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NOVEMBER 23, 2010

Early Retiree Insurance

To encourage employers to maintain coverage for early retirees, the federal government picks up the tab for high-cost medical claims.

What's the issue?

The number of employers offering health insurance coverage to early retirees---former employees older than 55 but not yet eligible for Medicare--has dropped sharply over the past two decades. Employers who have maintained that coverage have increased the share of premiums and other costs paid by enrollees. To help keep this type of coverage in place, the Affordable Care Act established a temporary program under which the federal government will reimburse retiree health plans for high-cost medical claims. This Early Retiree Reinsurance Program will pay 80 percent of each claim that exceeds $15,000, up to $90,000.

The program began in June 2010 and is slated to operate until the end of 2013. It is intended to slow the decline in employer health coverage for retirees and to help tide people over until 2014, when other provisions of the law go into effect. At that point, it will theoretically be easier for early retirees to obtain coverage through new state health insurance exchanges, often with the aid of subsidies. However, it isn't clear whether the $5 billion allotted for the program will cover the anticipated costs between now and 2014.

What's the background?

Among large employers (those with 200 or more workers) who provided health coverage in 2010, only 28 percent offered benefits to newly retired workers, down from 46 percent in 1991 (Exhibit 1). State and local governments and employers with union workers were the most likely to offer retiree coverage. Only 3 percent of small employers (3-199 workers) offered retiree coverage this year (Exhibit 2). Some retirees are in the same plans as active workers, while others are in plans covering retirees only. In 2007, the most recent year for which numbers are available, an estimated 6.5 million people ages 55-64 had early retiree coverage, on their own or as dependents.

Exhibit 1
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Exhibit 2
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PRIMARY COVERAGE: When early retirees have coverage through their former employers, that coverage is typically "primary." This means that if the retiree incurs a cost for something covered under the policy, the employer-provided retiree coverage is responsible for payment. Most retirees receive Medicare when they turn 65, or sometimes earlier in the case of disability. Medicare then becomes their primary plan, and any remaining employer-provided coverage becomes "secondary" coverage. As such, it may help pay for the deductibles or other cost sharing that retirees incur under Medicare, and it may also cover goods and services that Medicare doesn't cover. Nearly all large employers' retiree plans cover early retirees, and about 75 percent of them also cover Medicare beneficiaries.

The proportion of employers offering retiree plans has been dropping for more than 20 years. Many of those who still offer coverage have curtailed benefits, tightened eligibility rules, or eliminated future coverage for newly hired workers. Most employers have increased the share of premiums that retirees pay. One-fifth of the largest employers give early retirees the right to buy coverage through the employer's plan, but make no contribution toward the cost. Among employers who are still paying part of the premium, more than half have adopted a "premium cap"--a fixed dollar limit on the amount the employer will contribute toward coverage. Once the cap has been reached, all future increases in the cost of coverage are borne entirely by the participants.

ADVANTAGES FOR ENROLLEES: Even when the employer contributes little or nothing toward premiums, access to an employer-sponsored plan can be advantageous for early retirees. Under current insurance regulations in most states, retirees with health problems might not find affordable coverage if they had to shop for it on their own. This is scheduled to change in 2014, when the coverage provisions of the Affordable Care Act become fully effective. At that time, early retirees must be accepted by all insurers in the nongroup market. Premium rates will not be allowed to vary by health status, and variations by age will be restricted. In addition, premium subsidies will be available for purchasers with incomes below 400 percent of the federal poverty level.

During the health care reform debate, Congress considered a variety of approaches for improving or maintaining coverage of those who might have left the workplace and lost employment-based coverage but who were not yet eligible for Medicare. One widely discussed option was to allow these early retirees to "buy in" to the Medicare program. Another option that was included in the version of health reform that passed the House of Representatives was to prohibit employers from substantially modifying health benefits for any participant who had already retired.

In the end, however, Congress settled on having the federal government reimburse health plans covering these early retirees for medical claims above a specified level. Called "reinsurance" for high-cost claims, the plan was a variation of an idea that had been put forward by then-presidential candidate Sen. John Kerry (D-MA) during the 2004 election campaign.

What's in the law and rules?

