Early Retiree Health Benefits Could See Tweaks

Challenges and opportunities created by the Affordable Care Act (ACA) are prompting 66% of companies to consider altering their pre-65 retiree health strategies over the next few years, says a new Aon Hewitt study.

Of those companies considering a different strategy, 35% favor sourcing health coverage through the public exchanges under a defined contribution (DC) approach, according to Aon Hewitt’s 2015 Retiree Health Care Survey. More than a quarter of companies (28%) are considering eliminating pre-65 retiree coverage and subsidies altogether.

But the trend has not yet taken hold, and Aon Hewitt’s survey notes that, to date, few companies have actually changed their benefits strategies for pre-65 retirees. Just 6% of companies have decided to move some portion of their pre-65 retirees to the public exchanges to secure health coverage, and another 9% are offering retirees a choice between the group program and the public exchanges.   

Most companies are looking closely at altering their pre-65 retiree strategies to reduce cost and relieve the looming excise tax risk facing employers and retirees, according to John Grosso, actuary and leader of the Aon Hewitt Retiree Task Force. The reason for the delay, Grosso believes, is that plan sponsors are waiting on the outcome of the Kingv. Burwell U.S. Supreme Court case before taking action.

But change is very likely, as the data from Aon Hewitt’s survey shows. A strong majority of companies—84%—say they plan change their pre-65 retiree strategies to mitigate the excise tax on high-cost employer health plans when it goes into effect in 2018. Also known as the Cadillac tax, the excise tax remains deeply unpopular, the focus of a Congressional bill as well as a recommendation for repeal from the American Benefits Council.

About a quarter of those companies that say they will make changes (23%) favor sourcing coverage through the exchanges under a defined contribution approach. Grosso calls health exchanges attractive because they allow companies to take advantage of the health care efficiencies found in the individual market. “When you have efficiency on top of competition, you will see better financial outcomes for both companies and retirees,” he says.

Other strategies being considered include:

• Reducing costs by managing copays, deductibles or utilizing a health savings account (HSA)/high-deductible health plan (32%);
• Changing retiree premium cost-sharing requirements (19%); and
• Eliminating pre-65 coverage altogether (8%).

The strategies being talked about for pre-65 retirees are in line with other trends already taking place for post-65 retiree benefits, Aon Hewitt says. More than half of companies (58%) are now reassessing their long-term post-65 retiree health strategies. Of those companies that have already decided to make strategy changes, more than 33% have moved forward with one that will direct post-65 retirees to an exchange to secure individual market for coverage, oftentimes accompanied by a DC subsidy. Of the companies expecting to make changes to their post-65 retiree strategies in the future, an additional 33% indicate strong interest in this approach.

Companies that transition their post-65 retirees to a private retiree health exchange generally are providing subsidies that allow the vast majority of those retirees to buy at least comparable coverage to their group plan, with many retirees finding greater value in the individual market, according to Cary Grace, chief executive of Aon Exchange Solutions.

Aon Hewitt’s 2015 Retiree Health Care report surveyed 349 companies covering 3.2 million retirees between November 5, 2014, and February 27, 2015.