Health Benefits for Retired Employees Keep Getting Worse

by Mark Miller / Reuters

Planning for retirement is tough enough - and it gets even tougher when retirement benefits you expect to receive from an employer are changed on short notice. But a growing number of U.S. employers are capping their risk of rising health insurance costs by sending retirees into private exchanges to buy coverage - often with little advance warning.

Two-thirds of employers provided retiree health coverage as recently as 1988, according to the Kaiser Family Foundation. This was usually supplemental coverage to pay for prescription drugs, cap out-of-pocket expenses or to cover Medicare's deductibles and co-pays.

By last year, that number had dwindled to just 23%.

Among the employers that still cover retirees, a growing number are shifting retirees into insurance exchanges. Similar to a shift from a defined benefit to a defined contribution, the expense risk is shifted from employer to retiree.

Soon-to-be-released data from Aon Hewitt, a consulting firm that operates exchanges for employers, shows that 35% of public and private sector employers are using healthcare exchanges for all or some of their Medicare-eligible retirees. Of those that are not, 17% say they will do so in the future, and another 46% say they are considering it.

Healthcare is a major, unpredictable expense in retirement, so unexpected switches can affect a retirement plan. Typically, plan sponsors provide their Medicare-eligible workers between six months to one year of advance notice of these changes, according to John Grosso, a senior vice president at Aon Hewitt who leads the firm's retiree consulting practice.

GE Move Prompts Lawsuits

The latest poster child for this type of change is General Electric, which disclosed in its annual report for 2015 that it is saving $3.3 billion by sending many of its retirees into insurance exchanges with a subsidy to purchase coverage. The changes were effective on Jan. 1, 2016.

GE's move has prompted two lawsuits. One was by salaried workers claiming that the company broke promises it made to continue coverage and that it violated the Employee Retirement Income Security Act. The second suit was filed by a coalition of unions representing GE workers, and it claims that the change violates collective bargaining agreements. In the first case, a judge already has denied a GE motion for dismissal, but the company is also seeking dismissal of the case brought by the unions.

General Electric did not respond to requests for comment.

Health Reform Drives Change

Grosso said the Affordable Care Act has been a major driver of the shift to exchanges. The law improved the Medicare Part D prescription drug benefit by phasing out the gap in coverage known as the "doughnut hole" and by introducing reforms in the Medicare Advantage plans.

Also driving the shift, he said, is the flood of baby boomers entering retirement. These younger retirees drive down the premiums in marketplace plans, since they tend to utilize less healthcare than older retirees. That makes the plans even more attractive as options for plan sponsors.

That allows for a "win-win" situation in many cases, at least initially. "The overwhelming number of plan sponsors we work with pick a subsidy amount that balances their need to save money with savings that the retiree can achieve in the exchange. It's a win-win in the short-term, financially."

But Grosso acknowledged there is potential longer-term risk to retirees, depending on how the subsidy is designed. "The question is whether the sponsor grows the benefit or keeps it flat" as healthcare costs and premiums rise over time.

Indeed, Aon data shows that. 59% of companies sending retirees into exchanges do not index the subsidy; 28% index at their own discretion and 13% automatically adjust the subsidy amount annually. Companies that do index the benefit grow it anywhere from 3 to 5% annually, Grosso said.

The complex task of shopping for insurance in an exchange is another hurdle. Grosso said 95 percent of retirees using exchanges take advantage of benefit advisors who help guide their plan selections. "It's really a key issue for them to understand the market," he said. "But they are not doing this on their own."