Retiree Health Benefits Face Crossroads

Exchanges are being used to provide 'defined contribution' nongroup coverage

By Stephen Miller, CEBS Apr 18, 2014
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The share of employers sponsoring retiree health coverage has declined and employers that continue to offer coverage are redesigning their plans in response to rising health care costs and the Affordable Care Act, according to a new report by the nonprofit Kaiser Family Foundation, Retiree Health Benefits at the Crossroads.

The share of large firms (200 or more workers) in the U.S. offering retiree health benefits to active workers has declined from 66 percent in 1988 to 28 percent in 2013. The largest firms are most likely to offer health benefits to active workers when they retire; 48 percent of organizations with 5,000 or more workers provide retiree coverage versus 5 percent among those with from 3 to 199 workers.

 

Premiums and Cost Sharing

Typically retirees are required to make a contribution toward the total premium, and in some instances retirees pay 100 percent of the cost. According to Mercer’s National Survey of Employer-Sponsored Health Plans, as cited in the Kaiser report:

  • Retirees ages 65 and older paid the full premium in 40 percent of the large employer plans offering retiree health benefits.

  • Conversely, large employers paid the full amount in 14 percent of plans.

  • Among the remaining 46 percent of plans where the cost was shared, the average retiree contribution was 38 percent for Medicare-eligible retirees. The results were similar among employers offering benefits to pre-Medicare retirees.

Redesigning Coverage

Ongoing concerns about costs coupled with changes in Medicare, notably the addition of prescription drug coverage and more recent changes made by the Affordable Care Act (ACA), have triggered a major reassessment by employers of whether, and in what form, they should continue to offer retiree health benefits. Further, a number of policy proposals are under consideration that could have a significant impact on retiree health benefits and costs.

In general, most employers do not appear to be dropping coverage altogether, but the prevalence of retiree health coverage is expected to decline incrementally over time, assuming employers follow through on their interest in dropping coverage.

In addition to outright terminations of coverage, key changes reported by employers include:

  • Shifting to a defined contribution approach (providing retirees with a subsidy to purchase individual coverage) for both pre-65 and post-65 retiree coverage, fueled by the employers’ desire to manage future costs.

  • For Medicare-eligible retirees, facilitating access to nongroup "Medigap" or Medicare Advantage coverage through private exchanges.

  • For pre-65 retirees, using the new federal/state ACA marketplaces as a possible pathway to nongroup coverage.

  • Raising retirees’ premiums and cost sharing, including changes that essentially eliminated first-dollar coverage for retirees.

  • Tightening eligibility requirements, e.g., raising minimum age and service requirements.

  • Eliminating coverage for future retirees, typically first for new hires, in some cases for current employees and far less frequently, for current retirees.

  • Optimizing savings from Medicare prescription drug coverage.

Over the next few decades, these trends suggest that employer-sponsored supplemental coverage is likely to be available to far fewer workers, be structured differently and play a smaller role in retirement security than it has in the past.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related External Report:

Market trends in retiree healthcare and financial reporting implications, PricewaterhouseCoopers, April 2014

Related SHRM Articles:

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