As more and more baby boomers exit the workforce, fewer and fewer companies are offering medical benefit plans to their retirees. And organizations that do provide coverage are utilizing new strategies to manage the impact on their bottom line.
In the 1980s, more than 60% of employers with 1000 or more employees provided financial assistance to retirees to help with medical costs. Today that number has dropped to roughly 25%, and the trend is accelerating.
This movement is clearly bad news for employees approaching retirement age – especially younger retirees who must wait until age 65 to be eligible for Medicare. In fact, more than half of workers plan to work longer so they can continue to receive employer-sponsored coverage, according to the Employee Benefit Research Institute
A report from Towers Watson indicates several barriers to retiree coverage:
- Accounting issues. Future liabilities are a major hurdle. In 2013, Fortune 1000 companies reported about $385 billion in SEC disclosures.
- ERISA obligations. This includes reporting, disclosure and fiduciary responsibilities.
- Administrative costs. The expense of administering and maintaining retiree benefits has little payback on the bottom line.
- Excise tax (aka Cadillac tax). Health care reform legislation prescribed new tax obligations for employers offering rich benefit plans. Congress recently delayed implementation until 2020, however, making this a cloud on the horizon and giving employers more time to adjust.
Employers that are committed to coverage have made changes to control corporate costs at the expense of retirees’ pocketbooks. Examples include:
- Grandfathered benefits. Many large employers have pledged health benefit assistance to long-term employees, but new hires must fend for themselves when reaching retirement age.
- Increased cost-sharing. Municipalities that formerly covered 100% of medical expenses are now requiring premiums from former employees, according to MarketWatch. In a more dramatic turn, the City of Detroit used the bankruptcy process to slash its retiree health insurance benefits from $4.3 billion to $450 million.
- High deductible health plans (HDHP). Nearly one-quarter of workers are enrolled in an HDHP, which reflects a 4% increase over the past 10 years. In addition, almost half of workers have a general annual deductible of at least $1,000 for individual coverage, according to a Kaiser Family Foundation
- Raised out-of-pocket expenses. Benefit designs are shifting to place more of the financial burden on retirees through increase co-pays, coinsurance and deductible levels.
- Tightened eligibility. Employers are putting more parameters around eligibility. For example, individuals with access to coverage through other plans could be excluded from their spouse’s plan.
- Cash contributions or health reimbursement arrangements (HRAs). Many employers providing cash or HRA contributions for both pre-Medicare and Medicare-eligible retirees, and then sending them to state and private exchanges to purchase their own coverage.
- Improved retirement-readiness. Towers Watson reports that employers are using account-based health plans, education, wellness programs and decision-support tools to help current employees understand their coverage and learn to plan wisely for future medical costs.
- Voluntary Employee Benefit Associations (VEBAs). In the wake of employer bankruptcies, special tax-exempt VEBA trusts have been set up to allow retirees in the auto, steel and airline industries to take advantage of the Health Coverage Tax Credit. This credit covers 72.5% of insurance premiums for those aged 55-64 who are in a qualifying health plan and receive pension benefits from the Pension Benefit Guaranty Corp., a federal agency that often takes over pension plans of bankrupt companies.
The bottom line? Medical costs are a major factor in most retirees’ budgets. The Wall Street Journal reports that a healthy man should set aside an extra $143,800 for healthcare costs in retirement. Ironically, less healthy individuals can earmark smaller amounts because their chronic conditions signify a shorter life expectancy.
Relief and uncertainty
The Affordable Care Act (ACA) has brought some relief to younger retirees who were hard-pressed to purchase individual health insurance coverage before health reform: Access has improved as carriers cannot refuse to cover individuals with pre-existing conditions, and affordability improved with premium assistance.
What’s next? The future of retiree medical coverage is certain to be impacted by the upcoming election. Presidential candidate Hillary Clinton has floated the idea of making Medicare available to people in their 50s, Donald Trump has pledged to repeal “Obamacare” while leaving Medicare untouched, and Health Affairs’ overview of the new House Republican’s health plan indicates a phased increase in the age of Medicare eligibility to match the Social Security retirement age.