The Future of Health Benefits for Retirees

There are an estimated 15 million Medicare beneficiaries using retiree health benefit plans as supplemental coverage. An additional >2 million pre-retirees are also using retiree health benefit plans as a primary source of coverage, making retiree health benefit plans a crucial part of health coverage. In recent years, health benefits for retirees have undergone a major transformation, leaving retirees without the proper healthcare coverage, according to a Kaiser Family Foundation Report.

Today, 3 major factors play a role in diminishing retiree health benefits: (1) alterations made by the Patient Protection and Affordable Care Act (ACA); (2) changes in Medicare, particularly the inclusion of prescription drug coverage; and (3) the rising costs of healthcare. In addition, there are multiple policy proposals being considered that, if implemented, could directly affect retiree health benefits and costs.

When it comes to providing health benefits for pre-retirees (<65 years of age) and Medicare-eligible retirees, large firms are more likely to offer health benefits. Recently, however, there has been a steady decline in the number of firms that offer healthcare coverage to retirees. In the mid- to late-1990s, an estimated 40% of companies offered healthcare coverage to retirees, but in 2013, only 28% of firms offered healthcare coverage to retirees.

Given the current climate of healthcare, employers are searching for alternative ways to provide health benefits to pre-retirees and Medicare-eligible retirees. Although the impending excise tax included under the ACA applies to most plans, firms are attempting to minimize or avoid the impact of the excise tax on pre-retiree coverage because of its relatively higher cost than other plans.

According to the 2013 Aon Hewitt retiree health survey, there are 3 standard ways to minimize the excise tax according to the survey respondents: (1) 29% of large employers favor changing the plan design; (2) 22% prefer using a defined contribution approach for pre-retirees obtaining health benefits through the federal and/or state markets; and (3) 13% favor eliminating pre-retiree coverage altogether.

State and federal marketplaces are increasing in popularity due to federally-assisted ACA marketplaces allowing employers to contract out to benefit consultants in order to facilitate the coverage for employees and retirees not covered by the employer’s healthcare plan.

Another option for obtaining pre-retiree coverage is through private exchanges. Although private exchanges were not created for pre-retirees, many accept pre-retirees in addition to active employees. Private exchanges allow the employer to offer a defined contribution amount, which is used by the employees or pre-retirees to purchase the coverage type of their choosing. Employers are outsourcing their coverage so less money is spent on administrative fees. Private exchanges do not protect employees from possible increased costs due to increased premium rates.   

Strategies for obtaining health benefits for Medicare-eligible retirees include the Medicare Part D Employer Group Waiver Plan, which bears a coverage gap. The secondary plan, the “wrap,” supplements the basic Medicare Part D plan; therefore, covering the gap and replicating drug benefits that previously were available to retirees under the retiree drug subsidy. Both plans are typically self-insured and combining these would allow retirees access to drug benefits, while providing savings to employers.

Private exchanges are also another option for Medicare-eligible retirees, which allows employers to offer retirees choices, while controlling their future retiree healthcare costs and limiting liabilities, such as administrative and consulting costs.

There have been 4 proposals put forward in an attempt to decrease Medicare spending. These proposals could have a significant impact on both retirees and employers. The first proposal is to raise the Medicare eligibility age from 65 to 67 years of age. This would increase costs for retiree health plans, leading to increased costs for employers and retirees.

Another option is to change Medicare cost-sharing under Part A and Part B. This plan does bear cost implications, but determining who these costs will fall to depends upon the specific Medicare proposal, as there are multiple designs and variations.

The third proposal suggests imposing a surcharge on supplemental coverage in an effort to decrease Medicare spending. The surcharge would be applicable to employer-sponsored retiree health plans, Medicare supplement insurance policies, or both. This surcharge would discourage individuals, particularly those with lower incomes, from obtaining supplemental coverage. Not obtaining supplemental coverage could potentially lead to increased costs for medical care.

The final proposal is to restrict first dollar coverage, meaning legislation could potentially limit the amount of Medicare cost-sharing that the retiree health plan could cover by establishing benefit design guidelines of the employer-sponsored plan. Under this proposal, retiree healthcare plans may require deductibles and/or an out-of-pocket spending limit that cannot dip below a particular dollar amount. This alternative would cause a shift in policy and would make regulation more complex.