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How Health Reform Will Impact Retiree Benefit Programs

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If you're retired from a company that provides health insurance benefits, get ready for change over the next few years.

Many employers have shed retiree coverage altogether or cut back benefits in recent years due to skyrocketing health care costs. Just 29 percent of large companies provided coverage in 2009, down from 66 percent in 1988, according to the Henry J. Kaiser Family Foundation.

Now, the new health care reform law is stirring up more changes that should start showing up in retiree plans between now and 2013.

Medicare beneficiaries who have employer-sponsored prescription drug coverage will feel the most immediate impact. Employers currently receive federal subsidies on that coverage-and the dollars aren't counted as income for tax purposes. The idea was to encourage employers to keep providing the coverage, which in turn would reduce the cost of the new Part D plan.

But the new health care law repeals the tax break-a move that will provide money to fund reform. That's prompting employers to re-evaluate their options for retiree coverage.

One of those options is to move retirees to Part D, which will become more valuable under health care reform. The big change here is the closing of the notorious doughnut hole-the coverage gap that starts when a beneficiary's annual drug spending hits $2,830, and resumes at the catastrophic level ($4,550 out of pocket).

This year, patients who enter the doughnut hole will get a $250 rebate. In 2011, pharmaceutical companies will provide a discount of 50 percent on brand-name drugs to low- and middle-income beneficiaries who find themselves in the gap. Then, the doughnut hole itself will shrink a bit every year, ultimately disappearing entirely in 2020.

"Employers are looking hard at the alternatives," says John Grosso, a principal in Hewitt Associates' health management consulting practice. "Now that the tax situation isn't so favorable and the government is closing the doughnut hole, most employers will want to get employees into Part D."

Grosso says some employers will send employees into the individual market for Part D coverage-perhaps with a cash subsidy. Others, he thinks, will purchase Part D coverage for their retirees through group plans.

Most companies will be making changes in 2013, Grosso says, which will be the first year companies won't be able to reflect the tax break on their books.

Employers also are less likely to offer group Medicare Advantage plans to their retirees, Grosso says. The health reform law gradually reduces federal subsidies to Advantage plans, which currently are reimbursed at 114 percent of regular Medicare rates -- a payment scheme that was put in place to stimulate the Advantage market. The new law freezes Advantage payments at current levels through 2011, and then reduces them by $116 billion over a period of years, ultimately equalizing reimbursements with traditional Medicare.

"Companies that had been using Medicare Advantage for group coverage will be less likely to see it as a good solution due to the cuts in reimbursements," Grosso says.

Meanwhile, early retirees who are too young for Medicare and have group coverage through their former employers may see some changes in their coverage, too.

Pre-Medicare retirees have had a tough time finding affordable coverage in the individual insurance market. Some employers offer these early retirees access to group plans as a way to tide them over to Medicare eligibility.

The health reform law aims to plug the gap by creating public insurance exchanges that individuals can shop for affordable, quality plans. But the exchanges won't start until 2014.

In the meantime, the Obama Administration has created a $5 billion federal subsidy that employers can use to offset the cost of their early retiree plans. Grosso says employer interest in the new subsidy is running high, although he worries that the $5 billion in funds may not last until 2014.

"It may slow the tide of terminations," he says. "But this is a stop-gap until the public exchanges are created-it's a way to keep employers in the game until then."