SO HEALTH CARE REFORM HAS FINALLY PASSED! Yet, missed amongst the clamor surrounding, “political partisanship”, “the funding of abortion” or “the Cadillac tax” there is a significant subsidy that may provide relief to plan sponsors struggling to reign in retiree healthcare costs. This provision, referenced as the “Reinsurance Program”, creates a “reinsurance” subsidy for plan sponsors of retiree health plans providing coverage for pre- Medicare retirees over the age of 55.
The Medicare Modernization Act of 2003 created an employer subsidy program (“Retiree Drug Subsidy” or “RDS”) for plan sponsors as an incentive to maintain their retiree drug plans in lieu of dropping the coverage and forcing retirees to a Medicare Part D plan. The Reinsurance Program appears to provide employers a similar incentive. The incentive under this program would be for employer groups to maintain the medical plans for their pre- Medicare eligible retirees in return for a significant subsidy.
The Reinsurance Program clearly benefits employers and industries that are union-dominated and saddled with rich and expensive retiree medical plans. Ironically, as the health care reform bills have been touched by so many special interests and tainted by the political reality of compromise, one of the remaining provisions, the “Cadillac tax”, may be neutralized by the subsidy (although at print, labor presumably has worked out a deal with the White House to exempt groups with collective bargaining agreements until 2018). The “Cadillac tax”, which imposes a 40% excise tax on plans with premium costs exceeding pre-established “threshold amounts”, would increase plan costs for many of the same plans eligible for the reinsurance subsidy. For plan sponsors with a considerable retiree population the effect is that every dollar of the retiree plan premium subject to the excise tax could be significantly offset by a corresponding subsidy.
What are the Potential Savings?
The proposed program would establish a “temporary” Reinsurance Program for employers who provide health insurance coverage to retirees over the age of 55 and who are NOT yet eligible for Medicare. The program would reimburse employers or insurers for 80% of retiree claims between $15,000 and $90,000.
For an employer group with 700 employees and 500 retirees that spends $10,000,000 a year on health insurance plans, the subsidy could be as much as $720,000, effectively reducing its retiree plan costs by 14.4%.
How Will This Reinsurance Program Work?
If we can learn any lessons from the Retiree Drug Subsidy (“RDS”) program, where initially the drug subsidy was to be calculated as a percentage on ALL prescription drug claims incurred by plan sponsors, there will likely be a segment within the government that will push to dilute and reduce the category of “eligible” claims in the final calculation. The RDS formula was initially relatively simple until there was a bureaucratic decision to create “excluded” drug classes from subsidy eligibility. CMS’ rationale behind this change was to NOT pay subsidy on drugs that were excluded under the government sponsored Part D drug plan formulary. There could be a similar rationale used to create “excluded” medical expenses to align subsidy eligibility with only medical procedures approved and part of the government’s baseline plans as defined within the final bill.
Moreover, the language within the two bills is unclear as to “who” gets the subsidy. The Senate bill states “….the program will reimburse employers or insurers” whereas the House bill only references “employers.” Moreover, the language in both bills state explicitly that “payments from the Reinsurance Program will be used to lower the costs for enrollees in the employer plan”. What can we interpret from this language? Will the employer not be eligible for subsidy? Will insurance carriers be able to create insurance plans for employer groups and keep the subsidy and then lower premium costs just as they do now under Medicare Advantage?
How Long Will This Program Last?
The subsidy is “temporary”, as the Bill appropriates only $5 billion to fund this program through January 1, 2014.
Quick math shows that the monies earmarked for this program could run out quickly. The 2006 PEW Center1 Study reported significant un-funded retiree healthcare liabilities for state and local governments alone. State systems are projected to payout $9.7 billion for “other post employment benefits”. The 30 year retiree healthcare liability was projected to be $381 billion; a conservative estimate since these figures do not include obligations for teachers or local government workers. The State of California, combined with all local governments within California, was projected to have a $6 billion retiree healthcare bill in 2009. Add to this all the large Taft Hartley plans, independent VEBA plans (i.e. the UAW VEBA) and the remaining large private sector retiree plans, one can see this earmark evaporating in a short period of time.
This begs the question. How will priority be established if the government agency in charge of managing this program is inundated with applications? Will it be first come, first serve? Will there be some level of “need” established to assign priority or create qualification? Or will this program, once Health Care Reform passes, become another entitlement program that is legislated into permanency?
To learn more about the potential impact of Health Care Reform on Municipal Government Medical Insurance Plans, tune in to our free webinar Wednesday, April 28th. at 9AM.
For more than two decades Mark Manquen, CPA, MST has serviced clients on healthcare cost containment, innovative plan design solutions and retiree plan transition strategies within a union setting. As founder of RDS Services, LLC he has incorporated services specific to the Municipal market in areas such as GASB consulting, full service Retiree Drug Subsidy administration, and Medicare Act services. In 2008, Mark was named as one of Corp! Magazine’s Honorees for Entrepreneurs of Distinction.
1 The Pew Research Center is a non-profit, tax-exempt corporation which operates under Section 501(c) (3) of the Internal Revenue Service code. It was established in 2004 as a subsidiary of The Pew Charitable Trusts, a Philadelphia-based public charity. The Pew Research Center is a nonpartisan “fact tank” that provides information on the issues, attitudes and trends shaping America and the world. It does so by conducting public opinion polling and social science research; by reporting news and analyzing news coverage; and by holding forums and briefings. It does not take positions on policy.