Companies Reassessing Retiree Health Care Strategies

According to Aon Hewitt’s annual “Retiree Health Care” survey, more than 60% of employers are reassessing their long-term retiree health strategies due to rising health care costs and mandated changes brought about by the Patient Protection and Affordable Care Act (PPACA). Of those companies that have already decided to make strategy changes for their retirees, more than 40% have moved forward with one that will direct retirees to the individual market for coverage, often accompanied by a defined contribution subsidy. Of those companies expecting to make changes to their retiree strategies in the future, more than half indicate a strong interest in this approach.

“With the PPACA legal and political landscape generally clarified, employers are looking to control cost, manage risk and source coverage through the most efficient means possible,” said Maureen Scholl, CEO of Health Care Exchanges for Aon Hewitt. “Individual market-based retiree health care sourcing strategies can create significant savings opportunities for all stakeholders. We expect to see many employers apply these strategies where possible and supplement them with modified group-based programs for those retiree populations where individual strategies do not make sense.”

The survey shows that many companies are also considering changing their pre-Medicare retiree strategies to leverage the individual market in the future. Of those employers contemplating changes to their pre-65 retiree coverage, 34% favor a defined contribution strategy with individual market/public exchange-based benefit sourcing in the future and 30% favor eliminating pre-65 retiree coverage and subsidies altogether. Thirty-three percent do not anticipate a future change in their strategy.

Fifty-three percent of employers have altered or plan to alter their Medicare Part D or broader post-65 retiree benefit strategies. Thirty-six percent of companies that have made changes since 2010 have moved to a group-based Medicare Part D plan (EGWP), and another 21% of those still contemplating changes anticipate moving to the EGWP in the future.

According to the survey, the percentage of employers that filed to collect the federal Medicare Part D Retiree Drug Subsidy (RDS) has dropped from 63% in 2010 to 48% in 2013. Only 18% plan to file for the subsidy longer term.

Thirty-four percent of employers currently offer local/regional or national group-based Medicare Advantage plans to many of their post-65 retirees, and just 6% of employers say they consider Medicare Advantage to be a viable group-based strategy going forward.

However, 38% of employers say they would consider replacing their current group-based Medicare medical indemnity supplement strategies with a national Medicare Advantage PPO if there would be no change in retiree benefits and if it would generate material savings in the near term.

The survey found that more than one-quarter of companies said they would consider a retiree health care settlement strategy for all or a portion of their retiree group if the market environment could support it on a cost-effective basis.

Settlement strategies use a retiree benefit “buy-out” to enable companies to fully or partially eliminate their ongoing retiree medical commitment. Examples of settlement strategies that employers have considered include purchasing life annuities to provide a fixed income stream in place of ongoing medical coverage, establishing and funding a Voluntary Employee Beneficiary Association (VEBA) trust to support continued retiree benefits, or making direct cash lump-sum payments to retirees.

The survey covered 548 companies and nearly 4 million retirees. The full survey can be found at www.aonhewitt.com.