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Some companies have nixed group health-care coverage and are sending their former employees to exchanges to shop for plans.
Marie Leone, CFO.com | US
August 5, 2010
During the first quarter of this year, Goodyear Tire & Rubber, International Paper, AT&T, CBS, and other major companies reported large accounting charges related to the loss of a tax deduction. The deduction — a 28% break for corporations that provided a Medicare Part D drug subsidy to retirees — was eliminated by the new Patient Protection and Affordable Care Act. As a result, companies were required to write down deferred-tax asset balances.
The accounting hit no doubt dredged up memories of FAS 106, the 1992 accounting rule that forced companies to recognize estimated and actual liabilities for postretirement health-care benefits. At the time, the accounting rule caused many companies to cap retiree-benefit spending.
Today, accounting adjustments, lower profits, and higher health-care costs are causing some companies to abandon the retiree health-care business altogether. Only 45% of 550 of the largest U.S. employers subsidize retiree health coverage, according to Towers Perrin's 2010 Retiree Health Care Cost Survey. Other companies have kept some skin in the retiree-benefits game by opting to replace group-plan coverage with health-reimbursement arrangements.
The HRA concept got a big boost a few years back when the Big Three automakers switched out of the group coverage on white-collar retirees (nearly 200,000 in total) for the self-directed accounts. HRAs are retiree-controlled accounts that may be funded with a fixed annual payment from the company, and can be used to pay for qualified health-care-related expenses. Since those include insurance, Medicare-eligible retirees can use the HRA to pay for supplemental coverage.
From a corporate perspective, the fixed cost removes the volatility in health-insurance costs that plague the budgeting and planning process. The retiree accounts also relieve employers of the administrative costs and burdens of sponsoring group health-insurance plans or self-insured arrangements.
Eastman Chemical Co. is one of the companies that chose to move retirees to an HRA. The company, which generates $5 billion in annual revenues, set up its 6,700 Medicare-eligible retirees with HRAs in 2009. Eastman also gave them access to a national health-benefits exchange, where they can shop for insurance plans.
To accomplish that, the company contracted with Extend Health Inc., a benefits outfit that runs a national health-care insurance exchange. It also provides a licensed adviser to help retirees sort through the more than 30 insurance carriers and 300 plans that are available to them.
The exchange provides better benefits to retirees than Eastman could offer, says Phil Belcher, health and welfare manager at the Kingsport, Tennessee-based manufacturer. He points out that Eastman was drawn to the exchange because it allows retirees more choice in terms of selecting a provider and plan that fit their specific needs at a lower cost than the company could negotiate.
"We made the choice to go with [the exchange] model for the right reason and it turned out to be icing on the cake" when the company avoided the earnings impact related to the elimination of the tax break in the new health-care law. While Belcher declines to disclose the amount of the subsidy Eastman provides to retirees, he says that the benefit payout has not been reduced since the company exited its group health-insurance plan.
The payment is an "evergreen" subsidy, meaning it can be banked by the employee if it's not used in the year it is issued. While Eastman is freed from such administrative tasks as handling annual enrollment, it still works with Extend Health to develop customized communications for retirees and arrange face-to-face meetings with new retirees to explain the HRA. "We have a lot of Medicare retirees, and it was becoming difficult to assist them in navigating the [government] program," concedes Belcher.
In all, the exchange makes more than 50 carriers and 1,000 plans available to retirees, depending on their home state. There are other exchanges vying for a piece of the corporate retiree market as well, including Hewitt Associates's Senior Educators Ltd. and Transition Assist.
The exchange charges companies a small set-up fee. It receives the lion's share of its revenue, however, from commissions paid by insurers when retirees sign up for a plan. The commission rates are kept secret, and are known only to a handful of Extend Health executives. In that way, none of the plan advisers who counsel retirees has an incentive to steer participants to the plan that pays the exchange a larger commission, says Bryce Williams, Extend Health's chief executive officer.
Critics of HRAs and other "consumer-driven" plans contend that the accounts are the first step toward eliminating corporate-sponsored retiree benefits completely. HRAs have also been criticized for putting the burden of plan selection on the retiree, who may already be overwhelmed by confusing medical-care options. Williams says that's why the exchange provides plan advisers at no extra cost to a company — to counsel retirees on finding the plan that suits them best, cost-wise as well as care-wise.