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New Concerns about Early Retirees Flooding the Health Insurance ExchangeAugust 15, 2016:
A report by Paul Fronstin and Nevin Adams at the Employee Health Benefit Research Institute (EBRI) finds that the percent of employers offering health benefits to early retirees (45-64 years) dropped significantly: 28.8 percent of workers were offered early retiree health benefits in 1997 compared to an estimated 17.7 percent in 2010. Among the 8.5 million non-working early retirees in 2010, only 25%—or 2 million retirees—actually had retiree health benefits through a former employee. The remaining 6.4 million non-working early retirees did not have health insurance and remained ineligible for Medicare based on age alone.
Fronstin raises a real and important concern for the Health Insurance Exchanges under the Affordable Care Act, “As employers view state-based health exchanges as a viable option to retiree health benefits, they may view their own role in providing health coverage to retirees as no longer necessary.” In our system of voluntary health insurance coverage, there is no obligation for employer to provide early retiree health benefits. And this is not just a hypothetical.
3M: A Case Study in Early Retiree Health Coverage under the ACA
The large Minnesota-based 3M company recently told its employees that after 2014 there will be no group medical plan for early retirees – those who want to retire before age 65 when they become eligible for Medicare. 3M has directed these early retirees to the new Health Insurance Exchanges, being developed under the ACA, to find coverage. 3M does provide some transition credits ($300 a month at the outset) and eventually a Health Reimbursement Account for “non-Medicare eligible retirees” in 2015 to help subsidize their estimated $650 a month premium.
Why is this development so significant?
It is likely that large self-insured employers will follow 3M’s lead and a significant number of early retirees may look to the Health Insurance Exchange to purchase coverage. The ramifications could be significant for state and federal-based exchanges in terms of the cost of premiums with modified community rating and guarantee issue. The projections for how many people will purchase coverage in the exchange will need to be adjusted along with changes in the estimates of the risk (i.e., expected health cost) profile of those purchasing.
Since early retirees are likely to be older (60-65), they are likely to have one or more pre-existing health conditions, thereby raising the risk profile of the pool and in turn raising average premium costs. As the cost of the average premium increases, the cost of the (publicly-financed) premium subsidies will also increase, since the premium subsidies are set at a percent of the premium and not tied to a specific dollar amount. An increase in the price of coverage may also discourage young, healthy people from purchasing coverage, raising the overall risk profile of the exchange further. To avoid this scenario and offset the increase in the risk profile of the pool, additional incentives might be required to entice young people to purchase coverage.
Next Steps: Consider Alternative Strategies
In essence, the Health Insurance Exchange may become the default safety net plan for early retirees, replacing state-based high risk pools and also the federal Pre-existing Condition Insurance Plan. While the ACA provides for a three-year transition period during which the cost of high-risk enrollees in the individual market will be distributed broadly across the entire health insurance market through the use of risk corridors and reinsurance, it is not clear that these safeguards will be sufficient to protect against a disproportionate amount of financial risk from high-cost enrollees falling on the exchange.
One way to avoid such an unintended scenario would be to retain the state and federal high risk pools and continue to use them to serve those with high risks, including early retirees. Most high risk pool plans cap the premium that can be charged at some percentage of the average private market premium, with different financing mechanisms to help subsidize the cost. With a potential flood of early retirees into the individual market, new strategies such as this may be needed to create and a stable, functional, and affordable individual health insurance exchange.
“Issues for State High-Risk Pools with Implementation of Health Reform.” SHADAC Issue Brief, no. 20 (June 2010).
Paul Fronstin and Nevin Adams, “Employment-Based Retiree Health Benefits: Trends in Access and Coverage, 1997–2010,” EBRI Issue Brief, no. 377 (October 2012).