Early Retiree Reinsurance Fund Likely Will Be Exhausted in 2012, Study Finds

By Stephen Miller Jun 10, 2010

A $5 billion temporary reinsurance program designed to help U.S. employers maintain health benefits for early retirees and their dependents will likely be exhausted within two years after its June 2010 launch—well before the 2014 termination date for the program, according to a study by the not-for-profit Employee Benefit Research Institute (EBRI).

The Early Retiree Reinsurance Program is part of the Patient Protection and Affordable Care Act, signed into law in March 2010. One goal of the program is to provide an incentive for employers to maintain retiree health benefits and assist retirees with their costs for health coverage.

Under the reinsurance program, sponsors of early retiree health programs must be able to show that the subsidies were not used to reduce their level of support for the plan. Subsidies can be used to reduce retiree costs; sponsors must show that the subsidies were used to generate savings or had the potential to generate savings.

A draft application and accompanying documents, detailing the kind of information regulators will seek from employers applying for the subsidy, are available online at www.reginfo.gov. The Department of Health and Human Services (HHS) said it intends to have a final application available by the end of June 2010. The subsidy will be available through the earlier of Jan. 1, 2014, or the date when the funds are exhausted.

HHS answers frequently asked questions about the Early Retiree Reinsurance Program here.

Limited Funds

Congress appropriated $5 billion for the program, which provides an 80 percent subsidy for retirees who are over age 55 and not yet eligible for Medicare. Claims from dependents also are eligible. The subsidy applies to claims of between $15,000 and $90,000.

Using data to calculate how many early retirees there are and how much they tend to spend on health care services, Paul Fronstin, director of the EBRI Health Research and Education Program and author of the study, concluded that the funds will be exhausted well before the program is set to expire. The study appears in the July 2010 EBRI Notes, released in advance by the organization.

If the subsidy were drawn down for all eligible early retirees and their dependents, $2.5 billion of the available $5 billion would be exhausted in the first year of the program, Fronstin found. The $5 billion would last no more than two years and would not be available in 2012 or 2013. This assumes that all employers eligible to apply do so and is contingent on other assumptions outlined in the study.

Although $5 billion might seem like a lot, it would cover only a fraction of overall pre-Medicare retiree claims, concurs Thom Mangan, CEO of Corporate Synergies, a health care consultancy servicing middle-market companies. "There is going to be a rush on the government by employers signing up to get it as fast as they can. The first in are going to get the subsidy; those who don't rush out and get it, won't," Mangan told SHRM Online.

"The number of employers eliminating pre-65 retiree medical benefits has grown over the past decade as health care costs continue to rapidly increase," notes Milind Desai, senior consulting actuary and co-leader of consultancy Hewitt Associate's retiree health care task force. "The early retiree reinsurance program encourages employers to continue offering coverage to pre-65 retirees and their families by providing some temporary relief from expensive pre-65 retiree medical claims. But because so many companies plan to apply for the progarm, employers will need to act quickly to secure a share of the proceeds, since the federal funds earmarked for this program are limited."

No Need to Rush?

However, HHS officials say applicants misunderstand the program's operation. Jay Angoff, director of the agency's Office of Consumer Information and Insurance Oversight, told the Wall Street Journal on June 16, 2010, that the money will not be distributed based on when employers turn in their applications. Instead, it will be paid out gradually as they submit claims for their retirees.

Asked whether the $5 billion will run out early, Angoff told the paper, "We've got no reason to expect that that's not going to last."

Most Employers with Early Retiree Benefits to Seek New Subsidy

Most U.S. companies that offer pre-65 retiree medical benefits intend to apply for the Early Retiree Reinsurance Program (ERRP) to offset a portion of health care claims costs for retirees ages 55 to 64 and their families, according to a May 2010 survey by consultancy Hewitt Associates.

Hewitt estimates that the average federal reimbursement will represent between $2,000 and $3,000 per pre-65 retiree per year, or approximately 25 percent to 35 percent of total health care costs. As an example, for a company that covers 1,000 pre-65 retirees, participation in the ERRP could result in $2 million to $3 million in reinsurance proceeds per year.

Cost Reduction Uncertainty

While the law requires that employers use the ERRP reimbursements to reduce the cost of the plan, Hewitt's survey showed that most have not yet decided on a specific approach.

The survey was conducted just as interim final rules with additional guidance around the ERRP were issued by the Department of Health and Human Services (HHS). At that time:

Two-thirds (66 percent) of companies that intend to apply for the reimbursement said they were unsure about how they plan to use the proceeds and were waiting for this guidance before making a decision.

16 percent said they are considering using the reimbursement to reduce premiums—including both employer and retiree share.

Another 5 percent said they are considering reducing the retiree share of premiums only.

Employers will be required to describe how the proceeds will be used to support the plan in their ERRP application.

"While the interim final rule on the ERRP was released in early May 2010, most employers are still looking for more details about how these funds can and cannot be used," says John Grosso, senior consulting actuary and co-leader of Hewitt's retiree health care task force. "We expect additional guidance by the end of June, and we believe companies will then make final decisions on how to best allocate these reimbursements to offset the cost of the plan."

Stephen Miller 
is an online editor/manager for SHRM.

Related Article:

Temporary Retiree Health Subsidy Available in June, SHRM Online Benefits Discipline, May 2010

Quick Links:

SHRM Online Benefits Discipline

SHRM Online Health Care Reform web page

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