Aon Hewitt Report Shows Potential Impact of Health Care Reform on Retiree Medical Programs

LINCOLNSHIRE, Ill., April 20, 2011 /PRNewswire/ -- Most large employers are now beginning to rethink their retiree health care strategy as a result of federal health care reform, according to a recent report by Aon Hewitt, the global human resource consulting and outsourcing business of Aon Corporation (NYSE: AON).

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In late 2010, Aon Hewitt surveyed 344 companies, representing 2.2 million retirees nationwide, and found that 61 percent were either already evaluating or were expected to evaluate their long-term retiree medical strategy by the end of 2011, due to health care reform.  Meanwhile, 23 percent of respondents indicated they were still considering whether to assess their current strategy and only 16 percent had no immediate plans to review their current approach.

"Health care reform creates both challenges and opportunities for employers sponsoring retiree medical programs," said John Grosso, retiree health care group leader with Aon Hewitt.  "Most employers have been studying the new legislation to understand how to effectively manage the challenges, while taking full advantage of the new opportunities going forward.  Many will find that the new legislation will create significant and immediate savings opportunities."

Most immediately, among those planning to apply for the temporary Early Retiree Reinsurance Program (ERRP) to help offset a portion of the cost of health claims for retirees age 55 to 64, about half (48 percent) anticipate using the proceeds to reduce premiums, including both employer and participant share, while 21 percent intend to reduce the employer share of premiums only.

As for companies in the survey that pay a portion of health coverage for their retirees age 65 or older, three-quarters currently collect the Retiree Drug Subsidy (RDS).  Of those, 73 percent said they are altering their retiree drug benefits strategy, as health reform eliminates the RDS tax advantages for 2013, and creates enhancements to the Medicare Part D program for retiree drug benefits beginning in 2011.  In fact, 61 percent anticipate announcing these changes by the end of 2011 in order to begin recognizing accounting savings quickly, while 86 percent expect to actually implement these changes by 2013.

Alternatives most favored by employers making or contemplating changes to their post-65 retiree medical programs include contracting with a Part D Prescription Drug Plan (34 percent) or moving to a pure defined contribution approach (30 percent) where post-65 retirees can purchase benefits through the individual Medicare retiree plan market.  Other employers that anticipate leveraging an expanded market for Medicare retiree prescription drug plans support combining access to individual Part D plans with premium subsidization (5 percent) or out-of-pocket cost subsidization (5 percent).  Another 9 percent prefer eliminating employer-sponsored retiree prescription drug benefits altogether.

Of the employers favoring contracting with a Part D Prescription Drug Plan on a group basis, 57 percent will look to utilize an "Employer Group Waiver Plan (EGWP) + Wrap" approach, whereby the employer contracts for a Standard Medicare Part D plan design with a wraparound benefit that attempts to preserve the current prescription drug plan design and formulary strategy for the retiree.

"Many employers are looking to access cost-reduction opportunities created by the new changes to the Part D program," said Grosso. "For those wanting to continue to manage and control their group program, contracting with a Medicare Part D plan on a group basis, leveraging the EGWP process, will make sense. Conversely, for those looking to move away from a group-based model, individual market-based benefit sourcing, supported by some level of tax-effective defined contribution funding, may be a desirable strategy."

State Exchanges

In addition, Aon Hewitt's survey found that 36 percent of respondents plan to make changes to their pre-65 retiree benefits strategy to directly leverage the health insurance exchanges that states, or the federal government, are required to create in 2014.  What's more, 21 percent prefer moving to a pure defined contribution approach, where retirees could use an account established by the employer to purchase coverage through the exchanges.  The balance of these employers anticipate eliminating pre-65 coverage in response to the creation of exchanges.

"It is clear that a growing number of companies realize now is the time to take a closer look at their retiree medical strategies in an effort to leverage key cost and risk management opportunities created by reform," said Milind Desai, retirement actuary with Aon Hewitt.  "Individual market benefit-sourcing, supported by state and private exchanges, can create cost-effective coverage opportunities for retirees that do not exist today, even within most employer-sponsored retiree group health plans. This is a primary reason why employer programs will evolve toward individual market-based benefit strategies over time."

About this Survey

Aon Hewitt Surveyed 344 companies representing 2.2 million retirees from May 2010 – November 2010 in its report titled, "Employer Reaction to Health Care Reform: Retiree Strategy Survey."  The survey specifically focuses on employers that offer medical benefits to retirees and their families, and their reactions to the retiree aspects of health care reform.  For more information on this survey, please visit www.aon.com/evolution.

About Aon Hewitt

Aon Hewitt is the global leader in human resource consulting and outsourcing solutions.  The company partners with organizations to solve their most complex benefits, talent and related financial challenges, and improve business performance.  Aon Hewitt designs, implements, communicates and administers a wide range of human capital, retirement, investment management, health care, compensation and talent management strategies.  With more than 29,000 professionals in 90 countries, Aon Hewitt makes the world a better place to work for clients and their employees.  For more information on Aon Hewitt, please visit www.aonhewitt.com.

About Aon

Aon Corporation (NYSE:AON) is the leading global provider of risk management services, insurance and reinsurance brokerage, and human capital solutions and outsourcing. Through its more than 59,000 colleagues worldwide, Aon unites to deliver distinctive client value via innovative and effective risk management and workforce productivity solutions. Aon's industry-leading global resources and technical expertise are delivered locally in over 120 countries. Named the world's best broker by Euromoney magazine's 2008, 2009 and 2010 Insurance Survey, Aon also ranked highest on Business Insurance's listing of the world's insurance brokers based on commercial retail, wholesale, reinsurance and personal lines brokerage revenues in 2008 and 2009. A.M. Best deemed Aon the number one insurance broker based on revenues in 2007, 2008 and 2009, and Aon was voted best insurance intermediary 2007-2010, best reinsurance intermediary 2006-2010, best captives manager 2009-2010, and best employee benefits consulting firm 2007-2009 by the readers of Business Insurance. Visit http://www.aon.com for more information on Aon and http://www.aon.com/unitedin2010 to learn about Aon's global partnership and shirt sponsorship with Manchester United.

SOURCE Aon Corporation