Retiree Health Benefits At the Crossroads
Retiree health strategies of employers are undergoing accelerated change, and several major trends in particular stand out for the future. A marked and growing interest in shifting to a defined contribution approach for both pre-65 and post-65 retiree coverage is fueled by the employers desire to manage future costs. Increasing interest in moving from group coverage to non-group coverage is a trend that is particularly strong with respect to Medicare-eligible retirees for whom employers can facilitate access to non-group coverage through private exchanges. And while the jury is still very much out, the new federal/state marketplaces are gaining at least the consideration by employers as a possible pathway through which the employer’s pre-65 retiree population might gain access to non-group coverage.
While eliminating retiree coverage is not the prevailing strategy expressed by employers, the number of employers offering retiree health coverage will continue to decline in the future as incremental numbers of employers may follow through on their interest in doing so as reported in surveys.
The pace of employer changes in strategy is very sensitive to changes in public policy, whether these would be as potential changes in the ACA or as potential reforms to Medicare. The immediate impact of any of the various proposals for Medicare redesign would depend on the nature of the proposals and on whether they would apply to current retirees or only to future retirees. If they would apply to future retirees, then potential budget savings would be lower; if they applied to current retirees, there would be more problems and disruption for retirees, and the flexibility for the employer plan may be limited, either by collective bargaining agreements, or by the state law for a public employer plan. Most private employers typically do reserve the right to change the health plans, but as a practical matter, in many cases they have been more reluctant to change the plans for current retirees than for recent or new retirees. In terms of future retirees, one would expect the employer plan to respond in ways that reflect the Medicare changes, including by making changes in the retiree plan design, or the employer contribution to the plan, or in the way the plan coordinates with Medicare, or adopt an approach that we have noted above is a growing trend, namely, providing the retiree with a defined contribution amount that the retiree can use to purchase an individual Medicare or Medigap plan, as opposed to the employer group plan.
Over the next few decades, these trends suggest that employer-sponsored supplemental coverage is likely to be structured differently and play a smaller macro role in retirement security than it has in the past and than it does today. Relatively fewer workers will have such coverage available in the future, to be sure. But for workers and current and future retirees who do have employer-sponsored retiree coverage, changes resulting from rising costs and/or shifts in public policy that could weaken the prospects of retirement security warrant close attention.