Employers Reassess Retiree Health Strategy

By Stephen Miller, CEBS Aug 12, 2013

In response to rising health care costs and mandated changes brought about by the Patient Protection and Affordable Care Act (PPACA), a growing number of U.S. organizations plan to either drop group health​ coverage for post-65 retirees or replace it with subsidies to purchase Medigap plans through the individual market, according to an Aon Hewitt survey.

The consultancy’s 2013 Retiree Health Care Survey found that more than 60 percent of U.S. employers are reassessing their long-term retiree health strategies because of the PPACA. Of those companies that have already decided to make strategy changes to health coverage for post-65 retirees, more than 40 percent have moved forward with directing retirees to the individual market for coverage, often accompanied by a defined contribution subsidy. Of those organizations expecting to make strategy changes in the future, more than half indicated a strong interest in this approach.

“With the PPACA legal and political landscape generally clarified, employers are looking to control cost, manage risk and source coverage through the most efficient means possible,” said Maureen Scholl, CEO of Health Care Exchanges for Aon Hewitt. “Individual market-based retiree health care sourcing strategies can create significant savings opportunities for all stakeholders. We expect to see many employers apply these strategies where possible and supplement them with modified group-based programs for those retiree populations where individual strategies do not make sense.”

Post-65 Retiree Benefit Strategy Changes

Companies that have decided to make a strategy change

Companies that expect to make a strategy change in the future

Individual Market-Based Approaches

Adopt defined contribution strategy to subsidize post-65 Medigap coverage with individual market-based benefit sourcing.



Terminate group drug coverage with no replacement.



Terminate group drug coverage and reimburse out-of-pocket costs for individual Part D (Medicare drug benefit) plans.



Terminate group drug coverage and provide Part D premium support.



Group-Based Approaches

Provide a group-based Medicare Part D plan (employer group waiver plan).



Provide a group-based national Medicare Advantage plan with retiree drug subsidy.



Provide a group-based national Medicare Advantage plan with Medicare Part D coverage (employer group waiver plan).






Source: Aon Hewitt

Pre-Medicare Retirees

The survey showed that many companies are also considering changing their pre-Medicare retiree strategies to leverage the individual market in the future. Of those employers contemplating changes to their pre-65 retiree coverage, 34 percent favor a defined contribution strategy with individual market/public exchange-based benefit sourcing, and 30 percent prefer eliminating pre-65 retiree coverage and subsidies altogether. Thirty-three percent do not plan to change their strategy.

Medicare Part D Strategies

According to the survey, 53 percent of employers have altered or plan to alter their Medicare Part D or broader post-65 retiree benefit strategies. Thirty-six percent of companies that have made changes since 2010 have moved to a group-based Medicare Part D plan—known as an employer group waiver plan (EGWP)—and another 21 percent of those still mulling changes expect to move to the EGWP in the future.

The percentage of employers that filed to collect the federal Medicare Part D retiree drug subsidy (RDS) dropped from 63 percent in 2010 to 48 percent in 2013. Only 18 percent plan to file for the subsidy in the long term.

“The elimination of the tax-favored status of the RDS for 2013, coupled with the PPACA-prescribed improvements to the Medicare Part D program, created the impetus for employers to take action,” noted Milind Desai, retirement actuary at Aon Hewitt. “While many organizations will continue to rely on group-based sourcing strategies for their retiree populations, they will likely migrate toward ones that are more cost-effective.”

Medicare Advantage Strategies

Just 34 percent of employers offer local/regional or national group-based Medicare Advantage plans to any of their post-65 retirees, and a mere 6 percent of employers consider Medicare Advantage to be a viable group-based strategy going forward, the survey revealed.

However, 38 percent of employers say they would consider replacing their current group-based Medicare medical indemnity supplement strategies with a national Medicare Advantage PPO if there would be no change in retiree benefits and if it would generate material savings in the near term.

“In the past many employers leveraged Medicare Advantage plan strategies because the savings could be significant,” said John Grosso, health care actuary and leader of Aon Hewitt’s retiree health care task force. “Over time, these plans experienced significant challenges as federal funding cuts took place, which led to increases in plan premiums, reductions in benefits, and plans exiting certain locations. While PPACA introduced a number of changes to the Medicare Advantage program, employers generally want to see consistent performance over time and a stable federal funding commitment before investing in these group-based strategies for the long term.”

Settlement Strategies

Settlement strategies allow an employer to fully or partially eliminate its retiree medical commitment through a benefit buyout. Settlement strategies that businesses have considered include purchasing life annuities to provide a fixed income stream in lieu of ongoing medical coverage, establishing and funding a voluntary employee beneficiary association (VEBA) trust to support continued retiree benefits, and making direct cash lump-sum payments to retirees.

According to Aon Hewitt’s survey, more than a quarter of companies would consider a retiree health care settlement strategy for all or a portion of their retiree group if it were cost-effective in the market environment.

“We saw tremendous pension settlement activity during 2012, and that trend is continuing in 2013,” Desai said. “Companies looking to shrink benefit liabilities on their balance sheet may explore the viability of settling their retiree health care obligations, as well. At present, there are a number of tax, legal and market hurdles that limit the feasibility of settling retiree medical program commitments in a cost-effective manner, but this may change in the future.”

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

Related SHRM Articles:

Helping Those Turning 65 to Navigate Medicare, SHRM Online Benefits, August 2013

Health Insurance Exchanges and Early Retiree Health CoverageSHRM Online Benefits, August 2012

Estimate: Retiring Couples Will Need $240,000 to Pay Health ExpensesSHRM Online Benefits, May 2012

Still Worthwhile? Weighing Retiree Drug Benefits Without a Subsidy DeductionSHRM Online Benefits, July 2010

Quick Links:

SHRM Online Benefits page

SHRM Online Health Care Reform Resource Page

SHRM Online Wellness Programs Resource Page

SHRM Online Retirement Plans Resource Page

SHRM Online Outsourcing Resource Page

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