Why employers are shifting retiree health into insurance exchanges

CHICAGO Tue Mar 11, 2014 2:08pm EDT

An elderly man stands in Copacabana in Rio de Janeiro September 13, 2011. REUTERS/Ricardo Moraes

An elderly man stands in Copacabana in Rio de Janeiro September 13, 2011.

Credit: Reuters/Ricardo Moraes

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CHICAGO (Reuters) - A dwindling number of retirees get supplemental health insurance coverage from their former employers. But for those who do, big changes are afoot.

A growing number of companies are dropping single-employer group insurance plans in favor of privately run insurance exchanges, where a third party sets up a marketplace offering Medicare coverage offered by dozens of carriers, with costs subsidized by their former employers.

The trend was underscored by news this month that AT&T Inc will move its Medicare-eligible retirees in 2015 to an exchange operated by Aon Hewitt, the big employee benefits consulting firm.

AT&T's move marks one of the biggest shifts of retiree healthcare to an exchange so far, coming on the heels of recent moves by IBM Corp and Time Warner Inc. AT&T has not specified how many retirees will be moved to the exchange, except to say that it will be "much smaller" than the 310,000 retirees at the end of last year who were eligible to receive some kind of benefit from the company, according to company spokesman Marty Richter.

Thirty percent of companies that provide coverage to Medicare-eligible retirees (age 65 and over) already have moved to exchanges, according to an Aon Hewitt survey of more than 1,230 employers released last month.

The exchange trend is not limited to retirees. Walgreen Co announced plans last year to move about 160,000 of its active employees to a private exchange plan.

"Many large employers are looking at exchanges for retirees and active employees," says James Klein, president of the American Benefits Council, which lobbies in Washington on behalf of employer-sponsored benefit programs.

Fewer companies have been offering retiree health coverage at all over the past couple decades, the result of soaring healthcare costs and an accounting rule in place since the early 1990s that requires employers to report retiree health expenses as liabilities.

Twenty-eight percent of U.S. employers with more than 200 employees offered retiree coverage in 2013, down sharply from 66 percent in 1988, according to the Kaiser Family Foundation. Among non-unionized workforces, the figure is just 22 percent, compared with 45 percent at unionized companies, Kaiser reports. (AT&T is a heavily unionized employer, but retiree health coverage is not covered under its labor contracts, according to Richter, the AT&T spokesman.)

For Medicare-eligible retirees, employer benefits are supplemental. Retirees who use traditional fee-for-service Medicare might be offered a Part D (prescription drug) benefit, and a subsidized Medigap plan, which plugs coverage gaps in fee-for-service Medicare. Retirees using Medicare Advantage (all-in-one managed care plans) receive a subsidy toward buying those plans.

CLOSING THE DONUT HOLE

The U.S. Affordable Care Act (ACA) has enriched Part D benefits, making them more attractive than many employer plans. The ACA is gradually closing the donut hole, or the gap in drug coverage that starts when combined spending by an enrollee and his insurance provider hits a certain dollar amount. This year, the gap will begin when combined spending by patient and insurer hits $2,850, and will end when spending reaches $4,550. Seniors inside the donut hole receive steep discounts on brand and generic drugs.

Moving to exchanges also can help employers avoid the looming risk of the so-called Cadillac tax on rich-benefit insurance plans. Under the ACA, group insurance plans for active or retired workers whose benefits exceed a certain value will be subject to a 40 percent excise tax starting in 2018 (the value is $10,200 individual and $27,500 for families). Exchange coverage is not subject to the excise tax.

Some employers also provide health coverage for retirees younger than 65, and many are considering shifting them from group coverage to the ACA's new public insurance exchanges, says John Grosso, who leads Aon Hewitt's retiree consulting practice.

"It's likely to happen, but it will take more time to evolve," he says. "Many of them are taking a wait-and-see attitude, since the marketplaces are so new."

The ACA exchanges could cut the cost of coverage sharply, because many of these younger retirees will qualify for the law's credits, which offset premium costs. The credits are available to families with incomes between 100 percent and 400 percent of the federally defined poverty guideline. That works out to an annual income between $11,490 and $45,960 for an individual, and between $23,550 and $94,3200 for a family of four.

All this change may be unsettling to employees, who will be presented with more complex insurance choices than under the old group insurance system. But Grosso says advice and guidance are key parts of the exchange services provided by firms like Aon Hewitt. (Towers Watson & Co and Mercer also are big players in managing outsourced health insurance exchanges.)

"We'll have a consistent national customer service center that can offer advice and help," he says. "Instead of sending people off to shop in 50 state marketplaces, we'll have a single point of entry where they can shop and get help."

They'll need it. A 2012 study of Part D enrollment data by researchers at the University of Pittsburgh found that seniors waste hundreds of dollars annually by purchasing levels of coverage that they do not actually need. Just 5 percent picked the most cost-effective plan, and more than 30 percent overspent by $300 to $500.

For more from Mark Miller, see link.reuters.com/qyk97s

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Editing by Matthew Lewis)

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