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 Planning for retirement is tough enough - and it gets even tougher
when retirement benefits you expect to receive from an employer are
changed on short notice. But a growing number of U.S. employers are
capping their risk of rising health insurance costs by sending
retirees into private exchanges to buy coverage - often with little
advance warning.
Two-thirds of employers provided retiree health coverage as recently
as 1988, according to the Kaiser Family Foundation. This was usually
supplemental coverage to pay for prescription drugs, cap
out-of-pocket expenses or to cover Medicare’s deductibles and
co-pays.
By last year, that number had dwindled to just 23 percent.
Among the employers that still cover retirees, a growing number are
shifting retirees into insurance exchanges. Similar to a shift from
a defined benefit to a defined contribution, the expense risk is
shifted from employer to retiree.
Soon-to-be-released data from Aon Hewitt, a consulting firm that
operates exchanges for employers, shows that 35 percent of public
and private sector employers are using healthcare exchanges for all
or some of their Medicare-eligible retirees. Of those that are not,
17 percent say they will do so in the future, and another 46 percent
say they are considering it.
Healthcare is a major, unpredictable expense in retirement, so
unexpected switches can affect a retirement plan. Typically, plan
sponsors provide their Medicare-eligible workers between six months
to one year of advance notice of these changes, according to John
Grosso, a senior vice president at Aon Hewitt who leads the firm’s
retiree consulting practice.
GE MOVE PROMPTS LAWSUITS
The latest poster child for this type of change is General Electric
Co, which disclosed in its annual report for 2015 that it is saving
$3.3 billion by sending many of its retirees into insurance
exchanges with a subsidy to purchase coverage. The changes were
effective on Jan. 1, 2016.
GE’s move has prompted two lawsuits. One was by salaried workers
claiming that the company broke promises it made to continue
coverage and that it violated the Employee Retirement Income
Security Act. The second suit was filed by a coalition of unions
representing GE workers, and it claims that the change violates
collective bargaining agreements. In the first case, a judge already
has denied a GE motion for dismissal, but the company is also
seeking dismissal of the case brought by the unions.
General Electric did not respond to requests for comment.
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HEALTH REFORM DRIVES CHANGE
Grosso said the Affordable Care Act has been a major driver of the
shift to exchanges. The law improved the Medicare Part D
prescription drug benefit by phasing out the gap in coverage known
as the "doughnut hole" and by introducing reforms in the Medicare
Advantage plans.
Also driving the shift, he said, is the flood of baby boomers
entering retirement. These younger retirees drive down the premiums
in marketplace plans, since they tend to utilize less healthcare
than older retirees. That makes the plans even more attractive as
options for plan sponsors.
That allows for a "win-win" situation in many cases, at least
initially. "The overwhelming number of plan sponsors we work with
pick a subsidy amount that balances their need to save money with
savings that the retiree can achieve in the exchange. It's a win-win
in the short-term, financially."
But Grosso acknowledged there is potential longer-term risk to
retirees, depending on how the subsidy is designed. "The question is
whether the sponsor grows the benefit or keeps it flat" as
healthcare costs and premiums rise over time.
Indeed, Aon data shows that. Fifty-nine percent of companies sending
retirees into exchanges do not index the subsidy; 28 percent index
at their own discretion and 13 percent automatically adjust the
subsidy amount annually. Companies that do index the benefit grow it
anywhere from 3 to 5 percent annually, Grosso said.
The complex task of shopping for insurance in an exchange is another
hurdle. Grosso said 95 percent of retirees using exchanges take
advantage of benefit advisors who help guide their plan selections.
"It’s really a key issue for them to understand the market," he
said. "But they are not doing this on their own."
(Editing by Matthew Lewis)
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