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More early retirees to be covered via insurance exchanges

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Employers' move to jettison health insurance for pre-Medicare-eligible retirees is certain to accelerate in the wake of last month's U.S. Supreme Court decision upholding the legality of premium subsidies for lower-income individuals getting coverage in the state and federal exchanges.

Dropping coverage and directing retirees, in some cases with employer financial support, offers “win-win opportunities” for employers and retirees, said John Grosso, health care actuary and leader of Aon Hewitt's retiree health care task force in Norwalk, Connecticut.

For employers, the appeal is obvious: With premiums averaging more than $12,000 per year per retiree, according to a 2014 Mercer L.L.C. survey, eliminating those plans would slash employer costs even if they contribute to health reimbursement arrangements to help pre-Medicare-eligible retirees defray some of the cost of buying coverage in a public exchange.

“I can't think of an employer for whom this approach would not make sense to consider,” said Rich Stover, a principal with Buck Consultants at Xerox in Secaucus, New Jersey. Employers would have a “more manageable amount that is not subject to health costs and trend,” he said, referring to employers' HRA contributions that retirees could use to purchase exchange coverage.

In some cases, retirees wouldn't even tap employers' HRA contributions to buy coverage in the exchange.

That is because under the Patient Protection and Affordable Care Act, people whose incomes are between 100% to 400% of the federal level — or $11,700 to $47,080 for an individual — are eligible for federal premium subsidies to buy coverage in public exchanges.

The subsidies — in the case of lower-income early retirees — might be far larger than employers' HRA contributions, increasing the likelihood that they would turn down the HRA contribution and take the government's premium subsidy to buy exchange coverage, resulting in additional employer savings. Federal rules make clear that the retirees cannot take both the HRA contribution and the ACA premium subsidy to purchase exchange coverage.

For retirees eligible for the government's premium subsidies for exchange plans, the cost savings that they could rack up could be considerable, especially if their former employer previously paid only a small percentage of the premium in the plans they offered to retirees.

While the financial advantages of directing the retirees to the public exchanges were obvious, experts say one key issue held employers back from adopting the approach: Would the Supreme Court uphold the IRS rules authorizing federal premium subsidies in both state exchanges and in the 34 states where federal regulators set up exchanges after states officials declined to do so? Plaintiffs in the case alleged that the health care reform law limited the subsidies to those obtaining coverage in state exchanges

So the Supreme Court's June ruling upholding the IRS premium subsidy rules “removes one of the last barriers that had been holding back many employers from taking this approach,” Mr. Grosso said.

“A major barrier has been taken off the table,” said John Barkett, director of health policy affairs at Towers Watson Exchange Solutions in Arlington, Virginia.

Just 26% of employers still offered health insurance to early retirees as of last year, according to Mercer, and the Supreme Court's ruling looks to accelerate that trend. Still, not every employer will adopt the approach.

“An employer with high-income pre-65 retirees might be less inclined to suggest that the retirees access a public exchange because they would be less likely to be eligible for subsidies,” said Amy Bergner, a managing director at PricewaterhouseCoopers L.L.P. in Washington.

In addition, some employers may wait to see how successful insurers that offer exchange coverage are in attracting medical providers to their networks.

“Employers may want to see more exchange experience before jumping in,” Mr. Barkett said.

Plan documents that may bar employers from eliminating early retiree coverage or collective bargaining agreements requiring union agreement also could limit adoption, said Judy Bauserman, a Mercer partner in Washington.

Another factor that could hold back employers is a concern that the 2016 elections could result in electing a president who backs repealing the health care reform law that spawned the exchanges and the premium subsidies.

“Employers may still have some hesitancy because of political uncertainty,” Ms. Bauserman said. But with the Supreme Court “solidifying the place of exchanges in the marketplace, repeal will be more challenging.”

But some observers doubt the law will be repealed. “The ACA is here to stay, even if the GOP wins the presidency,” Mr. Stover said.