By Liz Farmer
Governing, January 9, 2019
The cost of retiree health care is spiraling out of control. In just two years, according to a recent S&P Global Ratings report, unfunded retiree health-care liabilities across the 50 states increased by $100 billion to now just under $700 billion.
The problem is becoming so alarming that Dearborn, Mich., recently borrowed money to help fill the gap, a move deemed risky by financial analysts. A more acceptable approach taking hold, thanks in part to the Affordable Care Act (ACA), is scrapping government-sponsored health plans and instead paying for retirees to purchase a plan on a private health insurance exchange. The change is expected to save some cities hundreds of millions of dollars and make their annual retiree health-care costs more predictable.
Retiree health care, also known as other post-employment benefits (OPEB), is one of the fastest-growing line items in government budgets. That’s because retirees are living longer and medical costs are rising faster than the rate of inflation.
In recent years, some governments have tried to manage costs by simply cutting health-care benefits — something they legally can’t do with pensions. In 2014, Memphis, Tenn., eliminated its 70 percent subsidy for retiree health insurance, and instead, plugged those savings into its vastly underfunded pension system. But unions fought the cuts, suing and pressuring the city to reinstate health care for retirees. With the subsidy gone, agencies were having problems with recruitment and retention, particularly police and fire departments where officers tend to retire well before the Medicare-eligible age of 65.
When Mayor Jim Strickland took office in 2016, he immediately tasked the city’s new chief human resources officer, Alexandra Smith, to fix the problem. That’s when the idea of turning to a health insurance exchange first emerged.
Private exchanges are different than the public, ACA exchanges. The idea is the same in that they pool risk and allow users to shop for their own health plans. But private exchanges are run by insurance and benefits companies. They have been around for much longer, generally catering to the 65 and older crowd looking for a health plan to supplement their Medicare coverage.
In recent years, governments, such as Cobb County, Ga., and the state of Ohio, have turned to these private exchanges for their Medicare-eligible retirees as a way to cut down on costs. But thanks to the ACA, private exchanges can expand their market to include users who are not yet eligible for Medicare. That’s opening up new options for governments that are paying for health care for younger retirees.
For Memphis, joining an exchange gave the city a chance to control their health-care costs because the insurer — rather than the city — is on the hook for big claims.
Shifting that responsibility, says Smith, dropped the city’s OPEB liability by $300 million to total $415 million. Costs going forward will also be more predictable, around $19 million per year. “The volatility we would have had by having retirees on our group insurance plan would have been much higher,” she says. “Now we’re able to better predict what our annual payments are.”
It also gave the city something to offer its younger retirees. While Memphis didn’t reinstate its 70 percent subsidy, it offers $5,000 annually for individuals and $10,000 for public safety retirees in the form of a health reimbursement account for those who aren’t eligible yet for Medicare. The money helps cover a significant portion of the premiums for retirees who buy a plan on the exchange.
Meanwhile, the idea is gaining traction. Ohio’s police and fire pension has already made the jump, and the state’s public employee pension plan is considering a similar move.
By Don McCanne, M.D.
Public employers, in order to help control the costs of their retiree health benefit programs, are dropping the retirees from their own government-sponsored health plans and instead giving retirees a health reimbursement account (HRA) that can be used to purchase health plans through a private insurance exchange. The plan in Memphis provides an example as to how that can work out for the employers and for the retirees.
Instead of paying a 70 percent premium subsidy towards the government-sponsored health plan, Memphis is paying into the HRAs an amount that reduces their post-employment benefit obligation by $300 million, a savings for Memphis of 42 percent! That’s great for their city budget, but what does that do for the retirees?
To begin with, private insurers generally have significantly greater administrative costs, higher executive compensation schedules, plus a need to divert funds to investors (or build capital margins for nonprofits), plus there are the additional administrative costs of the private exchanges. If the retirees have 42 percent fewer funds for their retiree coverage and the coverage is now more expensive than the previous government-sponsored plan, then what gives? It would require some combination of much higher insurance premiums (likely greater than the funds in their HRAs), much greater deductibles and other cost sharing, and a reduction in the health benefits covered by the private plans. All of these can place a significant financial burden on individuals now trying to get by on their modest pensions. They might have to deplete their assets, if they have any, and health care access may be impaired because of these financial barriers. This can’t be good.
We have to end our dependence on an overpriced, inefficient, inequitable, fragmented health care financing system dominated by private insurers. We can do that by enacting and implementing a Single Payer Medicare for All program. Although support is increasing, inertia remains a problem, and we may have to start taking to the streets to get it to happen.
Stay informed! Visit www.pnhp.org/qotd to sign up for daily email updates.