Health Care Reform Could Incent Employers to Drop Retiree Health Care

The latest Employee Benefit Research Institute (EBRI) Issue Brief examined how current health reform legislation being debated in Congress will impact the future of retiree health benefits.
Paul Fronstin, director of the Health Research and Education Program at EBRI, said that in the short term, the proposals’ reinsurance provisions would help shore up early retiree coverage and Medicare Part D coverage would become more valuable to retirees. However, in the longer term, the report contended insurance reform combined with other factors would create significant incentives for employers to drop coverage for Medicare-eligible retirees.

Those other factors are: new subsidies for individuals enrolling for coverage through insurance exchanges; the maintenance-of-effort provision affecting early retiree benefits; increases to the cost of providing drug benefits to retirees; and enhanced Medicare Part D coverage.

Fronstin explained that the proposed legislation includes a provision to create a temporary reinsurance program for employers providing health benefits to retirees over age 55 and not yet eligible for Medicare—intended to provide employers an incentive to maintain benefits until the health insurance exchange is fully operational. Once the exchange is fully operational, though, employers will have less incentive to provide health benefits to early retirees, and retirees will have less need for former employers to maintain a program, according to the report.

With some exceptions, the House-passed legislation would prohibit employers from changing the benefits offered to retirees and their beneficiaries once a person has retired. Fronstin says this provision could have a number of different effects: More employers may move toward capping their contributions; employers that want to maintain retiree health benefits may react by cutting the health benefits of active workers; employers may eliminate retiree health benefits altogether to avoid being locked into providing a permanent benefit; or they may drop benefits if they think there is no need to provide them.

Finally, Fronstin noted the Medicare Modernization Act provides subsidies to employers that continue to offer prescription drug coverage through a retiree health benefits program, and currently this subsidy is not counted as taxable income to the employer receiving it. However, both the House and Senate bills would effectively repeal this tax exclusion, which means the real cost of providing retiree health benefits to Medicare-eligible retirees would increase, and an employer’s FAS 106 liability would increase immediately.

The increase in the cost of retiree drug benefits will cause employers to re-evaluate the subsidy, compared with other available options, Fronstin contended. Moving retirees to Medicare Part D may become even more attractive to employers if the coverage gap is reduced and/or eliminated.

According to the report, the House-passed bill would initially reduce the coverage gap for individuals in the Medicare Part D program by $500 and eliminate it altogether by 2019. The bill currently before the Senate would also reduce the coverage gap by $500, but does not call for eliminating it. Both would also provide a 50% discount to brand-name drug coverage in the coverage gap. Fronstin said these provisions increase the value of the Medicare Part D drug program to Medicare-eligible beneficiaries relative to drug benefits provided by employers.

“Implications of Health Reform for Retiree Health Benefits,” EBRI Issue Brief, no. 338 (January 2010) is available at