Balancing Costs of Retiree Healthcare with the Retiree Experience
By: Trevis Parson, WTW
Plan sponsors struggle to balance current economic pressures with their retirees' needs for more affordable healthcare benefits and participants find it challenging to find new value in their existing retiree healthcare benefits. Opportunities created by recent legislation exist for both plan sponsors and their retirees making benefits more affordable while offering greater value.
This is an excerpt from NCPERS Spring 2023 issue of PERSist, originally published March 21, 2023.
Plan sponsors and participants are both under increasing financial pressure.
Costs are on the rise. As the nation experiences the effects of inflation on fuel, food and housing, retired Americans on fixed incomes especially feel the pinch.
While these increases may feel modest, larger cost increases on other major budget items leave little room for healthcare expenses and may force seniors to forgo necessary healthcare. For many retirees fortunate enough to have coverage from their former employer, especially those in plans with fixed-dollar benefit caps, the costs have become so great that retirees are waiving former employer coverage altogether.
Retiree medical plan sponsors feel the pressure, too. Not only from rising fuel prices driving up input costs, but also from rising interest rates that squeeze investment opportunities and tight labor markets that pressure the workforce balance. Sponsors are looking for ways in which they can balance economic pressures with the need to best attract and retain talent, while honoring commitments to healthcare retirees value.
Unfortunately, many sponsors struggle to find the balance and offer that value as the retiree healthcare landscape continues to respond to economic and legislative change.
63% of sponsors recently surveyed plan to make changes to their retiree healthcare benefits over the next three years, even as 37% have already implemented some degree of changes in the past three years.
Opportunities exist for plan sponsors to improve the value of retiree healthcare benefits.
For Medicare-eligible retirees, Medicare Advantage plans can provide incremental financial value above and beyond traditional Medicare. This has driven Medicare Advantage enrollment to nearly half of all Medicare members. The great majority of these Medicare Advantage enrollees are in individual products — many purchased with the help of a private marketplace. Others enroll through group Medicare Advantage plans sponsored by their former employer. With respect to prescription drug benefits, the Inflation Reduction Act is improving Medicare Part D by eliminating catastrophic cost sharing and implementing a maximum out-of-pocket limit of $2,000 per person per year beginning in 2025.
In the absence of Medicare, costs for health plans for retirees not yet 65 are much greater to many of those retirees and their employers. Some employers couple their Pre-Medicare retirees with their active employee populations to spread the higher retiree cost and risk over a larger population. However, in a tight labor market and with affordability a key concern, employers need more effective solutions.
Fortunately, recent legislation has provided cost-effective alternatives. Recent legislation established federal premium tax credits to reduce premiums for individual health insurance. These premium tax credits have fueled enrollment growth in individual plans, which is driving increased carrier participation and premium stability in the individual health insurance market. As a result, employers are looking to shift scarce financial resources away from their current group plan for retirees and toward the purchase of health insurance through an individual marketplace.
The current economic environment is challenging to both plan sponsors and participants to find new value in retiree healthcare benefits. Today's market offers many new opportunities to both provide retirees more benefit security and provide sponsors the flexibility to more affordably offer retirees the benefits they value.
Trevis Parson, FSA, MAAA, FCA is an expert on exchange-based healthcare offerings and has worked with many employers to redesign their retiree medical plans to reduce benefit and administrative costs while providing retirees enhanced choice and value. He currently serves as Chief Actuary of the Individual Marketplace for Via Benefits by WTW.