Large Employers Reconsidering Retiree Health Care

April 20, 2011 ( - Most large employers are now beginning to rethink their retiree health care strategy as a result of federal health care reform, according to a recent report by Aon Hewitt.

An Aon Hewitt survey found that 61% of companies are either already evaluating or expecting to evaluate their long-term retiree medical strategy by the end of 2011, due to health care reform.  Meanwhile, 23% of respondents indicated they are still considering whether to assess their current strategy, and only 16% had no immediate plans to review their current approach.  

Most immediately, among those planning to apply for the temporary Early Retiree Reinsurance Program (ERRP) to help offset a portion of the cost of health claims for retirees age 55 to 64, about half (48%) anticipate using the proceeds to reduce premiums, including both employer and participant share, while 21% intend to reduce the employer share of premiums only.   

The Centers for Medicare & Medicaid Services (CMS) recently announced that the Early Retiree Reinsurance Program will no longer be accepting applications after May 5, 2011, as it will be out of money (see Early Retiree Reinsurance Program to End).  

As for companies in the survey that pay a portion of health coverage for their retirees age 65 or older, three-quarters currently collect the Retiree Drug Subsidy (RDS).  Of those, 73% said they are altering their retiree drug benefits strategy, as health reform eliminates the RDS tax advantages for 2013, and creates enhancements to the Medicare Part D program for retiree drug benefits beginning in 2011. Sixty-one percent anticipate announcing these changes by the end of 2011 in order to begin recognizing accounting savings quickly, while 86% expect to actually implement these changes by 2013.

Alternative Plans 

According to the Aon Hewitt survey, alternatives most favored by employers making or contemplating changes to their post-65 retiree medical programs include contracting with a Part D Prescription Drug Plan (34%) or moving to a pure defined contribution approach (30%) where post-65 retirees can purchase benefits through the individual Medicare retiree plan market.  Other employers that anticipate leveraging an expanded market for Medicare retiree prescription drug plans support combining access to individual Part D plans with premium subsidization (5%) or out-of-pocket cost subsidization (5%).  Another 9% prefer eliminating employer-sponsored retiree prescription drug benefits altogether.  

Of the employers favoring contracting with a Part D Prescription Drug Plan on a group basis, 57% will look to utilize an "Employer Group Waiver Plan (EGWP) + Wrap" approach, whereby the employer contracts for a Standard Medicare Part D plan design with a wraparound benefit that attempts to preserve the current prescription drug plan design and formulary strategy for the retiree.  

In addition, Aon Hewitt's survey found that 36% of respondents plan to make changes to their pre-65 retiree benefits strategy to directly leverage the health insurance exchanges that states, or the federal government, are required to create in 2014.  Twenty-one percent prefer moving to a pure defined contribution approach, where retirees could use an account established by the employer to purchase coverage through the exchanges.  The balance of these employers anticipates eliminating pre-65 coverage in response to the creation of exchanges.  

In late 2010, Aon Hewitt surveyed 344 companies, representing 2.2 million retirees nationwide.