Employer health benefits for U.S. retirees keep declining

Health-insurance-150pxPlanning 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 percent.

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.

Aon Hewitt, a consulting firm that operates exchanges for employers, reports that 35 percent 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 percent say they will do so in the future, and another 46 percent say they are considering it.

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,  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.

But 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.

The overall decline in retiree health coverage could have important implications for the Medigap and Medicare Advantage insurance markets in the years ahead, according to the Kaiser Family Foundation:

The drop in retiree health coverage has important implications for retiring boomers who are approaching their Medicare years with a different set of insurance needs and choices than their parents’ generation.  A growing number of boomers are aging on to Medicare without the additional financial protection of an employer-subsidized retiree health plan.  Some will shift on to traditional Medicare, without supplemental coverage, and face multiple deductibles and cost-sharing requirements when they seek medical care, unless they forego care due to costs.  The decline in retiree coverage could lead to an increase in the demand for individually-purchased Medicare supplemental (Medigap) insurance policies and contribute to the rise in Medicare Advantage enrollment, particularly among those who are willing to trade more limited provider networks for the financial protection that comes with a limit on out-of-pocket spending.

Learn more at Reuters Money.




  1. I’ve only recently focused on Mark’s articles. He is spot on as to the issues of potential deteriation of various types of retirement plans from pension to SS. Health care costs have been and continue to grow much faster than other costs. Both government and private employers providing some sort of retirement benefit plans did not plan well for this continued explosion in costs resulting in the delima they face and that every individual faces.

    I would like to see Mark also focus on how to “reel in” the unrelenting out of control rise in the cost of health care.

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