Retiree Health Benefits At the Crossroads

Emerging Strategies for Employers Offering Retiree Health Coverage

Employers are moving forward with more alternative strategies for their early retirees and Medicare-eligible retirees, as they continue seeking to manage costs and watch for future developments in federal policy.  In addition to ongoing changes in eligibility, benefit design, premiums, and cost-sharing, employers are moving in new directions, some of which entail incremental changes in the way the group prescription drug benefits are offered and others of which entail a more substantial break from the past by shifting to non-group coverage for medical and drug coverage.

Strategies for Pre-65 Retirees

Employers offering coverage to pre-65 retirees are focusing on strategies to avoid or minimize the impact of the excise tax on high cost plans included in the ACA (discussed above).  Although the tax applies to plans for active employees, as well as pre-65 and Medicare-eligible retirees, there is a focus on pre-65 coverage because of its relatively higher cost.  And even though the tax takes effect under the ACA in 2018, employers must begin to account for any material impact the tax may have on their retiree health programs in today’s financial statements.

According to the 2013 Aon Hewitt retiree health survey, some of the most common strategies employers are considering to mitigate the effects of the excise tax include: (1) lowering the cost of the plan through plan design changes, e.g., higher deductibles, coinsurance and copays, or using a high deductible health plan that may be Health Savings Account (HSA) eligible, favored by 29 percent of large employers; (2) using a defined contribution approach to support pre-65 retirees obtaining coverage through the federal/state marketplaces, favored by 22 percent, and (3) eliminating pre-65 coverage, favored by 13 percent.  In terms of the longer-term future, employer sponsors of pre-65 coverage in the same survey expressed a roughly three way split in terms of favoring using a defined contribution strategy with federal/state marketplaces (34%), making no change in strategy (33%), and eliminating pre-65 coverage (30%).¹

Public Exchanges and Marketplaces

With the advent of the federally-assisted and state ACA marketplaces, a number of benefit consultants and e-brokers are offering employers the service of facilitating coverage in the ACA marketplaces for employees and retirees not covered under the employer’s health plan, e.g., part-time employees working fewer than 30 hours, and pre-65 retirees, if the employer does not offer a retiree health plan.²  A number of employers have already announced or are seriously considering providing their pre-65 retirees a defined contribution that can be used to purchase coverage in the federal/state ACA marketplaces.  Observers predict this will be a major trend going forward and in some cases see the ACA marketplaces as further displacing employer-provided coverage for pre-65 retirees.³ In a recent survey of 595 employers by Towers Watson and the National Business Group on Health, conducted between November 2013 and January 2014, nearly two-thirds of those that offer access to a retiree health plan today say they are likely to eliminate those programs in the next few years and steer their pre-Medicare retiree population to the public exchanges.⁴

A separate question may be how many pre-65 retirees with employer coverage might themselves choose to decline employer retiree coverage and enroll in a federal/state marketplace.  According to a survey by the National Business Group on Health, more than one-fourth (26%) of large employers felt that some pre-65 retirees might opt to join exchanges.⁵  Some actuaries are forecasting that pre-65 retiree participation rates in employer-sponsored plans will likely decline in the future, given favorable age rating in marketplace plans and in particular for employer plans with: (1) capped or lower employer contributions toward premiums; (2) covered populations with lower income retirees, due to federal premium subsidies available in the health care marketplaces; and (3) excise taxes on high-cost plans passed through to retirees.⁶  In particular, with respect to the 40 percent of retiree health plans wherein some surveys indicate retirees pay the full cost of premiums, individual health insurance coverage in the federal/state marketplace could well be cheaper (though potentially less generous) than the employer plan.

Private Exchanges

As an alternative to the federal/state marketplaces, employers may also consider offering group coverage through private exchanges for pre-65 retirees.  In the last few years, a growing number of benefit consultants and insurers have launched — or soon plan to launch — a private exchange through which active employees purchase coverage.  These exchanges are similar in concept to the private Medicare exchanges (described below) except that the active employees typically have access to insured or self-insured group products rather than non-group medical plans.  Like the exchanges set up for Medicare-eligible retirees, these private exchanges can be single carrier or multi-carrier, and the employer contribution is usually in the form of a defined contribution amount, which can be used toward buying more generous or less expensive coverage available through the private exchange.  Employers continue to offer the coverage, but it is outsourced through the private exchange, so the employer spends less on administration.  The defined contribution approach results in more predictable costs for employers.  Employees may or may not be exposed to greater cost increases in the future, depending on the rate of future increases in premiums and the share of that increase paid by the employer.  The hope is that particularly in the case of multi-carrier exchanges, greater competition among insurers may help lower the future rates of increase.  While these newer exchanges are typically not dedicated to pre-65 retirees, some of them will accept the employer’s pre-65 retirees along with the active employees.

