Monday, February 28, 2011

Shifting retiree health benefits

In a post below, I discuss the possibility that the new health care law many entice many employers to drop their company-provided health insurance plans and send their staff over to one of the new health insurance exchanges or Medicaid. Such a strategy, I noted, depends on a firm reaching a conclusion that having company-sponsored health insurance is not important to attract and retain workers.

But there is a group of people who are served by company-provided insurance whose competitive employment choices are no longer of any concern to the firm: Retirees.

Post-employment health benefits are an expensive drag for many companies. Even if the full provision of health insurance ends upon Medicare eligibility, there is the cost of covering retirees during an intervening period. This could easily be 10 years or more, since people can often retire in their mid-50s.

Hewitt Associates seems to be on top of this trend. The company conducted a survey last year of 245 U.S. companies that offer medical benefits to 1.3 million retirees and their families and "learned that six out of ten employers intend to evaluate their long-term retiree medical benefits strategy in the near future, and nearly half of these companies have already begun the evaluation process."

Look at this finding:

While the second option seems more drastic, the first option is intriguing because it still allows a company to gain financial stability with regard to the retiree health care costs. You set an annual amount that you are prepared to spend per person and let the former employees go shopping. Nothing says you have to increase that amount each year, or, if you do increase it, nothing says that you have to do so at the rate of inflation of health care costs. This could remove a huge liability from the balance sheet of many corporations and transfer the risk of future cost increases to the former employees.


Anonymous said...

Shades of 401-K's for retirement......


wrinkledman said...

Corporations ought not be the arbiters of our health care choices.

A shift toward individual responsibility for health care dollars spent will improve the way those dollars are spent regardless of how it happens.

Barry Carol said...

The number of private sector workers eligible for company paid health insurance in retirement has declined steadily since the 1990’s when the present value of the liability for retiree health benefits started to be reflected on corporate balance sheets in accordance with a then new accounting standard. My own employer continues to provide such benefits to our union members as part of their collective bargaining agreement. The non-union people, however, are not eligible but we can purchase the company’s coverage with our own money which at least gives us access at group rates to a plan that is more comprehensive than most available in the individual market. Since I don’t think most companies contemplated how expensive health insurance would become when they first started to offer it to retirees, I expect the number of people who receive company paid or heavily subsidized retiree health insurance will continue to shrink steadily over time with or without health insurance reform.

Many private sector union contracts, including ours, have a VEBA Trust that at least partially pre-funds the cost of retiree health benefits. Interestingly, companies can only get a tax deduction for funds contributed to a VEBA Trust if the employees are covered by a collective bargaining agreement. Congress didn’t want to apply the benefit more broadly because it didn’t want to forego the additional tax revenue that, in theory anyway, could otherwise be used to strengthen Medicare.

Anonymous said...

Not sure I'd call that "intriguing" as much as "alarming".