Senate Bill Could Help Rescue Employer-Provided Retiree Health Benefits

A provision in a Senate health reform bill announced last week could help strengthen an aspect of the employer-based system that has unraveled almost completely in the past generation: health benefits for retirees.

On page 150 of the draft legislation released last week by the Senate Health, Education, Labor and Pensions Committee is a proposal to reimburse employers for some of the medical costs incurred by retirees.

Reinsurance for retirees, as it is known, would reimburse employers, tax-free, 80 percent of an individual’s health care claims that cost between $15,000 and $90,000. Employers would be eligible if, among other things, they offered “programs and procedures to generate cost savings” for retirees or their spouses or dependents with chronic and high-cost conditions, the proposal says.

The proposal has slated $10 billion for this retiree reserve trust fund—a hefty sum but a small fraction of the overall cost of health care for this age group, experts say. The high cost of insuring middle-aged Americans is one reason why most employers no longer offer retirees health benefits.

Despite calls among health care reformers to strengthen the employer-based health care system, health care for retirees who are not yet eligible for Medicare has been given little attention.

In the past 20 years, the number of large employers offering retirees health care has plummeted to 31 percent from 66 percent, according to the 2008 annual survey of employer benefits by the Kaiser Family Foundation and the Health Research & Educational Trust.

“Retiree health care isn’t offered as much as it once was because it’s a very, very expensive benefit,” says Diane Howland, vice president for legislative affairs at the American Benefits Council.

The older people get, the more medical services they generally require. Retirees are more expensive to cover, and employers are unlikely to continue to do so unless they must, as in many cases with unionized workers.

For workers old enough to retire but not yet 65 (and therefore not eligible for Medicare), the lack of retiree health care means they must either continue working to use employer health benefits or pay a hefty sum to purchase coverage on their own.

The result is a high uninsured rate among Americans age 55 to 64. According to the Employee Benefit Research Institute in Washington, there are 4.8 million Americans in this age group who say they are retired, of which 700,000—or about 14.5 percent—are uninsured.

Then there are the 3.7 million Americans age 55 to 64 who say they are no longer working because of health reasons. Around 400,000, or 11 percent, of this group are uninsured.

For employers that offer retiree health care, helping them pay for it will help them continue to offer it, says Gretchen Young, vice president for health policy at the ERISA Industry Committee.

But it is doubtful the new provision would help those uninsured middle-aged Americans, retiree benefits experts say. In 2003, as part of the Medicare Modernization Act, Congress provided $88 billion in incentives to employers who kept their retiree health benefits. Since then the rate at which employers have stopped offering retiree health benefits has leveled off.

But like the 2003 Medicare act, this provision is likely to help the few employers already providing retiree health care without changing the calculus for the employers that have long since pulled the plug.

“The fact is, even with a strong economy two years ago and a tight labor market, employers didn’t need to offer [retiree health care] for competitive reasons,” says Paul Fronstin, a senior research associate with EBRI.

Another reason why employers are unlikely to start offering retiree health care is that the reinsurance program would be temporary. That has led others to speculate that the reinsurance fund would be a “bridge” program to help employers provide for early retirees until market reform makes health care for this age group more affordable.

The $10 billion fund could help offset costs employers are likely to incur as a result of new proposed rules that would prohibit employers from setting lifetime limits on the amount of medical expenses a person could incur.

“One of the ways employers control costs is to have limits,” Young says. “The new bills would not allow that.”

Employers have mainly focused on headline-grabbing issues such as an employer mandate, the public health plan option and taxing employee health benefits—the last of which has been strongly opposed by unions.

Fronstin speculates that the reinsurance fund could be most helpful to unions, since organized workers are more likely to receive retiree health care benefits. As such, its presence in health care reform legislation could help win organized labor’s support on controversial issues such as taxing employee health benefits.

“There’s a strong union presence when it comes to retiree health benefits,” Fronstin says. “This may be one way to get support from the union for a broader bill.”