Retiree Health Benefits At the Crossroads
The Current Policy Debate: Implications for Retiree Health
A number of proposals have been and are under discussion that could have important implications for employers that offer retiree health coverage and the retirees enrolled in them, including changes that would potentially impact the costs associated with coverage of both pre-65 and Medicare-eligible retirees. As noted earlier, the ACA includes a number of changes affecting employers and current and future retirees; thus, a significant change to the ACA (or outright repeal) could have far reaching effects; for example, outright repeal would, among other things, likely close the existing pathway to coverage for potentially millions of pre-65 retirees who are expected to eventually receive coverage through the federal/state marketplaces in the future.
Most of the other major policy proposals that would affect retiree health coverage are made within the context of changes to Medicare, so their most direct impact would be on retiree health benefits for Medicare-eligible retirees.
Medicare Proposals and Retiree Health
With ongoing concern about the rise in federal spending and concern about Medicare spending specifically, a number of proposals have been put forward to reduce Medicare spending that could have significant implications for beneficiaries with retiree health coverage, and for employers sponsoring retiree health plans. While such proposals are many and varied, this section highlights four general proposals that directly affect employer-sponsored retiree health plans.
Raising the Medicare Eligibility Age to 67
One proposal that has been consistently discussed over the years as a way of reducing spending is to gradually raise the Medicare eligibility age to 67. Under an option described by CBO, the Medicare eligibility age would increase by two months every year, beginning with beneficiaries born in 1951 (who will turn 65 in 2016), with projected net federal savings of $19 billion between 2014 and 2023.1
Beyond the effects on the federal budget, raising the Medicare age of eligibility would also have cost implications for beneficiaries, employers and other payers.2 Increasing the Medicare age would directly increase costs for retiree health plans, principally because the retiree health plan would be primary, rather than the secondary payer for two more years of retiree eligibility. In an earlier study, Kaiser Family Foundation (KFF) and Actuarial Research Corporation (ARC) modeled the effects of raising the Medicare eligibility in a single year (2014), finding that employer retiree plan costs were estimated to increase by $4.5 billion in 2014 if the Medicare eligibility age is raised to 67.3 In addition, public and private employers offering retiree health benefits would be required to account for the higher costs in their financial statements as soon as the change is enacted. Employers would likely consider a variety of steps to lessen the added costs, which would likely mean higher out-of-pocket costs for these retirees. In addition, the loss of Medicare benefits for retirees ages 65 and 66 could make the federal/state marketplaces a more tempting employer strategy for their early retirees.
Changing Cost Sharing Under Medicare Part A and B
Medicare cost sharing changes could also have significant cost repercussions for some retiree health plans; but the amount of any increase and who bears the brunt of that cost will vary widely depending on the specific Medicare proposal – and there are many variations — the design of the retiree health plan (both the cost sharing provisions like deductibles and coinsurance and how the plan coordinates with Medicare) and the level and form of the employer contribution. In addition, retiree plans vary so widely that it will be hard for lawmakers to know in advance who exactly will be affected and how big the impact will be for specific groups. But in general, if the employer plan is going to cover the same things as it did before, and Medicare is now paying relatively less, the employer plan is going to pick up the difference. Beyond that, it gets complex and the impact varies with the proposal.
CBO described an option others have considered and endorsed that would have replaced the current benefit structure with a $550 combined Medicare Part A/B deductible, 20 percent coinsurance for nearly all services, and a $5,500 spending limit.4 CBO estimated that if those changes took effect on January 1, 2015, and the various dollar thresholds were indexed to average fee for-service Medicare costs per enrollee, that approach would reduce federal outlays by $52 billion between 2015 and 2023.5
As with other changes to Medicare, the benefit redesign could have implications for employers and other payers. According to a KFF/ARC analysis of the option described by CBO, total costs associated with employer-sponsored retiree coverage (employer and retiree share) would increase by $1.2 billion in 2013, and nine out of ten beneficiaries (87%) with retiree coverage would see an increase in out-of-pocket (cost-sharing and premium) spending in 2013.6 Even with a new $5,500 limit on out-of-pocket costs, employers’ costs would rise unless they reduced their wrap-around coverage because of other new cost-sharing requirements imposed on beneficiaries, such as an across-the-board 20 percent coinsurance on all Medicare-covered services. If the Medicare spending limit were set at $7,500 rather than $5,500, the total costs for retiree coverage would rise by more than three times as much, to an estimated $3.8 billion.7 If employers do not make conforming changes in their benefit design to limit their costs, they would be required to book the additional costs on their financial statements. Or, if a cap on the employer’s obligation is already in place, costs would be shifted to their retirees.
Imposing a Surcharge on Retiree Health Plan Coverage
Another proposal that emerged during recent debt reduction discussions would have imposed a surcharge on supplemental coverage, either Medicare supplemental insurance policies (Medigap) policies, employer-sponsored retiree health plans, or both.8,9 Sponsors of these proposals observe that individuals with first dollar or near first dollar coverage tend to use more Medicare-covered services, which in turn leads to higher Medicare spending. A premium surcharge would discourage individuals from obtaining supplemental coverage and/or indirectly recoup the additional costs to Medicare that result from such coverage.
A surcharge on employer-sponsored retiree health coverage may achieve savings for Medicare, but also raise costs for Medicare-eligible retirees who choose to retain their employer-sponsored benefits, assuming employers pass through the additional cost associated with the surcharge to their retirees. With a surcharge, retirees with lower incomes might be more inclined to forego supplemental coverage than higher income retirees, depending on the additional expense. Retirees who forego supplemental coverage as a result of the surcharge would save on premiums, but would potentially be exposed to higher costs for their medical care, and as a result, may forgo needed services due to costs. To the extent the proposal is limited to plans that provide first-dollar coverage, the proposal may have less of an impact on Medicare utilization and savings, or on retirees, in that employer-sponsored retiree plans do not generally provide first dollar coverage, in contrast to the most popular individual Medigap plans (C and F).10 A further consideration relates to administrative feasibility. Retiree health plan premiums vary by economic sector and by eligible retiree groups, e.g., grandfathered, current actives, new hires, salaried or bargained, and if bargained, which bargaining agreement. It is not unusual for the same large employer to sponsor multiple retiree plans, with different premium contribution requirements for different groups of retirees. For these reasons, proposals that impose a surcharge on supplemental coverage that is tied to the Medicare Part B premium, rather than the premium of a given retiree health plan, may be easier for Medicare to administer.
Prohibiting First Dollar Supplemental Coverage
As an alternative to a surcharge, some have proposed to establish requirements for supplemental coverage, for example, by prohibiting first-dollar coverage. Under this approach, future legislation could potentially limit the amount of the Medicare cost sharing that the retiree health plan could cover by mandating certain benefit design parameters of the employer sponsored plan, e.g., the retiree plan might be required to have at least a certain deductible, and/or the out-of-pocket spending limit could not be below a certain dollar amount.11
Such an approach would be a fundamental shift in policy, by stipulating the design of what are otherwise voluntary employer-provided retiree benefits and in some cases collectively bargained arrangements that cannot easily be altered. As CBO has noted, “regulations on retiree coverage would be more complex to administer than those on Medigap insurance.” 12