Obamacare has upsides for big employers: Chance to save millions by offloading retiree coverage

Obamacare has upsides for big employers: Chance to save millions by offloading retiree coverage
By John Pletz
©2010 by Crain Communications Inc.
April 05, 2010
http://www.chicagobusiness.com/cgi-bin/mag/article.pl?articleId=33220


Big companies may find a lot to like in President Barack Obama's health care law — once they get over the tax changes burning a hole in their earnings.

Chicago-based Boeing Co. and Exelon Corp., Illinois Tool Works Inc. of Glenview, Peoria's Caterpillar Inc. and Deere & Co. of Moline all have warned they'll take non-cash charges of tens or hundreds of millions in the first quarter because they are losing a tax break for the drug-care benefits they give to retirees.

But in the long term, improvements in Medicare prescription coverage and the creation of private exchanges that would provide more affordable insurance to individuals could allow some of these same companies to stop providing insurance to retirees altogether, saving millions in expenses.

Private insurance exchanges

"There is no question that companies large and small will be better off with health reform than they would be without it," says Len Nichols, a professor of health policy at George Mason University in Washington, D.C.

Many companies already have stopped providing coverage in favor of letting retirees rely on Medicare and supplemental insurance or company subsidies. Between 2003 and 2007, the number of companies offering coverage to retirees over 65 dropped to 42% from 58%, according to consulting firm Towers Watson & Co. Those offering coverage to retirees under 65 — a large part at unionized companies such as Cat, Deere and Boeing — have dropped to 56% from 69%.

"The tax hit is a catalyst," says Roland McDevitt, Virginia-based director of health research at Towers Watson. "Employers already are struggling to support these plans, and I think there will be a lot of inclination to look at dropping them."

The savings can be immense. This year, Caterpillar moved 9,500 non-union retirees age 65 and older from a traditional insurance plan to a combination of Medicare and a $3,000 company subsidy, a move that saved $60 million last year and will cut more than $500 million in liabilities over the next seven years while boosting income by $334 million.

Those numbers dwarf the $100-million non-cash accounting charge Caterpillar says it will suffer because of tax-law changes limiting its ability to deduct government subsidies for providing retiree drug coverage.

Making similar changes at unionized plants such as those in Aurora and Pontiac would provide additional savings. That would require going back to the bargaining table, which Cat will have the opportunity to do later this year.

AT&T OUT FRONT

So far, only a few companies, such as AT&T Inc. (which includes the former Chicago-based Ameritech), have said publicly they will consider a change in benefits.

"I'd be surprised if AT&T were the only one, based on what I'm hearing," says Ken Porter, chief actuary at the Washington, D.C.-based American Benefits Council, a trade group that advises companies on employee benefits. Members include Abbott Laboratories, Boeing, Kraft Foods Inc., Motorola Inc. and Navistar Inc. The companies either say they are still evaluating the plans or decline to comment.

Retiree health insurance

Improvements in Medicare drug coverage under the new law will encourage companies to drop their plans. Until now, companies have been reluctant to simply push retirees into Medicare, especially for drug coverage, because of the notorious "doughnut hole" that leaves retirees on the hook for all drug expenses between $2,830 and $6,440. The hole will shrink steadily until 2020.

By then, Medicare will pay 75% of an average retiree's total drug spending, up from about 50% today, Towers Watson says. That's huge for employers because prescriptions account for more than half of retiree medical spending.

"The big advantage to employer-sponsored coverage was that it didn't have a doughnut hole, which was wildly unpopular. But that's going away," says Steve Riedl, a Chicago-based principal at Towers Watson.

For employers, another advantage of the health care bill comes from the proposed creation of statewide insurance exchanges. These exchanges won't be available until 2014.

In the meantime, the health care law provides $5 billion in subsidies for companies that provide under-65 coverage.

If the exchanges succeed in providing insurance to individuals at lower prices and with fewer restrictions than exist now, companies stand to benefit. Many companies — as well as state and local governments — provide coverage to under-65 retirees because these individuals often can't find affordable coverage on the open market. But the costs to provide such insurance are twice as high as for those over age 65.

"Having a viable market for pre-65 retirees to buy insurance would allow companies to drop these plans," says Rick McGill, a principal in Lincolnshire-based Hewitt Associates LLC's health-management consulting practice. "I think you'll see an uptick in employers saying, 'I create value by giving money to people to buy coverage instead of providing it.' Companies may not spend less per retiree, but potentially it could reduce their overhead costs."