Strategies for Medicare-Eligible Retirees

Employers offering retiree health coverage to Medicare-eligible retirees are also exploring alternative strategies to take the best advantage of the improvements in Medicare drug coverage, or transitioning to non-group arrangements for retirees to obtain medical and drug coverage.

Medicare Part D Group Waiver Plan (EGWP) plus Wrap

For employers choosing to continue offering retiree health plans on a group basis, the changes in the tax treatment provisions of the RDS coupled with the improvement in Medicare drug benefits have prompted many employers to replace their RDS strategy for Medicare-eligible retirees with what is called a Medicare Part D Employer Group Waiver Plan (EGWP). The most common EGWP strategy – EGWP + Wrap – consists of two separate but integrated plans.  The primary plan is the EGWP – a Medicare Part D plan offered by contract solely to the employer’s retirees – with the standard Medicare Part D plan design and the coverage gap.  The secondary plan is an employer group plan that supplements or “wraps around” the EGWP so that the combination of the two benefits basically replicates the drug benefits that had previously been available to retirees under the RDS.  Both plans may be (and often are) self-insured.  The 2013 Trustees report estimates that the proportion of Medicare beneficiaries in these employer-sponsored plans will increase from about 9 percent in 2012 to about 20 percent in 2016 and beyond.  The Trustees expect that such plans will offer additional benefits beyond the standard Part D benefit package.⁷

To reap the financial benefit of the 50 percent manufacturer discount on brand name drugs, under EGWP + Wrap, any brand drug coverage in the coverage gap is provided by the supplemental “wrap” plan, not the Part D plan.  Recent CMS guidance clarifies, however, that the 50 percent manufacturer discount is also available if the employer chooses to contract for an “enhanced” EGWP design for its retirees that may provide drug benefits close to the previous RDS plan design but without a separate wrap-around plan.  This effectively simplifies the administration of EGWP and results in reduced cost for the plan sponsor, as it avoids the need to split the drug benefit between a Part D plan that does not cover brand drugs in the coverage gap and a wrap plan that does.⁸  Surveyed employers appear to be still favoring the EGWP + Wrap over this relatively newer enhanced EGWP approach, at least for the time being.⁹

The shift to EGWP+Wrap could bring savings to employers while largely preserving drug benefits for retirees.¹⁰  Because drug benefits can be preserved, the EGWP + Wrap approach could be appealing for both salaried and collectively bargained plans.  Further, it may appeal to both public and private-sector employers as a strategy for reducing the retiree health obligations reported on their financial statements relative to the financial obligation reported under the RDS.

Private Exchanges for Medicare-Eligible Retirees

The strategy of transitioning from an employer-based retiree group health plan to using the non-group market for Medicare-eligible retirees is attracting interest among employers that offer retiree health benefits.¹¹, ¹²  Employers adopting this strategy often engage a third party that provides an administrative coordinator or “exchange” platform that provides a variety of functions.  This shift by employers to facilitate coverage for retirees through a private exchange is not new, though this approach has garnered a lot more attention in the media as more and more well-known companies have recently announced they are moving in this direction.  Among the early adopters of this strategy were certain large U.S. manufacturers, e.g., automobile manufacturers Chrysler, Ford, and General Motors, which employed this strategy for their Medicare-eligible salaried former employees.

This private exchange strategy originated with Medicare-eligible retirees because of the widespread availability of traditional Medicare along with other options for Medicare-eligible retirees to obtain coverage as individuals, such as a combination of traditional Medicare plus Medigap, or a federally-funded Medicare managed care plan, or (since 2006) a Medicare Part D PDP.   This strategy appeals to employers as a way of offering retirees a choice of health plans while controlling the employer’s future retiree health care costs and limiting their reported liabilities because of the shift to a defined contribution approach for funding these benefits and the consulting cost and administrative savings to the employer that may flow from the outsourcing to the private exchange.

