Employers Plan to End Retiree Health Coverage

Companies plan to eliminate retiree health plans when health insurance exchanges become operational.

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Many employers are planning to discontinue their group health plans for retirees. New retiree medical options created by health care reform are causing companies to rethink whether they still need to provide health benefits to former workers.

[See How to Get Retiree Health Insurance Before 65.]

A Towers Watson and International Society of Certified Employee Benefit Specialists survey of 248 employers that collectively provide medical coverage to 1.1 million retirees found that 42 percent are considering terminating group health plans for retirees not yet eligible for Medicare. Instead, these companies plan to encourage retirees under age 65 to purchase coverage through health insurance exchanges slated to take effect in 2014.

“Many employers have struggled to continue providing valuable benefits while managing their financial commitment,” says Stephen Parahus, a senior consultant with Towers Watson. “Now that health care reform has created new options for retirees to purchase cost-effective individual coverage, employers are seizing the opportunity to assess their current approach to managing retiree health care benefits.”

Some companies aren’t planning to wait until 2014 to begin cutting benefits for retirees. Almost half (47 percent) of the companies surveyed have already changed their plan design for pre-Medicare retirees and another quarter are planning changes for 2012 or 2013. Less than a quarter (24 percent) of firms have no changes planned for their retiree health plans. One popular strategy is to continue to offer health coverage to retirees, but cap or eliminate the amount the employer will subsidize.

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Most of the companies surveyed (80 percent) currently subsidize health coverage for retirees who aren’t yet eligible for Medicare. However, almost half of these companies (46 percent) have capped their subsidies. And 63 percent of the companies with caps say that plan costs for retirees exceeded the caps in 2011 and another 15 percent expect plan costs to increase beyond the cap within two years.

Capping the amount of retiree health coverage that is subsidized could lead to substantial increases in retiree out-of-pocket costs. Some 40 percent of the survey respondents reported that married, long-service employees under age 65 who retire this year will pay at least $500 per month more for coverage than they currently pay as an active employee. “As a result of capped subsidies, premium rate increases are driving up pre-65 retiree contributions, leading to cost concerns for this cohort and delayed retirement for older active employees,” according to the Towers Watson report.

For-profit companies (57 percent) are significantly more likely than nonprofits (18 percent) to have caps in place. And more companies have caps in place for future retirees (47 percent) than for existing retirees (40 percent). The most common type of cap is a fixed dollar cap (70 percent) and another 20 percent are indexed to plan costs.

[See 10 Ways the Recession Has Changed Retirement.]

Some employers also provide supplemental health coverage to former workers after they sign up for Medicare. Only 5 percent of the employers surveyed have stopped offering group plans to Medicare-eligible retirees. However, over a third (36 percent) of these firms are considering ending health coverage for retirees age 65 and over within the next 2 years.

Twitter: @aiming2retire