Health Care Reform Driving Change in Retiree Medical Programs

The Sixth Annual Employer Survey on Retiree Medical Strategy, conducted jointly by Towers Watson and the International Society of Certified Employee Benefits Specialists (ISCEBS) finds nearly 60% of the retiree medical plan sponsors responding to the survey revealed that the high cost of providing coverage and opportunities under health care reform are primary reasons for rethinking their role in providing retiree medical benefits. Among these employers, 87% cite new federally subsidized insurance options under reform for pre-65 coverage; 73% cite the “Cadillac tax” as a concern, and 58% are swayed by coverage enhancements for Medicare Part D prescription drug coverage.   

For Medicare retirees, many employers are adopting one of two options. Approximately one-third of employers have converted their current Retiree Drug Subsidy programs to Part D Employer Group Waiver Plans (EGWP) or plan to do so in the next two years in order to take advantage of the higher funding available to Part D plans. A small percentage of employers (5%) have discontinued group plan sponsorship entirely and are instead helping Medicare retirees purchase higher-value medical and pharmacy insurance in the individual market through the use of increasingly common Medicare coordinators. Towers Watson said in a press release that this approach enables employers to reduce their financial commitment while ensuring that retirees have access to attractive coverage options, including enhanced Part D coverage available to all Medicare participants.   

Approximately 80% of respondents currently provide a subsidy for pre-Medicare retiree coverage, and most respondents plan to keep these subsidies over the next several years. Of the employers subsidizing pre-Medicare coverage, 46% have capped their subsidies, leading to substantial increases in retiree contributions and increasing the likelihood of older employees delaying retirement.   

While subsidies are likely to continue well into the future, employers are making changes to their retiree medical plan design for pre-Medicare retirees. Forty-seven percent made plan design changes in 2011 or earlier, and another 25% are considering changes for 2012 or 2103. In addition, 42% of respondents are considering terminating group plan sponsorship for pre-Medicare retirees altogether and encouraging them to elect more favorable coverage in the insurance exchanges slated to take effect in 2014. 

Employers are also looking to improve retiree health care awareness by providing account-based plans (33%), communicating costs for pre-Medicare coverage (32%) and promoting planning resources so employees can anticipate health care costs in retirement (29%).   

“Prior to reform, the lack of effective individual retiree insurance options created an impediment to employers exiting retiree medical,” said Stu Alden, senior consultant with Towers Watson, in the press release. “Now, with reform, this exit can be a mutually beneficial transition that reduces cost for employers while providing retirees with significant value and enhanced choice through the emerging individual market.