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As Federal Healthcare Subsidy Winds Down, What Will Happen to NJ's Early Retirees?

Health coverage subsidies for early retirees at NJ employers topped $300 million.

The 2010 Affordable Care Act helped many U.S. employers through some of the worst of the recession by awarding $5 billion in subsidies to them in order to provide health coverage for early retirees who were too young for Medicare. The program attracted little attention in New Jersey, but it's brought more than $300 million to about 90 New Jersey employers -- including the state of New Jersey, which got $98.6 million to cover prescription drugs for state and local government workers who retired early. Verizon Communications, at $162.9 million, tops the list of New Jersey-based employers who've benefitted, according to figures through December 2 from the U.S. Department of Health and Human Services.

The fund has nearly run dry and the program is winding down at year end, but it's unclear what impact, if any, the loss of subsidies will have on early retiree health benefits. On the one hand, it could accelerate a trend toward dropping retirement health benefits, particularly for new early retirees. On the other, employers say they have no plans to make any changes just now.

Employers have been dropping retiree health benefits for years, and the ACA money was supposed to encourage them to continue covering early retirees, at least until 2014, when most Americans will be required to have health coverage, and the new exchanges mandated by the ACA are supposed to start selling affordable health plans. The employers that applied for and got the subsidies had to agree not to reduce early retiree benefits while they were getting the money.

Richard J. Fuerstenberg, a partner in the Princeton office of the employee benefits consulting firm Mercer, said "I don't think you will see a sudden drop off" in early retiree health coverage just because the subsidy money is drying up. "Anecdotally, I have not had a client say 'I'm staying in the game because I'm getting the money,' and I've not heard anyone say 'As soon as it's gone, I'll get out.'" He said employers are very interested in the exchanges that will come on line in 2014. "Employers are taking a wait and see approach and saying 'I will hang in there for another year or two and then decide whether to get out [of health insurance] completely or give people money and let them decide where to buy their coverage.'" He said that when employers reduce or eliminate retiree benefits, they generally change the rules for new hires but maintain existing benefits for those who have already retired.

Paul Fronstin is director of the health research program at the Employee Benefit Research Institute in Washington, D.C., which predicted that the $5 billion would be gone in less than two years. But he's not expecting the loss of subsidies to have much impact on coverage. "Is an employer going to drop it [retiree healthcare] when they could just wait until 2014? I think most employers will hold off rather than make things difficult for their early retirees," Fronstin said.

According to HHS the $5 billion subsidy was an effort to stem a decline in retiree health coverage that has been underway for decades. The Kaiser Family Foundation annual employer survey found that 26 percent of U.S. employers with 200 or more workers provided health coverage to retirees in 2011, a significant drop from 66 percent in 1988. KFF said of the employers who offered health coverage to retirees in 2011, 91 percent also covered early retirees, down from 98 percent in 2001.

U.S. Sen. Robert Menendez (D-NJ) said the ACA early retiree subsidy "received an overwhelming response because the need was there," adding that the program helped private companies, labor unions and state and local governments.

Rep. Frank Pallone (D-6th) said the early retiree program "has been tremendously successful, particularly for New Jersey, where more than 80 employers have used nearly $300 million. While it's unfortunate that the program's resources are running out, it speaks to the need among early retirees and the benefits of the ACA."

Verizon spent $3.6 billion in 2010 to provide healthcare to its 800,000 employees, retirees and their families, according to spokesman Ray McConville. The $162.9 million ACA subsidy defrayed a portion of the bill for early retiree healthcare, according to McConville, who did not have a breakdown of how much Verizon spent to cover early retirees. Asked if Verizon would maintain coverage for early retirees, he said the company "continues to review and evaluate our benefit programs and at this point we don't have any changes planned."

The New Jersey Carpenters Funds, which pays about $20 million a year in medical expenses for carpenters who've retired early and their families, received about $1.8 million, or about 10 percent of it early retiree medical costs.

That money "was very welcome," said George R. Laufenberg, administrative manager for the funds. He said the decline in construction has thrown many of his members out of work, "making it very difficult to maintain benefits. We've had to eliminate dental and vision coverage, and we are charging everyone more each year." He said each year, hundreds of members drop their coverage because they can't afford it.

Unemployment in the building trades is more than 30 percent, Laufenberg said. "We give the retirees health coverage at a reduced rate, and when there is work that is easy to do, but it has been very difficult in the last three or four years." He said the union has about 10,000 active carpenters and 7,000 retirees, of whom about 800 are early retirees.

Laufenberg said the union is looking at moving its members into the exchange in 2014. One option is to create health reimbursement accounts for the members, which they could use to buy coverage on the exchange. "We will take a look at the exchange if it becomes cost-prohibitive for us to continue to provide coverage," he said. "We may provide these [HRA] accounts and tell our members to buy health coverage on the exchange."

John Rowland, senior benefits specialist for the Chubb Group of Insurance Companies in Warren, said the ACA subsidy helped cover the company's nearly 400 early retirees and their families. According to HHS, Chubb received $912,839 in subsidies through December 2. Active employees and retirees contribute to the health plan, and the subsidy "had a favorable impact on Chubb's costs as well as on the share of the costs that the retirees pay," he said. Rowland explained that the program subsidized 80 percent of the medical claims between $15,000 and $90,000. So if Chubb, which is self-insured, paid a medical claim of $300,000, it would get a $60,000 subsidy for that claim.

Rowland said the end of the subsidy won't affect early retiree coverage: "There is no intent to eliminate the coverage we now offer to our retirees."

New Jersey employers who've gotten early retiree medical costs reimbursed under the program through include Prudential Financial, $14.2 million; The Port Authority of New York and New Jersey, $12.2 million; Johnson & Johnson, $9.7 million; Avaya Inc., $8.7 million; Mars Inc., $4.9 million; Jersey City, $4.6 million; and Public Service Enterprise Group, $2.7 million.

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