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Retiree Health Benefits At the Crossroads

Retiree health benefit plans are an important source of supplemental coverage for roughly 15 million Medicare beneficiaries and a primary source of coverage for more than two million pre-65 retirees in the public and private sectors.1  But the state of retiree health coverage is at a critical juncture after decades of change, with still more to come on the horizon.  The share of employers sponsoring retiree health coverage has declined and employers that continue to offer coverage are redesigning their plans on a virtually annual basis in response to rising health care costs.  Ongoing concerns about costs, coupled with changes in Medicare, notably the addition of prescription drug coverage, and more recent changes made by the Affordable Care Act of 2010 (ACA), have triggered a major reassessment by employers of whether and in what form they should continue to offer retiree health benefits.  Further, a number of policy proposals are under consideration that could have a significant impact on retiree health benefits and costs.

This report reviews the role of retiree health coverage for early and Medicare-eligible retirees, examines changes underway, and considers the outlook for the future.  Specifically, the report:

  • Presents an overview of retiree health benefits including the extent of such coverage for both pre-65 and Medicare eligible retirees, the manner in which it is provided, and the efforts by large employers to control retiree health costs;
  • Discusses the implications of recent legislation, examining the aftermath of the Medicare Modernization Act’s Part D prescription drug benefit as well as the more recent  provisions of the Affordable Care Act (ACA) that directly or indirectly affect employer-provided coverage for pre-65 and Medicare-eligible retirees (e.g., the provision that makes available new federal/state marketplaces and the provision that closes the Part D doughnut hole);
  • Describes emerging strategies employers are adopting or considering to limit their retiree health costs, including changes in the arrangements for providing prescription drug coverage for Medicare-eligible retirees and shifts toward the use of defined contribution approaches and offering non-group coverage, including coverage made available through private exchanges; and
  • Reviews current policy proposals under consideration that could affect the future of retiree health coverage, such as proposals to raise the age of Medicare eligibility, modify the benefit design and cost-sharing rules under traditional Medicare, impose a new surcharge on retiree health plans, and prohibit first dollar coverage.

The report concludes that under continuing pressure from rising costs, retiree health strategies of employers are now undergoing accelerated transitions and that the direction and pace of future changes will also be very sensitive to shifts in public policy.  Several major trends stand out in particular, namely, growing interest in shifting to a defined contribution approach and in facilitating access to non-group coverage for Medicare-eligible retirees, and consideration by employers of using new federal/state marketplaces as a possible pathway to non-group coverage for their pre-65 retiree population.  In general, most employers do not appear to be dropping coverage altogether, but the prevalence of retiree health coverage is expected to decline incrementally over time, assuming employers follow through on their interest in dropping coverage as reported in surveys.

Together these trends suggest that retiree health coverage is likely to be structured differently and play a smaller macro role in the future, but for the millions of workers and current and future retirees who do have employer-sponsored retiree coverage, changes that could weaken the prospects of their retirement security warrant close attention.

Overview of Health Benefits for Pre-65 and Medicare-Eligible Retirees