Retirement Healthcare Trends

Trends in Retiree Healthcare

Healthcare continues to challenge employers, and rising costs have made healthcare in retirement an increasing risk to retirement security. For private institutions, FAS 106 changed the retiree medical playing field and GASB 43 & 45 has driven changes among public employers. Over time different strategies have been employed but are strategies designed to solve one financial crisis leading to an even larger crisis for generations to come?

Traditional employer provider healthcare coverage in retirement has eroded over the last 20 years. Increasingly, people entering retirement today will not receive retiree healthcare coverage from their employer. The absence of retiree healthcare coverage may result in delayed retirements which can stifle workforce management goals. Ever-increasing healthcare costs in retirement also place a significant burden on traditional retirement plan income. Retirees who utilize income assets for medical expenses could see an erosion of retirement savings at a pace not planned for or expected.

There is no special “pill” or single solution to the challenges of retiree healthcare benefits. Employer provided medical coverage for both pre-65 and post-65 retirees varies significantly based on the type of institution, total rewards philosophy, culture and the financial capacity to provide benefits to long service employees. Legislative change as a result of the Affordable Care Act has had a significant impact on an employer’s decision making process.

Challenges and Opportunities

Employers are looking for ways to shift retiree healthcare costs to employees. Reductions in subsidies, reduced benefit coverage, elimination of spousal coverage, or worse, eliminating the retiree health coverage entirely may help lower the employer’s current benefits cost, but it will not lower or eliminate the cost of healthcare for a retiree.

Employers that continue to offer retiree health benefits are utilizing various strategies to limit retiree health costs, including, a implementing fixed cap on financial liabilities, shifting from a defined benefit to a defined contribution plan, and increasing premiums and cost-sharing for retirees and their spouses. In recent years, some employers have elected to offer retiree benefits through contracts with private health insurance exchanges.

Not all defined contribution solutions are the same.

Employers that have adopted a defined contribution approach utilizing a fixed stipend into a retiree Health Reimbursement Account (HRA) may control costs but problems remain. As healthcare costs rise, does the employer increase the stipend to the HRA?

Most retiree HRAs are funded on a pay-as-you-go basis from the employer’s general assets. Over time, as baby boomers retiree, the cost of a pay-as-you-go benefit suddenly becomes a significant cash drain on the employer.

Funding an HRA represents a future promise to pay, creating a FAS 106 or GASB 43-45 liability, placing further financial pressure on the employe, who may ultimately reduce or eliminate the HRA benefit altogether.

A cost-effective, flexible and sustainable solution for funding retiree healthcare is required.