Employers are increasingly trying to avoid paying for health insurance for retirees who leave the workforce before they become eligible for Medicare. Some 43 percent of companies currently offering retiree medical benefits plan to soon reduce or eliminate them, according to a recent Towers Watson survey of mid and senior level benefit professionals at 392 companies providing health plans to retirees.
“Beginning in 2014, when health insurance exchanges become operative, pre-65 retirees will have access to competitive plan choices without preexisting condition underwriting,” says Dave Osterndorf, a senior consulting actuary for Towers Watson. “This important development will likely accelerate employers exiting sponsorship of retiree health programs and, in many cases, adopting account-based solutions.” Towers Watson suggests that some companies will deposit a portion of their current retiree health spending into a medical reimbursement account such as a health savings account or retiree medical savings account for former employees to help with premium costs and uncovered expenses.
Until these health insurance exchanges become operational in 2014, many employers plan to accept federal subsidies to maintain their retiree health care coverage. The Obama administration announced earlier this month that companies will get $5 billion from the federal government to maintain health care coverage for early retirees. Most companies that offer retiree medical benefits intend to apply for the Early Retiree Reinsurance Program, which will subsidize employers that provide health insurance to retirees age 55 and older who are not yet eligible for Medicare.
More than three-quarters (76 percent) of companies with retiree health plans plan to pursue reimbursement through the program which goes into effect June 1, according to a Hewitt Associates survey of 245 large employers that offer medical benefits to over 1.3 million retirees. Employers that are accepted into the program, which was created by the health reform bill, will be reimbursed for up to 80 percent of each retiree’s medical expenses between $15,000 and $90,000.
The average federal reimbursement will be between $2,000 and $3,000 per retiree each year, which is approximately 25 percent to 35 percent of their total health care costs, according to Hewitt estimates. A company that provides insurance for 1,000 retirees could receive between $2 million and $3 million from the federal government each year.
Employers must use the reimbursement to reduce their own health care costs or to reduce premium prices for workers and their families. Two-thirds (66 percent) of companies that intend to apply for the reimbursement say they are unsure about how they would spend the proceeds, Hewitt found. Some employers plan to use the federal money to reduce both the employer and retiree share of premiums (16 percent) or to reduce only the retiree share of premiums (5 percent). Companies will be required to describe how the proceeds will be used in their Early Retiree Reinsurance Program application.
The reinsurance program will last until January 2014 or until the $5 billion set aside for the program is exhausted. “Because so many companies plan to apply for the Early Retiree Reinsurance Program, employers will need to act quickly to secure a share of the proceeds, since the federal funds earmarked for this program are limited,” says Milind Desai, a senior consulting actuary for Hewitt.