Retiree Reinsurance Runs Out

A $5 billion fund to help employers pay for early retiree healthcare benefits was depleted well ahead of schedule, but experts say the impact on employers was minimal. Nearly half of the funding went to state and local governments, which have higher numbers of early retirees than the private sector.

Wednesday, November 23, 2011
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Created as part of the new health-reform law, the Early Retiree Reinsurance Program was designed to function as "a bridge" to help employers finance healthcare benefits for early retirees until the insurance exchanges became reality in 2014.

Unfortunately, the popularity of the ERRP has led it to fall a few expansion beams and trestles short of making it to bridge status.

Already, the $5 billion fund has gone dry -- well ahead of expectations. ERRP stopped taking applications in May 2011 and the fund is projected to run out by the end of September 2012. Employers already enrolled in the program have to use their funds by December 2013.

Even so, say experts, the impact on employers has been minimal.

In fact, say those health-benefits experts, no employers really banked on the ERRP funds as an alternative means for financing early retiree-healthcare benefits.

Rich Stover, a principal at Buck Consultants in New York, calls the ERRP a source of "found money" that helped a little bit, but was really just a blip on the cost radar screen for large private-sector employers.

"The idea was to encourage employers to keep early retiree programs until 2014, but many also realized quickly the funds would not last," Stover says.

"For the employers I work with, this has not changed their [benefits] strategy. It will not stop some from eliminating early-retiree healthcare benefits if that was their plan because in most cases, even if they got some of the money, it didn't fund a significant part of the cost."

As of Oct. 14, more than $3.66 billion in reimbursements had been made to 2,000-plus retiree medical plans, according to the Centers for Medicare & Medicaid Services, which administers the program. Entities on the massive list include for-profit companies, schools and educational institutions, unions, state and local governments, religious organizations and nonprofit plan sponsors.

According to a GAO report in June 2011, government entities led the way, with 46 percent of reimbursements, with the commercial sector second at 37 percent and non-profits third at 15 percent. Unions (3 percent) and religious organizations (0.1 percent) were the other two sectors funded.

In terms of employer size, several small entities received between $1,000 and $5,000, while the largest payout to date has been to the California Public Employees' Retirement System at $131 million. Large companies receiving funding included General Electric ($38.5 million), Aetna ($1.7 million) and Intel ($1.3 million). (This is the entire list of entities (PDF) receiving funding.)

Steve Wojcik, vice president of public policy at the Washington-based National Business Group on Health, agrees that lack of ERRP funding will not change much for employers in the long run.

"For our members, it was not looked upon as something to rely upon to change their commitment to stay with or decision to scale back early retiree health benefits," he says.

"Whatever the employer plans were for coverage for early retirees, they knew going in this was a temporary program," Wojcik says. "While $5 billion is a lot of money, the overall impact for our members has been minimal."

The initial beliefs that the program would result in a funding shortfall "were confirmed when there was a rush to apply," he says. "The early applications were mainly municipal and state governments, possibly because they were encouraged to apply early. What most people would think of as for-profit employers were second or third in line."

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Wojcik says several members contacted NBGH to find out what to do and the organization helped as much as it could. One of the tricky aspects of applying was that even a single small mistake on the application form put an employer at the end of the line.

On the other hand, he says, a publicly traded company eligible for the ERRP reimbursement that didn't apply might be neglecting its fiduciary duty.

Mary Clark, principal of the health and welfare practice at Cammack LaRhette Consulting in New York, says the $5 billion fund was a "drop in the bucket," compared to the liability of retiree plans throughout the United States.

"It was anticipated that a few large groups would receive much of the benefit of the fund, due to the disproportionate size of these plans," she says. "Most employers continuing to sponsor retiree health benefits have moved on to other avenues for controlling costs."

Karen McLeese, vice president of Employee Benefit Regulatory Affairs for CBIZ Benefits & Insurance Services Inc., in Kansas City, Mo., says it's not surprising the largest single group receiving funding through ERRP was the public sector since they have relatively high numbers of early retirees, compared to the private sector.

" It was a little bit gravy, you might say, especially in these tough economic times," she says. "But I don't believe it has that much bearing on early-retiree health-benefit strategies, in general."

Buck Consultants' Stover says the real issue is whether or not the exchanges mandated by the healthcare-reform law will be a viable alternative for employers looking to move early retirees out of their current benefit plans.

"The theory is that, in 2014, early retirees or their employers will be able to buy inexpensive coverage," he says. "The ERRP is a bridge that didn't quite make it, but for most private-sector employers, these funds did not change a thing."

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