Companies are revisiting and rethinking their strategies for managing retiree medical benefits.
Employers have been easing away from offering these benefit plans since the early 1990s. That’s when they were first required to account for future retiree medical benefit liabilities on their balance sheets. Now that the Patient Protection and Affordable Care Act of 2010, otherwise known as health care reform, is taking hold, the landscape for retiree medical benefits is changing again.
The reform law includes provisions to help employers manage their retiree medical plans. But it may not be enough to stem the tide away from offering these benefits.
"It is difficult for companies to keep their past promises to pre-65 and post-65 retirees if they intend to be globally competitive," says Paul Kersting, a principal with Buck Consultants in New York City. "More employers will move away from sponsoring plans if they can."
Roughly 60 percent of employers are reconsidering their approach to providing retiree medical benefits or plan to do so within the next two years, according to a 2011 survey of 248 companies conducted by Towers Watson and the International Society of Certified Employee Benefit Specialists. Many employers see health care reform as a way to exit plan sponsorship by relying on state health insurance exchanges and other innovations in the reform law to ensure that retirees have access to affordable coverage. The exchanges are slated to begin operating in 2014.
But, according to the survey, employers already are:
- Assessing the impact of temporary federal subsidies for providing medical benefits to retirees under the age of 65—a program so popular that it is no longer open to new employers.
- Measuring and dealing with the potential impact of the excise tax on high-cost "Cadillac" plans.
- Rethinking retiree prescription drug coverage in light of enhancements to the Medicare Part D program.
"Health care reform can serve as a catalyst for employers to rethink their benefit strategies in a way to create as much predictability in their health care for retirees as possible," says Jim Parker, president of Health Market Strategies, an Indianapolis-based health consulting firm. "Some provisions of the reform law will actually facilitate that."
Changes, Now and Later
The challenge for employers is to review their retiree medical plans and develop long-term strategies in light of health care reform. "Companies need to see what opportunities brought about by health care reform they can take advantage of," says John Grosso, leader of the Health Care Practice for Aon Hewitt in Norwalk, Conn. No matter what direction companies take, several provisions of the reform law will influence their strategies.
One of the most immediate impacts of health care reform affects prescription drug benefits for retirees. Employers currently receive a federal subsidy equal to 28 percent of the cost of providing prescription drug coverage for retirees. This federal subsidy serves as an important incentive to employers to offer retiree drug coverage, but the reform law eliminates the tax benefit of the subsidy. Even though the tax benefit does not go away until 2013, there is an immediate effect on companies that continue to receive the subsidy because they must account for future retiree medical liabilities on their balance sheets.
In addition, the health care reform law slowly closes a gap in coverage under Medicare Part D known as the "doughnut hole." The gap will be narrowed between 2011 and 2020 through a combination of federal subsidies and manufacturer discounts on brand-name drugs. Beneficiaries now pay for the costs of their prescription drugs after the first $2,830 in costs and benefits are paid by Medicare; then, after a $6,440 threshold is reached, Medicare resumes paying for benefits. This makes the Medicare Part D program much more expensive for retirees compared to coverage under a typical employer’s prescription drug plan. The closing of the doughnut hole is likely to make the program more attractive. "This is designed to encourage employers to take a second look at the Part D program as a solution for the retirees currently receiving retiree coverage," Parker says.
To encourage employers to continue offering medical benefit plans to pre-65 retirees, the reform law includes a temporary $5 billion early retiree reinsurance plan. The program reimburses employers for a portion of the cost of providing health benefits for pre-65 retirees and their spouses, surviving spouses and dependents. Specifically, the program reimburses up to 80 percent of certain medical claims between $15,000 and $90,000.
The reinsurance subsidy is designed to keep pre-65 retiree medical benefit programs going until state health insurance exchanges begin operating in 2014. However, with so many employers taking advantage of this program, its funds are not expected to last that long. "About $2.7 billion of that money has already been used, and the rest is expected to run out in 2012," Kersting notes. As of March, more than 1,300 employers were participating in the program. In May, the program stopped accepting applications.
Excise tax on Cadillac plans.
Employers need to start planning for the so-called Cadillac tax—a 40 percent nondeductible tax on the annual value of employee health plan costs in excess of $10,200 for single coverage or $27,500 for family coverage.
"Companies with pre-65 programs are looking long and hard to understand exactly how the excise tax might affect their plans," Grosso says. Even though the tax does not begin until 2018, it can have an immediate and negative accounting impact. Companies can take a hit to their current accounting statements because of future liabilities created by the Cadillac tax, Grosso notes.
