Pressured by rising costs, U.S. employers are looking at alternative ways to provide health care benefits to their retirees over the next three years, such as by replacing traditional group medical benefits for pre-Medicare retirees with subsidies to purchase individual insurance through a private marketplace, new research shows.
Half of large U.S. employers are concerned about increases in their costs to provide medical benefits for retirees, according to consultancy WTW's Retiree Medical Survey, conducted in July and August among 122 U.S. employers that together employ 1.9 million workers.
WTW projects that:
- Costs for retirees who aren't eligible for Medicare will rise 4.8 percent next year, up from a 3.6 percent increase this year.
- Costs for Medicare-eligible retirees will rise 2.7 percent next year, up from 2.1 percent this year.
"With meaningful cost increases coming, employers aren't sitting still," said Lindsay Hunter, senior director for health and benefits at WTW. "For now, they remain committed to offering retiree health care benefits and a positive retiree experience. But they're looking for ways to provide them more cost effectively."
She added, "Employers are rightfully concerned about this growing burden and are studying all options, including private marketplaces."
According to WTW's survey, 13 percent of respondents expect to make changes to their retiree medical benefits over the next three years. These employers expect to make changes because:
- The benefits are too expensive for the company to maintain (49 percent).
- They are looking to address unacceptable financial risks (36 percent)
- They need to reduce the plan's administrative burden (33 percent).
The survey also showed that over 1 in 5 employers (22 percent) have either stopped offering a traditional group medical plan to early retirees or are considering a replacement. Among those employers that terminated a group plan, 75 percent are replacing it with access to and financial support for individual insurance through a private marketplace. Similarly, those considering a replacement are looking toward a private marketplace.
"The recent passage of the Inflation Reduction Act is making private insurance marketplaces for individual coverage an even more attractive option for retiree benefits," said Trevis Parson, chief actuary for benefits at WTW. "In particular, the extension of premium tax credits and improvements to Part D [prescription drug] plans position private marketplaces to better offset rising health care costs for both organizations and their retirees."
Health Care Costs for Retirees
According to a September 2022 analysis by actuary and advisory firm Milliman:
- A healthy 65-year-old man retiring in 2022 is projected to spend approximately $264,000 on health care during his retirement, assuming a life span of 88 years.
- A healthy 65-year-old woman retiring in 2022 is projected to spend approximately $300,000 on health care during her retirement, assuming a life span of 90 years.
Projected costs are based on the Milliman Health Cost Guidelines and premium information obtained from the Centers for Medicare & Medicaid Services.
"Out-of-pocket costs for health care are an important part of retirement planning, and how much you will spend depends on a variety of health factors," wrote Robert L. Schmidt and Eric Walters, actuaries in Milliman's Boise, Idaho, office.
These factors, they explained, include:
- Current health status, such as heart problems, arthritis and other chronic or recurring ailments.
- Risk factors that could affect a retiree's health status, such as tobacco use or high blood pressure.
- The level of financial risk a retiree is willing to take on (or withstand) by trading lower premiums for higher deductibles and out-of-pocket costs under a Medicare supplemental ("Medigap") plan or a Medicare Advantage plan.