Individual Medicare Market to Get a Boost

Many employers are sourcing post-65 retiree health care coverage through the individual Medicare plan market or are considering doing so, according to a survey by Aon Hewitt. The ACA is causing more than 60% of employers to reassess their long-term retiree health strategies.

More than 40% companies that have decided to change their strategy for post-65 retirees are now directing retirees to the individual market for coverage, often accompanied by a defined contribution subsidy. More than half of companies that expect to change their post-65 retiree strategies indicate strong interest in this approach.

Maureen Scholl, CEO of Health Care Exchanges for Aon Hewitt said, “Individual market-based retiree health care sourcing strategies can create significant savings opportunities for all stakeholders. We expect to see many employers apply these strategies where possible and supplement them with modified group-based programs for those retiree populations where individual strategies do not make sense.”

Fifty-three percent of employers have altered or their Medicare Part D benefit strategies or plan to do so. Thirty-six percent of companies that have made changes, since 2010, have moved to a group-based Medicare Part D plan and another 21% anticipate doing so.

In 2013, 48% of of employers filed to collect the federal Medicare Part D Retiree Drug Subsidy compared to 63% in 2010. Only 18% plan to file for the subsidy longer-term. Milind Desai, retirement actuary at Aon Hewitt explained that employees had the impetus to take action with the elimination of the tax-favored status of the Retiree Drug Subsidy for 2013 and ACA-prescribed improvements to the Medicare Part D program. While many employers will continue to rely on group-based sourcing, they are likely to migrate toward more cost effective sourcing, he said.

Only 34% of employers offer local/regional or national group-based Medicare Advantage plans, and just 6% consider Medicare Advantage to be a viable group-based strategy. However, 38% of employers say they would consider replacing their group-based Medicare medical indemnity supplement strategies with a national Medicare Advantage PPO if there would be no change in retiree benefits and if it would generate near-term savings.

John Grosso, leader of Aon Hewitt’s Retiree Health Care task force said, “While ACA introduced a number of changes to the Medicare Advantage program, employers generally want to see consistent performance over time and a stable federal funding commitment before investing in these group-based strategies for the long-term.”

Some settlement strategies with a retiree benefit buy-out enable employers to eliminate their retiree medical commitment completely or in part. Employers are considering the following strategies: purchasing life annuities to provide a fixed income stream in lieu of ongoing medical coverage, establishing and funding a VEBA trust to support continued retiree benefits, or making direct cash lump-sum payments to retirees.

More than a quarter of companies say they would consider a retiree health care settlement strategy for all or a portion of their retiree group if it were cost-effective. Desai said, “We saw tremendous pension settlement activity during 2012, and that trend is continuing in 2013. Companies looking to shrink benefit liabilities…can explore…settling their retiree health care obligations as well…There are a number of tax, legal and market hurdles that limit the feasibility of settling retiree medical program commitments in a cost-effective manner, but this can change in the future.” For more information,

Last Updated 01/19/2022

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