The Affordable Care Act requires the secretary of Health and Human Services (HHS) to establish a temporary reinsurance program. HHS issued implementing regulations on May 5, 2010, and the program took effect on June 1. It will continue through 2013, unless funds are exhausted sooner. Any group health plan that covers early retirees and is sponsored by an employer or union is eligible to participate. This includes private employers and state and local governments, but not federal civil and military retiree plans. Plan sponsors must file an application for each year and meet two key requirements:

STRIVE FOR COST SAVINGS: The plan must have programs or procedures with the potential to generate cost savings for enrollees with chronic and high-cost conditions. In the regulations, HHS did not specify which conditions a plan must address or what kinds of programs are required. Instead, a plan must show that it has programs to address at least some conditions. HHS offered a single example of an acceptable program: "a diabetes management program that includes aggressive monitoring and behavioral counseling to prevent complications and unnecessary hospitalization." A plan's programs need not achieve savings right away, but HHS could review their effectiveness later on and might recover funds paid to plans with inadequate programs.

Sponsors also must use all reinsurance payments they receive to reduce the total cost of the plan or the costs paid by retirees. The sponsor could use the funds to reduce the share of the premiums paid by enrollees or required cost sharing, such as deductibles or copayments. If the plan's total premiums go up year by year, the sponsor could use the funds to offset these increases. However, the law specifies that reinsurance payments may not be used by the employer as "general revenue." The regulation interprets this to mean that the employer cannot use the payments to reduce its dollar contribution to the plan below the level in effect in June 2010.

An employer may file a claim when total health benefit costs for an eligible enrollee during a year exceed $15,000. Both costs paid by the employer plan and costs paid by the participant are counted. Eligible enrollees include retirees aged 55-64 and their dependents, but not those who also have Medicare benefits. For each claim, the program will pay 80 percent of the costs after the threshold of $15,000 has been reached, to an upper limit of $90,000; this means a maximum payment of $60,000 for any one claim. The $15,000 threshold and the upper limit will both be increased each year for inflation, rising by an amount equivalent to the increase in the medical care component of the consumer price index for urban consumers.

PROBLEMS WITH REQUIREMENTS: To receive the reinsurance payment from the government, the employer or plan sponsor must provide documentation that all the amounts included in its claim were actually paid out. This requirement raises at least two problems.

First, an employer plan commonly deducts the amount for which a participant is responsible--such as the deductible, coinsurance, or copayments--before making payment to a doctor, hospital, or other provider. The provider collects this amount directly from the patient, and the plan sponsor rarely has evidence that the patient actually did pay. As a practical matter, then, most claims are likely to include only the amounts paid by the employer or insurer, rather than the total cost of the claim that includes the portion the retiree paid as well.

Second, there are still some health plans that pay providers on a so-called "capitated" basis, which means that the provider receives a fixed payment at a regular interval to provide all covered care for an enrollee, rather than being paid to provide care service by service. Other plans employ physicians or other professionals on a salaried basis. These plans may not always be able to calculate amounts spent for any particular patient. However, the largest such plan, Kaiser Permanente, will be furnishing the data needed for its employer clients to file reinsurance claims, and it is likely that similar plans will follow suit.

FUNDING: The Affordable Care Act appropriates $5 billion to cover claims and administrative costs for the reinsurance program through 2013. If at any time HHS anticipates that the funds are likely to be exhausted, it may stop accepting new applications from plan sponsors. To help HHS project future draws on the funds, each application is required to include a two-year projection of expected reimbursement amounts.

As of late October, HHS reported that nearly 3,600 employer plans had been accepted into the reinsurance program. These include more than half of the Fortune 500 companies, all major unions, and government entities in every state (Exhibit 3). Still, these plans probably represent only a small fraction of all retiree health plans. The exact number of employers offering early retiree coverage is not available, but data from the 2010 employer health benefits survey conducted by the Kaiser Family Foundation and the Health Research and Educational Trust suggest that there could be as many as 24,000 large employers with retiree plans. There are also many smaller employers with retiree coverage, but the survey sample is too small for a meaningful estimate.

Exhibit 3
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Some of these employers have applications in process, while others may not yet have learned about the program. But it appears that thousands of potentially eligible employers have decided not to participate. There are a number of possible explanations.

