Post-Reform, Retiree Medical Benefits Are Under Review

U.S. employers are assessing their commitment to retiree health coverage

By Stephen Miller, CEBS Apr 25, 2011

Most large U.S. employers are beginning to rethink their retiree health care strategy as a result of federal health care reform, according to a report by consultancy Aon Hewitt.

In late 2010, Aon Hewitt surveyed 344 companies, representing 2.2 million retirees nationwide. According to the firm's Employer Reaction to Health Care Reform: Retiree Strategy Survey report:

61 percentof respondents were evaluating or expected to evaluate their long-term retiree medical strategy by the end of 2011 because of health care reform.

23 percent were considering whether to assess their current strategy.

Only 16 percent had no immediate plan to review their approach.

"Health care reform creates both challenges and opportunities for employers sponsoring retiree medical programs," said John Grosso, retiree health care group leader with Aon Hewitt. "Most employers have been studying the new legislation to understand how to effectively manage the challenges while taking full advantage of the new opportunities going forward. Many will find that the new legislation will create significant and immediate savings opportunities."

The End of ERRP

Among employers that had applied or were planning to apply for the temporary federal Early Retiree Reinsurance Program (ERRP) to help offset a portion of the cost of health claims for retirees age 55 to 64, about half (48 percent) expected to use the proceeds to reduce premiums, including the employer and participant share, while 21 percent intended to reduce only the employer share of premiums. The federal government planned to stop accepting ERRP applications at the end of April 2011. Employers already enrolled in the program will continue to receive their approved funds, which must be used by December 2013.

Prescription Drug Benefits

For companies that pay a portion of health coverage for their retirees age 65 or older, three-quarters collect the federalretiree drug subsidy (RDS). Of those, 73 percent said they are altering their retiree drug benefits strategy, as health reform created enhancements to the Medicare Part D program for retiree drug benefits beginning in 2011 and eliminates the RDS tax advantages in 2013. Moreover, 61 percent expect to announce these changes by the end of 2011 in order to begin recognizing accounting savings quickly, while 86 percent expect to implement these changes by 2013.

Alternatives most favored by employers making or contemplating changes to their post-65 retiree medical programs include:

Contracting with a Part D prescription drug plan (34 percent of respondents).

Moving to a pure defined contribution approach where post-65 retirees can purchase benefits through the individual Medicare retiree plan market (30 percent).

Combining access to individual Part D plans with premium subsidization (5 percent) or out-of-pocket cost subsidization (5 percent).

Eliminating employer-sponsored retiree prescription drug benefits (9 percent).

Of the employers favoring contracting with a Part D Prescription Drug Plan on a group basis, 57 percent will look to use an "employer group waiver plan (EGWP) + wrap" approach, whereby the employer contracts for a standard Medicare Part D plan design with a wraparound benefit that attempts to preserve the current prescription drug plan design and formulary strategy for the retiree.

"Many employers are looking to access cost-reduction opportunities created by the new changes to the Part D program," said Grosso. "For those wanting to continue to manage and control their group program, contracting with a Medicare Part D plan on a group basis, leveraging the EGWP process will make sense. Conversely, for those looking to move away from a group-based model, individual market-based benefit sourcing supported by some level of tax-effective defined contribution funding, may be a desirable strategy."

State Exchanges

In addition, Aon Hewitt's survey found that 36 percent of respondents plan to make changes to their pre-65 retiree benefits strategy to leverage directly the health insurance exchanges that states, or the federal government, are required to create by 2014. What's more, 21 percent prefer moving to a pure defined contribution approach, where retirees could use an account established by the employer to purchase coverage through the exchanges. The balance of these employers expect to eliminate pre-65 coverage in response to the creation of exchanges.

"It is clear that a growing number of companies realize now is the time to take a closer look at their retiree medical strategies in an effort to leverage key cost and risk management opportunities created by reform," said Milind Desai, retirement actuary with Aon Hewitt. "Individual market benefit-sourcing, supported by state and private exchanges, can create cost-effective coverage opportunities for retirees that do not exist today, even within most employer-sponsored retiree group health plans. This is a primary reason why employer programs will evolve toward individual market-based benefit strategies over time."

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

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