An Option for States and Localities Seeking to Save on Retiree Health Care Costs

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Connecting state and local government leaders

A group highlights why shifting to individual Medicare marketplaces can make sense in some cases, and offers some tips on how to head in that direction.

Some state and local governments are achieving savings on retiree health care costs by turning to what are known as individual Medicare marketplaces as an option for providing insurance coverage for their former employees, a new report says.

Health care benefits for retired public workers vary around the U.S.—some state and local governments don’t provide any coverage, some offer generous plans, and others fall in between. But overall the expected cost of these benefits in the coming years is substantial.

And unlike pensions, where employer and employee contributions are funneled into funds over the years and invested to help pay for future benefits, many state and local governments opt for a pay-as-you-go approach for retiree health care, declining to set money aside in advance.

In 2017, about $673 billion, or 93%, of the “other post-employment benefits” (mostly health care) that states are expected to owe in the decades ahead were not funded by any assets, according to the report, which the Center for State and Local Government Excellence released Monday.

These costs come as health care spending overall in the U.S. has been on the rise. It increased about six-fold on a per-capita basis between 1970 and 2018, from $1,832 to $11,172 (after accounting for inflation), according to the Peterson-KFF Health System Tracker.

People are also living longer than they used to, meaning that a government may have to cover benefit costs for a greater number of years than in the past.

Meanwhile, experts on public workforce issues note that states and localities are in some cases struggling to attract talent—particularly in fields like teaching, policing and information technology—and health benefits into retirement can be an attractive perk for prospective hires.

It’s in this context that the Center for State and Local Government Excellence is highlighting the individual Medicare marketplaces as an option for public employers.

The marketplaces are sometimes called exchanges, but they are not the same as the insurance exchanges created by the Affordable Care Act.

With the individual Medicare marketplace system, as the report explains, state and local governments contract with a vendor that provides retirees with health insurance plan options and assistance with getting enrolled.

The government employer or “plan sponsor” would then typically pay all or some of the retiree’s health care costs by reimbursing them through a “health reimbursement arrangement,” or HRA.

As of December, three state retirement systems—in Ohio, Nevada and Rhode Island—have transitioned to this Medicare marketplace model, the report says. A number of local governments, including Memphis, Tennessee have gone this direction as well.

Memphis achieved $5 million of annual savings and reduced its other post-employment benefit obligations by $319 million by making the switch, according to the report. At the same time, the transition led to out-of-pocket savings for city retirees of about $2,000 per year.

Ohio’s Public Employees Retirement System moved Medicare eligible retirees to the marketplace and saved upwards of $625 million in 2016 and 2017, the report also says.

The Center for State and Local Government Excellence designed its report to serve as a guide for state and local officials interested in possibly shifting towards individual Medicare marketplaces. The center also has an online event coming up on the topic on March 16.

More information on the report and the event can be found here.

Bill Lucia is a Senior Reporter at Route Fifty and is based in Olympia, Washington. 

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