirees enrolled in employment-based plans.”

Stephen Miller is an online editor/manager for SHRM.

Related Articles:

Employers, Unions Warn Against Taxing Medicare Drug Subsidy in Retiree Health Programs, SHRM Online Benefits Discipline, December 2009 

Employers Anxious About Retiree Medical Promises, SHRM Online Benefits Discipline, December 2009

Employers Would Reduce Health Benefits to Avoid Excise Tax, SHRM Online Benefits Discipline, December 2009

Employers Group Offers Mixed Appraisal of Senate Health Bill, SHRM Online Benefits Discipline, November 2009

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