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Some employers may shift health plans for early retirees to insurance exchanges

Some employers may shift health plans for early retirees to insurance exchanges

Many employers that offer health insurance plans to retirees who are not yet eligible for Medicare are exploring potential savings of directing them to plans offered through soon-to-be launched public insurance exchanges.

“A lot of employers are exploring this option. They have come to the conclusion that certain of their retiree population may be better off in exchanges,” said Susan Nash, a partner with law firm McDermott Will & Emery L.L.P. in Chicago.

A foundation of the Patient Protection and Affordable Care Act is establishment of 51 public health insurance exchanges; some will be run by states and others, in states that declined to set them up, will be run by the federal government.

The exchanges will be available starting next year, with the federal government subsidizing premiums of low- and middle-income uninsured U.S. residents with incomes between 100% and 400% of the federal poverty level. For example, this year 100% of the federal poverty level for a family of two is $15,510, while 400% of the federal poverty level for a family of the same size is $62,040.

While not as well-known — but clearly intended by legislators when they drafted the health care reform law — is that the ex-changes and the premium subsidies also would be available to retirees younger than 65, even if they have access to coverage offered by their former employers.

In fact, the law authorized $5 billion to partially reimburse early retiree health care plan sponsors for claims incurred through the end of 2013.

The chief purpose of the Early Retiree Reinsurance Program was to encourage employers to continue offering coverage until the exchanges are launched, said Rich Stover, a principal at Buck Consultants L.L.C. in Secaucus, N.J.

“The extension of exchange coverage to early retirees was one of the things envisioned by the health care reform law,” said Steve Wojick, vice president of public policy at the National Business Group on Health in Washington.

Such a move could be financially advantageous for employers, depending on whether they subsidized such coverage, as well as the pre-Medicare-eligible retirees. It also would remove from employers the administrative burden of offering the coverage.

“This could be a win-win for employers and retirees,” said John Grosso, a senior vice president with Aon Hewitt in Norwalk, Conn.


Take the case of a retiree with an annual household income of $22,980, or 200% of the federal poverty level of $11,490 for a one-person household. That individual could be required to pay no more than 6.3% of his or her income, or $121 a month, for the second-lowest cost “silver'' health plan offered through an exchange, according to an analysis by consultant Mercer L.L.C.

By contrast, that retiree could pay far more in premiums for coverage from a former employer.

For example, according to a Mercer survey, 39% of large employers — those with at least 500 employees — that extend such coverage require the pre-Medicare-eligible retirees to pay the full premium for individual coverage. When the cost of the premium is shared, retirees pay an average of 37% of the plan premium, according to Mercer.

Given the availability of the federal subsidies, “I would not be surprised if many retirees saw their premiums decline” by getting coverage through an insurance exchange instead of their former employers, said Gretchen Young, senior vice president of health care policy with the ERISA Industry Committee in Washington.

Despite the apparent financial advantages, employers aren't rushing to terminate their early retiree health care plans, which would force retirees to seek coverage through the exchanges.

“It is definitely on employers' radar screen,” but for 2015 and beyond, said Derek Guyton, a Mercer partner in Chicago.

In part, that delay is due to the fact that final information is not available on the number of plans and premiums insurers will charge through all the exchanges.

Another uncertainty is how much exchange insurers will boost rates over the next several years. A factor holding down rates — $25 billion in federal subsidies to partially reimburse insurers for covering high-cost individuals — ends in 2016.

“It isn't known what will happen to rates over time,” Mr. Guyton said.


Rather than terminating coverage, employers could give pre-Medicare-eligible retirees a choice of staying in the employer-provided health plan or moving to an exchange.

Still, there are risks to that approach, benefits consultants say.

The main concern is adverse risk selection, with retirees in good health opting for low-cost and less-generous exchange plans, while retirees in poor health staying with coverage offered by their former employers.

Whether an employer thinks it would retain retirees who are “less healthy” would be a consideration in deciding if it would keep its plans, Mr. Guyton said.

Yet another issue employers would have to resolve is whether their benefit plan documents make it clear they have the right to make such a change, such as for union employees covered by a collective bargaining agreement.

“The devil will be in the details,” said Andy Anderson, a partner with Morgan, Lewis & Bockius L.L.P. in Chicago.