By evaluating the impact of the Cadillac tax now, employers have plenty of time to develop a strategy and make plan changes to avoid or minimize the tax. Companies may be surprised at the results of their evaluations, according to Ed Pudlowski, a principal with Ernst & Young in Dallas. "Our analyses suggest that more than 50 percent of all employer plans will likely be impacted by the Cadillac tax in 2018 if employers make no changes to the current coverage."
State health insurance exchanges.
Perhaps the biggest change to the retiree medical benefits landscape will be the creation of state health insurance exchanges. These will be marketplaces open to small businesses and individuals shopping for insurance. Those who buy insurance on an exchange could be eligible for tax credits and federal subsidies. "If health care exchanges are up and running as planned in 2014, they will provide access to guaranteed issue plans and to federal subsidies," Grosso says. "We expect to see a number of companies send their pre-65 retirees to the state exchanges to get coverage."
Employers struggling to maintain retiree medical benefits are likely to find that the exchanges will ensure that their pre-65 retirees have access to quality plans, says Helen Darling, president and CEO of the Washington, D.C.-based National Business Group on Health, a coalition of large employers. "Retirees will benefit from having access to the exchanges because they will be able to get coverage that is likely to be better for them than what they would normally get on their own," Darling says.
To facilitate this shift, employers may be more willing to increase the financial help they provide to retirees through health savings accounts or other vehicles. Since pre-65 retirees will have access to the insurance exchanges, it could be "much easier for an employer to provide some financial assistance in an account rather than coverage through their own plans," Darling says.
Life on an Exchange
Although the first state health insurance exchanges won’t be up and running until 2014, private Medicare exchanges are already operating. When its national insurance carrier stopped offering its post-65 retiree health plan, Boston-based publishing firm Houghton Mifflin Harcourt turned to Extend Health Inc., a private Medicare exchange, rather than choosing another national plan. The company’s former national plan’s provider network was not broad enough to meet the needs of the company’s far-flung retiree population. In addition, Houghton Mifflin Harcourt wanted to provide individual retirees with the opportunity to choose from an array of health insurance plans based on their own needs. The Medicare exchange plans also cost less than or no more than what retirees had been paying for the national plan.
Moving to the Medicare exchange was just one change of many to Houghton Mifflin Harcourt’s retiree medical benefits. The company began freezing the benefits several years ago, which has created different levels of benefits among employees and retirees. The first group includes those who were grandfathered into the original retiree medical program and have 100 percent of their retiree medical premiums covered. Retirees in another, post-freeze group receive a specific contribution to their retiree medical premiums on a sliding scale based on years of service and hire dates. The company’s most recent changes to its retiree medical program provide pre-65 retirees with access to group medical coverage after retirement with a discretionary company subsidy.
Based on his experience with the private Medicare exchange, Carl Cudworth, Houghton Mifflin Harcourt’s director of benefits in Austin, Texas, is keeping an eye on the state insurance exchanges to see if they could be a viable option for the company’s pre-65 retiree group. If the state exchanges function in much the same way as the post-65 retiree market currently functions, "that would certainly be a game-changer," Cudworth says.
Cudworth says leaders in many companies would be interested in providing pre-65 retirees with access to guaranteed issue medical coverage through the state exchanges. "The exchanges could provide retirees with the opportunity to select plans and carriers based on their individual needs, and to do so cost-effectively while allowing companies to provide subsidies," he says. "That would be an exciting environment to be working in."
Many questions remain about the future of health care reform and its implementation—and not just the elements affecting retiree medical benefits. However, Cyndy Nayer, president and CEO of The Center for Health value Innovation, a nonprofit health care think tank based in Estero, Fla., notes that a bit of chaos is to be expected with such a major change. "Medicare’s rollout was similarly chaotic, but it settled down after a few years," she says.
One thing Cudworth believes is unlikely to change: the move toward defined contribution approaches in retiree medical benefits. In fact, with more companies offering high-deductible health insurance plans with either health savings accounts or health reimbursement accounts, future retirees are likely to make the transition away from employer-sponsored retiree plans much more easily.
No matter what health care reform brings, employers need to keep tabs on what is happening with their retiree medical plans. "Look at everything—education, the cost-effectiveness of the plan, plan designs, contributions, cost sharing—and see if it all makes sense," says Jim Miller, a consultant with brokerage firm The Graham Co. in Philadelphia. "Are retirees in a position to choose benefits that make financial sense?"
The author is a New Jersey-based business and financial writer.