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December 9, 2023

Demystifying Retiree Health Insurance Policies for Individuals Over 65

Many Americans, especially those over 65, depend on their former employers for health insurance coverage. When they retire, the majority of them make a direct transition from their employer’s health plan to Medicare (Part A and Part B). Some, however, leave the workforce before becoming eligible for Medicare or leave at age 65 but continue receiving employer-sponsored supplemental coverage, either through COBRA or state continuation, or by using their spouse’s health care coverage or Medicaid. Regardless of the source of their post-retirement health care, most individuals find that they face significant costs and potential financial challenges once they retire and lose their employer-sponsored health benefits.

The availability of supplemental retiree health insurance is one of the major factors that influence when people decide to retire, particularly those who choose to do so early. Various studies-using different Get the insights samples, years of data, and methodologies-convey a similar message: the percentage of firms that offer retiree health coverage has declined significantly over the past decade. In 1997, Mercer reported that 41 percent of employers offered retiree health coverage to their early retirees; by 2000, this figure had fallen to 36 percent. Kaiser has found a similar decline among both early and Medicare-eligible retirees over the same time period.

While a few firms have made changes in their retiree health benefit offerings, most have not. Of those that did, most limited the generosity of their plans. For example, 3 percent of the sampled firms introduced a three-tier cost-sharing formula for prescription drugs, and virtually none reduced the maximum lifetime benefit or capped/reduced the annual drug cost-sharing limit for their retirees.

These cost-containment strategies are likely to remain popular. For example, the use of age brackets in calculating cost comparisons between younger and older employees-as permitted by the Employee Retirement Income Security Act (ERISA)-can allow an employer to justify reductions in benefits without having to demonstrate that the change is justified by actuarial evidence. In addition, the increasing use of Medicare Advantage plans-often referred to as “Part C” plans-can provide retirees with an alternative to traditional Medicare services by covering all or most of the cost-sharing liabilities and copayments associated with Original Medicare.

It is likely that, in the future, more firms will shift to defined contribution approaches, which provide retirees with a dollar amount that they can spend on health care in the open marketplace. In some cases, retirees may also be eligible for premium tax credits to help pay for health insurance purchased through the Marketplace. The effect of these reforms on retiree health coverage will be closely monitored. In the meantime, individuals over 65 who are concerned about their ability to afford health coverage in retirement should review their options and consider seeking advice from a financial planner or other qualified professional.

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