Companies embarking on this approach typically use the third party coordinator or facilitator (the private exchange) to help retirees understand the choices available in the non-group market and facilitate the enrollment of the retiree in the plan of his/her choice.  The exchange typically handles the administration, the billing and member services, with licensed benefit advisors, a call center, and online tools to assist retirees in plan selection.  In many instances, the employer contributes a fixed defined contribution using a tax-effective health reimbursement arrangement (HRA) that is favorable for both the employer and the retiree and reimburses retirees for premiums and/or out-of-pocket expenses.  The private exchange platform then helps apply that monetary contribution toward the individual retiree’s choices.  According to a recent Aon Hewitt survey of employers, the revenue for the exchange platform mainly comes from the commission built into the health plan premiums.¹³

For retirees, the employer’s shift to a private exchange often means a wider range of plan choices for Medicare-eligible retirees along with decision support provided by the exchange.  How the shift affects retirees’ costs will vary depending on the existing retiree health plan.  On the one hand, premiums paid by retirees could be more attractive, especially in situations where retirees were expected to pay a large share of the premium or if the employer’s contribution to the retiree plan had been capped and the cap was hit or about to be hit, at which point any increases in retiree costs would be fully borne by the retiree.  On the other hand, the defined contribution amount that the employer offers toward the exchange may or may not increase in line with medical inflation, if it increases at all, in which case retirees in the exchanges may be paying more than what they previously contributed.  The hope is that the availability of multiple plan options will give retirees more flexibility in managing these costs by seeking lower-cost alternatives in the private exchange.  In addition, private exchanges offer retirees access to benefits beyond just medical services, e.g., dental, vision, life, and other forms of voluntary insurance.

Two general types of private exchanges exist.  The first is a multi-carrier model, where the exchange entity makes available to retirees a choice of health insurance options offered by multiple insurers.  The second is a single-carrier model, where the medical plan options available are generally those offered by a single insurer. Thus far, employers tend to prefer the multi-carrier approach.

The number of private exchanges available to employers offering retiree health benefits is expanding, which may reflect growing interest among employers.  By some tallies, there are now more than 100 private exchanges,¹⁴ though most of  these are intended  for active employees and not retiree populations The proliferation of these private exchanges and the different options for employers available through them has given rise to the Private Exchange Evaluation Collaborative — a joint effort among the Employers Health Coalition, the Midwest Business Group on Health, the Northeast Business Group on Health, the Pacific Business Group on Health, and PricewaterhouseCoopers — to create  a comprehensive database of information that employers can use to analyze the various exchanges for active employees and retired groups.¹⁵  According to recent reports posted by the sponsors of these private exchanges for Medicare-eligible retirees:

• Towers Watson operates the largest private Medicare exchange, called OneExchange, serving more than 500,000 retirees¹⁶ after acquiring Extend Health in 2012.  Towers Watson has more than 250 organizations as clients, and offers plan choices from more than 80 national/regional insurance carriers.

• Aon Hewitt operates a private exchange for Medicare-eligible retirees, called Aon Hewitt Navigators, which serves more than 300,000 Medicare-eligible retirees.  It too describes on its website how it partners with over 80 leading insurance companies.¹⁷

• Mercer recently announced that 19 employers with a total of 35,000 retirees have chosen Mercer’s Medicare solution.¹⁸

• Buck Consultants, a Xerox Company, announced the launch of RightOpt®, a private health insurance exchange that includes a retiree exchange platform, My Medicare Advocate®, which serves 19 employers with 50,000 retirees.¹⁹

These private exchanges often provide more choices to retirees than would otherwise be offered under an employer-sponsored retiree health structure, but fewer plans than are currently offered to all Medicare beneficiaries in an area, outside the private exchange.²⁰  The more narrow selection of available MA and PDP plans on private exchanges could be viewed as a positive by those who view the existing number of plans as overwhelming, but as a shortcoming to others for potentially not showing retirees that there may be some better plans out there.  In addition, depending on the arrangement, the employer’s contribution to the health reimbursement account may sometimes only be available to the retiree for premium payments to plans that the retiree enrolls in through the private exchange, and not for use with other plans that the retiree may enroll in through the CMS site or directly with the insurers.  The employer may want to ensure, for example, that the retiree receiving the employer-provided defined contribution has the benefit of the decision support tools and the full range of customer support for which the employer has contracted with the private exchange, rather than leaving the retiree to his/her own devices. The exchange may, for example, provide enrollees with advocacy services if the retiree later needs help with an insurance issue.

In addition to using private exchanges for Medicare-eligible retirees, some employers may ultimately envision going one step further, and paying an insurer to assume full responsibility for their retiree health obligations, thus eliminating the employer’s ongoing payments for these benefits which instead would get paid by the insurance company.²¹