PLANS NOT ELIGIBLE: Some employers' plans may not meet the requirements for participating, such as having programs in place to reduce costs for chronic and high-cost conditions. The HHS rules do not set a very high bar for participation. Still, some self-insured plans or plans obtained through smaller insurers might not qualify, or might conclude that the costs of coming into compliance exceed the potential benefits.

EFFORT NOT WORTHWHILE: Some employers may not be certain that they will have enrollees with large enough claims to make applying worthwhile. The Employee Benefit Research Institute (EBRI) has estimated that 13 percent of early retirees or dependents incur claims of $15,000 or more during a year. However, this small share of enrollees accounts for 61 percent of all costs. EBRI calculates that subsidies from the reinsurance program would cover about one-fourth of total costs for an average employer's retiree plan.

However, some plans may have healthier populations or less-generous benefits, meaning that fewer enrollees would meet the $15,000 threshold. And in plans with fewer participants, claims experience is likely to fluctuate considerably from year to year. The rules appear to allow a plan sponsor to apply for the program after it has incurred the costs for which it will be seeking reimbursement. Although the estimated cost of applying is not high--about $2,000 per plan per year--some employers may be waiting to see if their potential subsidy is large enough to be worth the trouble.

NO FINANCIAL INCENTIVE: Finally, some employers may be deterred by the requirement that reinsurance payments be used to reduce costs for the employer, the enrollees, or both. As noted earlier, many employers have set a fixed dollar cap for their contributions to retirees' health costs or are contributing nothing. This means that any reinsurance payments would have to be used to reduce the costs for enrollees, not the employer's costs, because the rules forbid use of the payments to reduce the employer's own fixed contribution. In these cases, the employer would have no financial incentive to complete the application process and collect the data needed to file claims.

What's next?

Earlier this year, both EBRI and the Congressional Budget Office (CBO) projected that the $5 billion appropriation for the program would be exhausted before the program expires at the end of 2013. EBRI concluded that funds would be used up in 2011, while CBO expected them to last through part of 2012. However, EBRI assumes that all employers providing early retiree coverage will participate, and CBO's projection is likely similar. If employer participation remains low, the funds might stretch further. If the Affordable Care Act works as intended, people who retire in 2014 or later will have access to affordable and often subsidized coverage through state health insurance exchanges. This means that they may have less of a need to rely on coverage through their former employers. As a result, employer-provided retiree coverage is expected to continue to decline, and will no doubt play a steadily smaller role in the coverage of future retirees.


Agency for Healthcare Research and Quality, Early Retiree Health Insurance, 2007, Medical Expenditure Panel Survey Statistical Brief #296, October 2010.

Claxton, Gary, Bianca DiJulio, Heidi Whitmore, Jeremy D. Pickreign, Megan McHugh, Awo Osei-Anto, and Benjamin Finder, "Health Benefits in 2010: Premiums Rise Modestly, Workers Pay More Toward Coverage," Health Affairs 29, no. 10 (2010):1942-50.

Fronstin, Paul, "The Early Retiree Reinsurance Program: $5 Billion Will Last About Two Years," Employee Benefit Research Institute, EBRI Notes, vol. 37, no. 10 (July 2010).

Hall, Mark A., "The Three Types of Reinsurance Created by Federal Health Reform," Health Affairs 29, no. 6 (2010):1168-72.

Kaiser Family Foundation/Health Research and Educational Trust, Employer Health Benefits: 2010 Annual Survey.

US Department of Health and Human Services, Early Retiree Reinsurance Program, General ERRP Program Overview, August 2010.

About Health Policy Briefs

Written by
Mark Merlis
Health Policy Consultant

Editorial review by
Ed Neuschler
Senior Program Officer
Institute for Health Policy Solutions

Mark V. Pauly
Department of Health Care Management
The Wharton School
University of Pennsylvania

Ted Agres
Senior Editor for Special Content
Health Affairs

Susan Dentzer
Health Affairs

Health Policy Briefs are produced under a partnership of Health Affairs and the Robert Wood Johnson Foundation.

Cite as:
“Health Policy Brief: Early Retiree Insurance,” Health Affairs, November 23, 2010.

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