Aug. 15, 2013. - AIS Health

Detroit, Chicago Propose Moving Retirees To Exchanges in Attempt to Save Millions

In two developments watched closely by struggling municipalities across the country, Detroit and Chicago are proposing to shift their city-employee retirees onto insurance exchanges next year. Terminating the cities’ retiree health plans would save hundreds of millions of dollars annually, but could represent a substantial downsizing of the generous health benefits that the retirees have come to expect. Benefit and pension experts tell HRW that it’s still unclear how such a move would play out among city voters, but it would almost certainly boost the number of older, less healthy individuals on the exchanges.

Towns and cities across the country have eyed the exchanges since the 2010 enactment of the Affordable Care Act (ACA). But the possibility of such a move actually happening returned to the spotlight last month after Detroit filed for Chapter 9 bankruptcy protection — a designation that would give Detroit’s emergency financial manager, Kevyn Orr, significant powers to enact financial changes in the troubled metropolis.

Moving Detroit city retirees to the exchanges would cost the city between $27.5 million and $40 million annually, Orr said in a June 14 proposal to city creditors. By contrast, projections for spending on retiree health benefits now start at $140.7 million in 2014 and rise to $233.7 million in 2023, the proposal said.

Although Chicago is not facing the financial crisis of Detroit, the city is looking to save money on its retiree benefits. Moving Chicago city retirees to the exchange would save the city $61.5 million in 2014, according to a Jan. 11 report from Chicago Comptroller Amer Ahmad. Without the move, the city projects retiree health spending will rise to $540.7 million in 2023 from $194.4 million in 2014. In a May 15 letter, Ahmad said the city plans to phase out its retiree health coverage by 2017.

Municipalities around the country will be closely watching the outcomes of these proposals, benefits experts say.

“A lot of cities are looking at ways to reduce their overall retiree health care costs,” says Neil Bomberg, program director for human development issues at the National League of Cities. “Those tend to be very expensive for them. And if there were a way to ensure they receive adequate health care, but the costs would be substantially less to the city or town, I think they see this as a viable option.”

The perception is that cities offer their employees some of the most generous benefits available, he says. “It goes to the view that often city workers get paid at a slightly lower level than comparable private-sector employees,” Bomberg tells HRW. “But part of that agreement is to provide them with better health care, better vacation [and] better pension plans.”

Taking away retirees’ generous health benefits could cause anguish for some and a shrug from others, one observer says.

“There is a current running through our society where public employees are one of the last bastions of what is described as ‘old-style’ benefits,” says Alexander Rosaen, director of public policy and economic analysis at the Michigan-based consulting firm Anderson Economic Group.

“Some people think that’s a model we should all strive to, and would be very dismayed if this is how that ends,” he tells HRW. “Other people look at that and say, ‘These people have something I don’t and they don’t deserve it. And that’s fine if they’re kicked off their Cadillac plans, like I have been.’”

Retirees may be surprised to find that plans on the exchanges will require significant out-of-pocket payments. Even the most generous platinum-level plan covers up to 90% of expenses, while the lowest bronze-level plan only covers 60% of expenses.

Still, reactions to these plans could go a lot of different ways, Rosaen says. “Somebody could say, ‘This is not that bad; I have choices.’ Or others might say, ‘Before I didn’t have to pay something, and I’m on a pension and can’t afford it.’ The public has yet to pass judgment on it.”

And Bomberg asserts that the possibility of moving retirees to the exchanges should not be seen as cities and towns trying to circumvent their obligations. “The whole idea of the ACA and exchanges, and of broadening the availability of health care, is to make it more affordable and provide alternative mechanisms by which people can get the insurance they need,” he says. “It’s unfair for some to make it appear that some are shirking their responsibilities.”

Cash-strapped municipalities, as well as the few large employers that still provide retiree health benefits, may see the exchanges as a good choice compared with the alternative.

Employers will have the option of not simply throwing the employees “out in the cold,” Rosaen says of the institutions that can no longer keep their legacy commitments of providing retiree health coverage. This is particularly important for retirees and current employees with significant medical conditions who may face medical bankruptcy if they don’t have coverage.

“There are the Obamacare exchanges, where you can get a fair deal. You’re not making a life and death decision for them,” he adds. “We may see a lot of organizations potentially cutting loose people, because basically people have been handed a life ring.”

Positive for Cities, but a ‘Crush’ to Insurers?

If cities drop their retiree coverage, then enrollment on the exchanges will naturally go up.

“But [it’s] not a happy boost in enrollment,” says Edward Fensholt, J.D., senior vice president and director of compliance services at benefit consulting firm Lockton Companies.

“Retirees pose some of the worst health risks as a group because of their age,” he tells HRW. “Driving thousands or tens of thousands of older, sicker individuals into the exchanges could crush the insurers offering coverage there, unless the onslaught of retired individuals was offset by a significantly larger number of new, younger and healthier lives in the exchanges.”

Fensholt notes that only a small minority of employers still offers retiree coverage, and typically only until the retirees reach the age of 65 when Medicare kicks in. “Employers not contractually bound to offer the coverage tend to look for ways to jettison it, just because of the cost anchor around the employer’s neck,” he says.

That’s why so many cities are watching closely what happens in Detroit and Chicago.

“It seems funny to use the word ‘leader’ for a place like Detroit that is being looked at as a failure or a warning sign or grave reminder,” Rosaen says. “They would be seen on the vanguard of a new practice that may become normal going forward.”

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