Managing public-sector retiree health-care benefits under the Affordable Care Act.

• Author: Nadol, Michael
• Position: Cover story

The news surrounding the often contentious launch of the Patient Protection and Affordable Care Act has been full of stories about website failures, mandated switches in health plans, and ongoing policy divides. Underneath the debates and the headlines, however, a new landscape is taking shape, providing access to health-care benefits through the ACAs state exchanges. Government finance officers, who are charged with both maximizing scarce budgetary resources and sustaining quality and competitive benefits for public employees, are facing uncertainty and confusion, but also--potentially--opportunities.

This article assesses the emerging terrain of the ACA and some of the early initiatives for navigating it--with a focus on the possibilities for shaping more affordable and sustainable retiree benefit programs within the public sector.

NEW, BUT NOT UNPRECEDENTED

Many state and local governments that offer retiree health-care programs have long aligned these benefits with federal coverage, as provided under Medicare. Approaches vary by employer, but many require Medicare enrollment upon eligibility (typically age 65) and offer a lower-cost supplemental plan or an integrated Medicare Advantage plan. In other cases, employer coverage ceases altogether when retirees become eligible for Medicare. In general, the approach is to avoid having the employer pay for benefits that are available through Medicare, to which both the employer and employee have contributed via payroll taxes over the employee's active career.

With the ACA, one key question is whether further realignment of existing retiree benefit structures through state-sponsored health exchanges--particularly for younger retirees who are not yet eligible for Medicare--is a viable option for reducing the employer's cost while still providing quality coverage in sync with what is now available elsewhere.

This dynamic is particularly relevant for public employers because some large groups of government employees routinely retire before they are eligible for Medicare. For example, public safety workers such as police officers and firefighters often have benefits designed to encourage retirement well before age 65 because of the physical demands of their positions. The continued prevalence of defined benefit pensions in the public sector (which provide for retirement after many years of service, but, in some cases, before age 65), can also contribute to this circumstance. Governments that provide pension plans that allow for "25 and out" (full retirement after 25 years of service, or some other fixed period) with no minimum retirement age, or have a minimum age requirement of 62, 60, or younger, can wind up paying postemployment health care for pre-Medicare eligible employees for years, sometimes for more than a decade.

From a fiscal perspective, this issue is chiefly important because these earlier retirees who are not yet eligible for Medicare have still reached a point in life when their healthcare needs and costs tend to be greater than the needs and costs for their active-workforce colleagues. Furthermore, managing other postemployment benefit (OPEB) costs and liabilities has become more important than ever before, from a balance sheet perspective, since the implementation of Governmental Accounting Standards Board Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other than Pension Plans, and Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other than Pensions, which require actuarial accounting for such benefits. Future OPEB accounting changes now under consideration, potentially parallel to recent changes for pensions under GASB Statement No. 67, Financial Reporting for Pension Plans--an Amendment of GASB Statement No. 25, and Statement No. 68, Accounting and Financial Reporting for Pensions--an Amendment of GASB Statement No. 27, are likely to be adopted within a few years and will bring additional focus on these financial pressures.

NO ONE-SIZE-FITS-ALL APPROACH

Because employer approaches to retiree health-care benefits vary significantly, it is difficult to generalize about strategies for addressing these costs that will be applicable to all employers. There is no one-size-fits-all approach.

For example, the legal protections surrounding retiree benefits for employees can vary greatly by jurisdiction. In many states, a variety of constitutional, contractual, and/or property rights protections can greatly restrict a state or local government from impairing an existing pension benefit for current employees. (1) In contrast, public employers in many communities are generally thought to have more flexibility for enacting retiree health-care reforms--so much so that in some states, retiree healthcare benefits may be considered a gratuity rather than a right. Collective bargaining laws, which also vary by jurisdiction, often add yet another dimension to an employer's prospects for reform. Sound legal guidance is critical to developing any strategy for changing benefits.

In addition, each government's level of exposure to retiree health-care costs will also vary. Most cities, and many counties, have public safety employees such as police officers and firefighters. These employees, again, typically retire earlier than civilian workers because of the nature of their work, generating strong OPEB cost pressures. Among state...