Employers Reconsidering Health Benefits for Pre-65 Retirees

Health care reform has given employers new ideas about providing health benefits to pre-65 retirees.

Over the next two years, more than half of employers surveyed by Towers Watson that provide health care to pre-65 retirees are planning significant changes to their medical benefits and how those benefits are delivered.

The Towers Watson 2014 Survey on Retiree Health Care Strategies reveals that employers are seeking new solutions due to annual cost increases that are outpacing those of benefits for active employees and Medicare retirees and the availability of new individual coverage options under the Patient Protection and Affordable Care Act (ACA). Cost trends for Medicare-eligible retirees after plan changes (3.9%) are similar to trends for active employees (4.0%). However, survey results show that trends for pre-65 retirees after plan changes are much higher (5.5%). In addition, 73% of employers offering medical benefits to retirees younger than 65 said their 2015 plan costs already exceed the cap for the plan.

Most employers are using traditional methods to control the costs of pre-65 retiree medical plans. For 2015, 61% of employers surveyed that provide pre-65 health coverage changed plan design. Forty-two percent currently offer or have added account-based health plans (ABHPs) with high deductibles connected to tax-advantaged health savings accounts for the plan year 2015. Another 8% are considering ABHPs for 2016 or 2017. Also, plan sponsors have relied on shifting costs to retirees and using cap arrangements. Forty-five percent reported capping the company subsidy for pre-65 retirees.

Increasingly, employers are interested in public exchanges as a new alternative to providing pre-65 medical benefits because of the federal subsidies potentially available to retirees based on family income. However, just 4% of employers said they have given some consideration to ending coverage and subsidies since retirees often have access to federally subsidized plans on public exchanges.

When asked if they would end coverage but provide a private-exchange solution that connects retirees to plans on the public exchanges, the percentage of employers that have considered this option rises to 17%. Confidence is growing that public exchanges will be a viable alternative for employer-sponsored coverage for pre-Medicare retirees—while only 8% are confident for 2015, confidence rises to 35% for 2017.

“Pre-65 retiree medical benefits are complex,” says Joe Murad, managing director for Towers Watson’s Exchange Solutions. “Companies have to consider the excise tax, new benefit options, provider networks and subsidies along with the retirement needs of their workforce. Fortunately, with guaranteed issue, the ACA created a viable individual market for health insurance. Public exchanges simplify access to individual plans, and private exchange solutions help ease the experience of purchasing plans on public exchanges or directly from carriers. For the first time, employers can develop a pre-65 retiree medical strategy that meets the needs of retirees and helps them manage costs.”

Towers Watson surveyed 144 companies representing 2.1 million employees and 290,000 retirees in September 2014 for its Survey on Retiree Health Care Strategies.