Employers Reconsider Retiree Medical Strategies

News Updates

Six in 10 U.S. employers that provide retiree health care coverage are considering alternative strategies for delivering this benefit in light of market changes under the Patient Protection and Affordable Care Act (PPACA), according to newly released findings from a 2012 survey by HR consultancy Aon Hewitt.

Of those employers planning changes to their coverage, 63 percent are implementing or considering subsidized coverage through the individual market.

Health Care Reform's Impact

Among other changes, the PPACA closes the Medicare Part D drug coverage "donut hole." Revisions also are made to how the federal government pays private Medicare Advantage plans to provide basic Medicare benefits. The PPACA reduces federal payments to Medicare Advantage plans over time, bringing them closer to the average costs of care under the fee-for-service Medicare program.

“Changes to the Medicare Part D and Medicare Advantage programs, along with the choice, competition and generally favorable rating rules, have made the individual market very cost-effective compared to a group insurance program,” said John Grosso, health care actuary and leader of the Aon Hewitt retiree health care practice, in a media statement. “We expect that there will be a similar opportunity for pre-Medicare retirees beginning in 2014,” when new state-sponsored health care exchanges are scheduled to begin operating.

In addition to an individual market strategy, employers are currently pursuing two other general retiree health care strategies, described below, in response to provisions under the PPACA.

Medicare Part D Strategies

The Centers for Medicare and Medicaid Services’ 2005 regulations for implementing Medicare Part D prescription drug coverage gave employers four options:

  1. Offer prescription drug coverage that’s actuarially equivalent to the standard coverage under Part D and receive the federal Retiree Drug Subsidy (RDS) for each eligible retiree not enrolled in Part D.
  2. Become a prescription drug plan and self-insure.
  3. Contract with a prescription drug plan and fully insure.
  4. Offer prescription drug coverage that supplements or wraps around Part D.

As of 2013, employers that receive the federal RDS for providing retiree prescription drug coverage will no longer be able to take a deduction related to the subsidy. Prompted by the elimination of the tax-favored status of the RDS, a majority of employers (61 percent) expect to change their Medicare Part D or broader strategy for Medicare-eligible retirees. Of those plan sponsors, 17 percent made changes in 2011 or 2012, another 11 percent will make changes for 2013 and nearly three-quarters (72 percent) are exploring what actions to take and when.

Of employers who have decided to make changes to their retiree drug program, 62 percent are moving forward with providing a group-based Medicare Part D prescription drug plan, while 32 percent will leverage the individual Medicare-eligible health insurance market in some manner.

Excise Tax Mitigation Strategies

To mitigate the cost of the "Cadillac" excise tax on high-cost health plans scheduled to take effect in 2018, 29 percent of retiree health plan sponsors anticipate changing plan features, such as deductibles, co-payments and co-insurance. Twenty-two percent would favor sourcing coverage through the state exchanges, and 18 percent favor changing retiree premium cost-sharing in some manner.

While most employers anticipate needing to manage excise tax exposure over time, 69 percent do not anticipate announcing or implementing actions in the near-term.

Stephen Miller, CEBS, is an online editor/manager for SHRM.  To read the original article, please click here.