The Decline in Employer-Based Retiree Health Insurance Continues

Employer-based retiree health insurance (RHI) benefits have been on the decline for two decades. Many in industry think this decline was initially triggered by the December 1990 issuance of the Financial Accounting Statement No. 106 by the Financial Accounting Standards Board (FASB), which required private-sector employers to account for non-pension retirement benefits (i.e., retiree health insurance benefit liabilities) on accounting statements. This accounting rule change emphasized to employers how much they were spending on health insurance benefits for their retirees. This cost recognition resulted in coverage reductions in private-sector employer-sponsored RHI plans or wholesale elimination of coverage in some cases.

Three Employer Strategies

An August 2009 research report prepared by researchers at the Center for Retirement Research at Boston College discussed the implications of the decline in RHI. The report found that employers generally use three strategies to reduce RHI costs: (1) the elimination of RHI for new retirees; (2) making retirees pay a larger portion of premiums, deductibles, and co-payments; and (3) tightening of employee vesting and eligibility requirements for RHI plans.

Trends in Access and Coverage: 1997 to 2010

According to an October 2012 issue brief by the Employee Benefit Research Institute (EBRI), between 1997 and 2010, the number of workers employed at companies that offered early retiree health coverage dropped from 28.9 to 17.7 percent, and the percentage of non-working retirees over age 65 with retiree health benefits fell from 20 to 16 percent.  The EBRI brief reports that “while many employers have dropped retiree health benefits, especially for future retirees, most that have continued to offer retiree health benefits have made changes in the benefit package they offer: raising premiums that retirees are required to pay, tightening eligibility, limiting or reducing benefits, or combination of these.” Top in the list of future changes by employers, according to EBRI, will be increases in retiree contributions, such as the retirees’ portion of annual premiums. Finally, EBRI surmises that as state insurance exchanges become a viable alternative to RHI, employers may decide that RHI for their retirees is no longer necessary.

Possible Results of RHI Elimination

After extensive analysis, the report by the Center for Retirement Research at Boston College offers two important predictions of what would happen if  RHI were eliminated.  “First, for the near elderly, without the added incentive of RHI to retire early, about 7 percent of workers between ages 55 and 64 would choose to work longer. A large group who previously would have had RHI would still retire early but be left with little in the way of secure health insurance coverage. Second, Medicare beneficiaries who do not have the luxury of RHI would have to choose an alternative type of supplemental coverage, which may be more expensive; however, this change in insurance would be unlikely to alter their health outcomes.” As a result, the Center’s report concludes that the elimination of RHI would profoundly effect the 55 to 64 age group, but the effect on retirees 65 and over would be minimal.

Savings Needed for Health Expenses

Because Medicare covers only about 60 percent of the cost of health care services (not including long-term care), a certain level of savings for out-of-pocket health care spending is needed.  In fact, EBRI offers two scenarios for consideration: (1) in 2012, to have a 50 percent chance of covering their health care expenses (excluding long-term care) in retirement, a 65-year-old man would need need $70,000 in savings and a woman would need $93,000; (2) in 2012, to have a 50 percent chance of covering their health care expenses (excluding long-term care) in retirement, a 65-year-old couple, both with median drug expenses, would need $163,000 in savings, $227,000 in savings to have a 75 percent chance of covering expenses, and $283,000 in savings to have a 90 percent chance of covering expenses.