Major employers consider alternatives to retiree health benefits

Under the pressure of rising costs, U.S. employers are looking for other ways to provide health care benefits to their retirees over the next three years, such as replacing traditional group medical benefits for pre-Medicare retirees with subsidies for buy individual insurance in a private market, new research shows.

Half of large U.S. employers are worried about their rising costs of providing medical benefits to retirees, according to consulting firm WTW Retiree Medical Survey, conducted in July and August among 122 U.S. employers who together employ 1.9 million workers.

WTW projects that:

  • Costs for Retirees Not Eligible for Medicare will increase by 4.8% next year, compared to an increase of 3.6% this year.

  • Costs for Medicare-Eligible Retirees will increase by 2.7% next year, compared to 2.1% this year.

“With significant cost increases coming, employers aren’t standing still,” said Lindsay Hunter, senior director of health and benefits at WTW. “For now, they remain committed to providing retiree health care benefits and a positive retiree experience. But they are looking for ways to provide them more cost-effectively.”

She added: “Employers are rightly concerned about this growing burden and are exploring all options, including private procurement.”

According to the WTW survey, 13% of respondents expect to make changes to their medical benefits for retirees in the next three years. These employers expect to make changes because:

  • Benefits are too expensive for the company to maintain (49 percent).

  • You seek to face unacceptable financial risks (36%)

  • The need to reduce the administrative burden on the plan (33 percent).

The survey also showed that more than 1 in 5 employers (22%) have either stopped offering a traditional group medical plan to pre-retirees or are considering a replacement. Among employers who have terminated a group plan, 75% are replacing it with access to individual insurance and financial support for it through a private market. Likewise, those considering a replacement are looking to a private market.

“The recent passage of the Cut Inflation Act makes private insurance markets for individual coverage an even more attractive option for retiree benefits,” said Trevis Parson, chief benefits actuary. at WTW. “In particular, the extension of premium tax credits and Part D improvements [prescription drug] plans position private markets to better offset rising health care costs for organizations and their retirees. »

Healthcare costs for retirees

According to a September 2022 analysis by actuary and consulting firm Milliman:

  • Healthy 65-year-old retires in 2022 is expected to spend about $264,000 on health care in retirement, assuming a lifespan of 88 years.

  • Healthy 65-year-old woman retires in 2022 is expected to spend about $300,000 on healthcare in retirement, assuming a 90-year lifespan.

Projected costs are based on Milliman healthcare cost guidelines and premium information obtained from the Centers for Medicare and Medicaid Services.

“The health care costs you pay are an important part of retirement planning, and how much you will spend depends on a variety of health factors,” wrote Robert L. Schmidt and Eric Walters, actuaries at Milliman’s Boise office, Idaho. .

These factors, they explained, include:

  • current state of health, such as heart problems, arthritis and other chronic or recurring conditions.

  • Risk factors that could affect a retiree’s health, such as smoking or high blood pressure.

  • The level of financial risk a retiree is willing to take on (or bear) by trading lower premiums for higher deductibles and out-of-pocket expenses under a Medicare Supplemental Plan (“Medigap”) or Medicare Advantage Plan.

About Evelyn C. Heim

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