Aon Hewitt Survey Shows Most Employers Considering Move Towards Exchange-Based Individual Market Strategies for Retiree Medical Programs

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Sep 26, 2012, 09:00 ET

LINCOLNSHIRE, Ill., Sept. 26, 2012 /PRNewswire/ -- Driven by changes under the Patient Protection and Affordable Care Act (PPACA), most employers are reevaluating their retiree health care strategy and are considering implementing strategies that open access to the individual Medicare plan market through health care exchanges, according to a new survey by Aon Hewitt, the global human resources solutions business of Aon plc. (NYSE: AON).

According to Aon Hewitt's 2012 survey of almost 450 private and public plan sponsors representing 5.8 million retirees, 6 in 10 employers have reviewed or are currently reviewing their retiree health care strategies and are considering alternatives in order to leverage opportunities created by the PPACA.

Of those employers planning changes,63 percent are currently implementing or are considering moving towards an individual market strategy, where they would leverage a health exchange partnership. Aon Hewitt estimates that approximately two-thirds of Medicare-eligible retirees in the U.S. are already enrolled in a Medicare plan through the individual market.

"With the Supreme Court ruling largely upholding the PPACA, plan sponsors have the opportunity to reassess their role as a provider of retiree health care benefits and consider changes that will better position their retiree health care programs for the future," said John Grosso, health care actuary and leader of the Aon Hewitt Retiree Health Care sub-practice. ""The combination of changes to the Medicare Part D and Medicare Advantage programs, along with the choice, competition and generally favorable rating rules, have made the individual market very cost-effective compared to the group insurance program. We expect that there will be a similar opportunity for pre-Medicare retirees beginning in 2014."

Aon Hewitt's survey found that 65 percent of plan sponsors said they will at least consider leveraging an exchange strategy for their pre-Medicare retirees some time after 2013, with or without a subsidy, in order to take advantage of the opportunities created through new state-sponsored health care exchanges and additional PPACA market reforms.

In addition to an individual market strategy, Aon Hewitt's survey shows that employers are currently pursuing two other general retiree health care strategies in response to provisions under the PPACA:

Medicare Part D Strategies
Prompted by the elimination of the tax-favored status of the Retiree Drug Subsidy (RDS) under the PPACA, a majority of employers (61 percent) expect to change either their Medicare Part D or broader strategy for Medicare-eligible retirees. Of those plan sponsors, 17 percent made changes in 2011 or 2012, another 11 percent will make changes for 2013, and nearly three quarters (72 percent) are currently exploring what actions to take and when.

Of the employers who have already decided to make changes to their retiree drug program, 62 percent are moving forward with a group-based Medicare Part D Prescription Drug Plan (PDP/EGWP). Thirty-two percent are leveraging the individual Medicare-eligible health insurance market in some manner.

"Changes to the tax-favored status of the RDS, in conjunction with improvements to the Medicare Part D program over time, are driving significant change in the employer-sponsored retiree health care market," explained Grosso. "These enhancements allow for cost savings for both plan sponsors and retirees, while still preserving retiree benefits."

Excise Tax Mitigation Strategies
To mitigate the cost of the excise tax on high-cost health plans in 2018, Aon Hewitt's research shows that 29 percent of plan sponsors anticipate changing plan features such as deductibles, copayments and coinsurance. Twenty-two percent would favor sourcing coverage through the state exchanges, and 18 percent favor changing retiree premium cost-sharing in some manner.

While most employers anticipate needing to manage excise tax exposure over time, 69 percent do not anticipate announcing or implementing actions in the near-term. Only 12 percent did so before to 2012.

"Even though the excise tax is not scheduled to take effect until 2018, plan sponsors must reflect any anticipated excise tax exposure on their current financial statements," said Milind Desai, retirement actuary at Aon Hewitt. "Some employers have already made changes to their retiree strategy to limit this impact, but others with higher cost plans should, at a minimum, evaluate how they can preserve the tax efficiency of their program on behalf of both the plan sponsor and participating retirees."

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About Aon Hewitt
Aon Hewitt is the global leader in human resource 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 plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 62,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world's best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources. Visit www.aon.com for more information on Aon and www.aon.com/manchesterunited to learn about Aon's global partnership and shirt sponsorship with Manchester United.