While employers seeking to manage runaway health care costs have been rethinking their retiree benefit strategies for years, the U.S. Supreme Court decision in June to uphold subsidies on the public exchanges presents them with an alternative to providing costly coverage for retirees who are too young for Medicare: move them to a federal or state insurance marketplace.
Unlike retirees over 65 who get their health care benefits through Medicare, younger retirees typically get the same health plan options available to active employees making coverage much more costly for employers. But the public exchanges may offer a way out.
“Before the ACA, employers had to keep everyone on a group plan, which was very ineffective and costly,” said Joe Murad, managing director of Exchange Solutions at Towers Watson & Co., a private Medicare exchange that serves more than 400,000 retirees. “The most expensive individuals on group plans were early retirees. Now you can go to the public marketplace where you have these cost pressures and purchase individual insurance with a subsidy that the employer provides.”
Employer-sponsored health insurance has provided a safety net for workers too young to qualify for Medicare, but the cost of covering younger retirees is outpacing the cost of providing coverage to those eligible for Medicare, according to Towers Watson’s 2015 employer survey on retiree health care strategies.
Nearly three-fourths of employers offering medical benefits to retirees under age 65 and using a cap on their 2015 plan costs have already exceeded that limit, the survey found.
Under a public exchange, large employers would help early retirees purchase coverage by setting up and funding a health reimbursement account. Interest in this option is growing as employers become more confident in the viability of public exchanges, he said.
The ACA, which enables individuals not yet eligible for Medicare to buy coverage on the public exchanges, now offers large employers an opportunity to eliminate costly pre-65 group coverage, Murad said. Instead, employers would help early retirees purchase coverage by setting up and funding a health reimbursement account. Interest in this option is growing, along with confidence in the public exchanges, he said.
According to the Towers Watson survey, by 2017 more than half of large employers will reassess their current approach to pre-Medicare retiree health benefits in light of new opportunities under reform. Almost a third (31 percent) are considering moving these retirees to public exchanges by next year.
Up until now, the focus has been on Medicare-age retirees with some of the nation’s large companies like Time Warner Inc. and Walgreen Co. moving them to private insurance exchanges, but with the Supreme Court ruling on subsidies, employers are looking at public exchanges to lower or eliminate the cost of providing coverage for early retirees, said Rich Stover, a principal at Buck Consultants.
“Employers have been grappling with Medicare retiree costs for the past seven or eight years, but the pre-65 retirees are the focus now,” Stover said. “There’s been a rapid escalation of employers looking to move out of sponsorship of plans for pre-Medicare retirees. Employers have just been waiting to see if the exchanges really worked.”
The uptick of interest, according to Stover, is also spurred by the so-called “Cadillac” tax, which levies a 40 percent excise tax on pricey health plans starting in 2018.
“The constant theme I see is, ‘We are going to do anything we can to avoid paying it,’ ” he said. “One way to avoid it is to get rid of the plan. Fear of the Cadillac tax is absolutely driving employers to get out of offering pre- and post-Medicare coverage.”
However, for now the preferred strategy for managing pre-65 retiree health care costs is adding a high-deductible health plan with a health savings account; 42 percent of employers adopted this approach in 2015, according to the Towers Watson survey.
But as employers become more confident in the ability of public exchanges to offer an alternative for employer-sponsored coverage, interest will continue to grow, according to the survey.
Stover said he believes that the writing is on the wall for pre-65 retiree health plans.
“You will see a pretty rapid demise of pre-65 plans now that the ACA has eliminated the issue of access,” he said. “I’m seeing employers that were so paternalistic in their approach starting to drop these plans. Eventually they will go away.”