Major Flux for Retiree Health Care

IBM and Time Warner are the latest to say they’ll send ex-workers to private health-insurance exchanges. Companies making this move and their retir...
David McCannSeptember 10, 2013

Announcements in the past few days by IBM and Time Warner could signal an avalanche of retired people spilling into private health-insurance exchanges over the next few years.

The two big companies will be far from the first to move their retirees to private exchanges. In a National Business Group on Health study of large employers released in late August, 10 percent of participants said they have retirees in private exchanges this year, 7 percent more plan to do so in 2014, and an additional 40 percent are considering the transition for 2015 or later.

Other big-name companies that have made the move include Caterpillar and DuPont. But IBM and Time Warner are among the most iconic American companies. “This is big news,” says Ron Fontanetta, senior health care consulting leader at Towers Watson. “There has been a lot of discussion about this within companies, and we think this is going to accelerate the pace of those discussions. Big names like these will make other companies think about whether they should do it too.”

Towers Watson’s Extend Health retiree exchange will serve IBM employees, and Fontanetta’s comments have to be viewed in that light. But Ed Kaplan, senior vice president and national health practice leader at another consulting firm, Segal, that does not offer a private exchange, largely agrees with Fontanetta.

“I’m not at all surprised to hear this,” Kaplan says. “We’re seeing clients’ interest in new options for retiree health benefits every week.” Segal, in fact, is helping clients select which private exchange to offer.

In part, the trend is a response to new health-care options for retirees that are external to their former employers. Competition among a host of new Medicare products introduced in recent years has kept premiums flat for post-65 retirees. There are also new rules capping the premiums that can be charged to Medicare-eligible people.

For pre-65 retirees, provisions of the Affordable Care Act taking effect in 2014 – most notably, that insurers won’t be able to deny coverage, even because of pre-existing conditions – are a potential game-changer.

“Organizations are looking at their retiree healthcare portfolios and asking whether it makes sense to actively sponsor benefits when there are attractive alternatives for both the post-65 and pre-65 populations,” says Fontanetta. “More often than not, retirees will have better options in the individual market than with an employer-sponsored plan.”

In fact, IBM says its motivation for the move is entirely about helping out retirees and has nothing to do with its finances. “IBM capped its subsidy for retiree health care back in the 1990s,” says Douglas Shelton, a spokesman for the company. “We didn’t do this to save money.” Rather, he says, projections indicate that retiree health-care costs under IBM’s current plans for Medicare-eligible employees will triple by 2020 and that the shift to a private exchange “provides our retirees more choice and flexibility at equal or better costs.”

Time Warner did not respond to a request for comment by press time for this article.

IBM aside, many companies making the transition are also motivated by the appeal of cutting their own costs. More often than not, they opt to make defined contributions that retirees can use to help buy coverage through the exchange, but the contributions amount to less than the employer was paying to provide a defined-benefit health plan, says Kaplan. “Some of our clients have chosen to cut 10 percent of that cost, others 50 percent,” he says. “A lot of the consultants [with firms that offer private exchanges] and employers are not talking about that piece of it.”

Acknowledges Fontanetta, “Are there likely to be some companies that conclude they can make this transition because of all the opportunities for retirees available in the marketplace and save money at the same time? Yes.” But, he adds, “Some may keep their financial commitment where it is. That’s an independent decision, but what’s mostly motivating this change is the recognition that retirees will often be better off.”

Whatever the benefit to retirees, IBM and Time Warner seemingly wanted to minimize fanfare over their announcements, which came respectively on Saturday and Sunday, Sept. 7 and 8. Companies often choose to reveal news they think may invite negative backlash on weekends or late-Friday afternoons.

Health benefits for retirees have been dwindling steadily since the early 1990s, when the Financial Accounting Standards Board ruled that employers had to account for future health-cost liabilities on an accrual basis rather than a pay-as-you-go cash basis. That caused dramatic, almost-overnight negative changes in balance-sheet liabilities and bottom lines.

The NBGH study, meanwhile, also supported other research suggesting that many companies are pondering a switch to private exchanges for active employees as well. And three participating employers said they may eliminate health-care coverage for active employees and pay the resulting penalty of $2,000 per year per employee. Annual health-care costs for employer health-plan sponsors are typically more than $10,000 per employee.

Those three companies are likely to be in industries with many low-wage and part-time employees. Such workers would benefit from the public subsidies for buying insurance through the public health-insurance exchange scheduled to open in 2014, notes Helen Darling, chief executive of NBGH, which represents the health-care interests of about 365 large member organizations.