Plan Watch

Can Defined Contribution Rescue Retiree Coverage?

UnitedHealthcare and Towers Watson team up to capture the business of employers who provide coverage for former employees

Frank Diamond

An undertaking by one the nation’s largest insurers and a leading consulting company aims to address increasing problems encountered by employers that offer health benefits to retirees.

Through their Retiree Health Collaborative, UnitedHealthcare and Towers Watson hope to help businesses adjust to significant changes affecting that market by turning retiree benefits from a defined benefit into a defined contribution.

Dave Osterndorf, senior health and group benefits actuary at Towers Watson, says that over the last few years, his corporate clients have felt that they have been spending too much time and energy managing retiree plans, mostly because of changes in the marketplace.

Those changes include passage of the Medicare Modernization Act of 2003, which established the Retiree Drug Subsidy (RDS) program as well as Medicare Part D. “RDS added unwanted administrative burdens, and Medicare Part D established a viable market for prescription drug plan alternatives to employer-sponsored plans,” says Osterndorf. “Along that same line, the growth in the Medicare Advantage market, which serves about 10 million seniors, has presented even more alternatives to retirees.”

Talking about employer-sponsored retiree health benefits might seem a bit like discussing where is the best place to get your buggy whip repaired, but there is still a sizeable retiree market, says Joe Altman of UnitedHealthcare, who directs benefits programs for retirees.

“In some cases, the benefits and additional supports employers provide to retirees may be locked either through prior legal action or just prior commitments that the employer has made, or feels that it’s made,” says Altman. “But for those who’ve retired more recently, as well as those who are retiring today, there are still many employers who provide retiree health care benefits that go above and beyond Medicare, and the Retiree Health Collaborative is intended for all of those.”

The collaborative, which essentially functions as a clearinghouse for United’s benefits packages, was launched January 1 and has about 20,000 enrollees.

Altman says that there is no added cost to the enrollee or the employer for belonging to the collaborative, although, obviously, one plan package might cost more than another. In addition, all products are guaranteed issue.

What makes UnitedHealthcare even more competitive, says Altman, is its Medicare Connector, the plan’s sophisticated call center in Green Bay, which is staffed by licensed insurance agents who can assist retirees with the mountain of information on Medicare plan options.

“We have 61 retiree health care specialists at the call center,” says Altman. “It is worth noting that the call center overall is much larger, as it supports other UHC products and services. Therefore we can easily expand our trained retiree health care specialist staff, should the volume of sales warrant it.”

Insurance specialists on call

Osterndorf likes the call center as well. “Retirees might call and say, ‘I’m changing from my employer’s plan to something in this new marketplace. I don’t know what to do. Can you help me?’ The agents take them through the process.”

The call center was just one of the reasons Towers Watson decided to join with UnitedHealthcare in the effort. Towers Watson (it was then Towers Perrin) issued a request for proposals to some of the major health insurers. “After that search process finished, we identified UnitedHealthcare as the best partner for us in this effort,” says Osterndorf.

UnitedHealthcare has been offering retiree health care benefits for years, and is the official insurance carrier for AARP products, he says. United also has three Part D prescription drug plans for people eligible for Medicare, and many Medicare Advantage products that the insurer sells nationwide.

In addition, says Osterndorf, UnitedHealthcare has managed plans for pre-Medicare retirees, people typically ages 55–64, who often don’t have good insurance options. In fact, the pre-Medicare retirees market represents an opportunity, says Osterndorf. “We’re in the process right now of working with UnitedHealthcare to develop a new product along that line.” (The Patient Protection and Affordable Care Act mandates that beginning in 2014 there will be insurance exchanges that many people who are without other sources of health insurance — including those ages 55–64 — will be able to buy into.)

Altman says that the market “is saturated and confusing because there are a lot of different insurers offering a lot of different products to the retirees. For seniors, it can be overwhelming and confusing trying to determine what is the right product.”


Employers steer retirees to the call center and to online support systems, Altman says. There they can find out whether it would be worth it to pay a few extra bucks a month in premium for access to, for instance, a broader formulary.

“There are different plans. Some perhaps carry a higher premium but provide richer benefits either because of additional drugs covered, additional services covered, or lower out-of-pocket costs,” says Altman.

Towers Watson’s primary role is to help the employers, says Osterndorf. “The employers are looking at moving from their traditional role of being that plan’s sponsor and moving their retirees into this new world of the facilitated individual marketplace, where the employers help retirees switch from company benefits.”

Ripe market

Osterndorf believes that retiree health care is where change is happening faster than anywhere else in the industry. “There will be a lot more to come on this topic. What you are seeing right now is just the leading edge of change.” Through the collaborative, employers can discontinue sponsorship of their current plans, which are often self-insured and therefore present risks, he says.

By directing subsidies to insured individual products through the collaborative, employers significantly mitigate those risks.

Two provisions

“Employers can keep providing retiree benefits in a fairly meaningful way,” says Osterndorf. “They want two provisions, however. They don’t want to take a lot of time, and they don’t want to promise an open-ended benefit that could see a big spike in costs that the employer doesn’t expect.”

It seems there are still some large- and medium-size employers that provide their retirees with health benefits.

“A lot of name-brand companies have benefits for their retired employees and really what they are saying is, ‘We still think that’s a valuable thing to do,’ but they want to do it in a different way,” says Osterndorf.

“The Retiree Health Collaborative offers a very effective mechanism through which employers can deliver fixed subsidies to their retirees to offset the cost of plans retirees can elect in the marketplace.”

In other words, employers have come to feel that the choice is not just between continuing to provide the sort of benefits they have historically provided or not providing any retiree health benefits at all.

“They are asking for an intermediate point,” says Osterndorf. “And for them the intermediate point is exactly where the collaborative exists. It means getting rid of the administrative effort, and getting a very close-ended financial promise that lets the employer know exactly what he is going to spend.”

Employers need plans’ help to manage retiree benefits

Many employers that offer health care benefits to their retirees want either to shift more of the costs to those beneficiaries or to exit the programs altogether, according to a study by the consulting company Towers Watson. Between August and October 2009, Towers Watson surveyed 550 of the nation’s largest employers, representing about 10.3 million covered lives. Those employers spent about $53 billion on medical benefits last year. “Participants were asked to report their 2010 per capita premium costs for insured health and dental plans and premium equivalents (i.e., estimated benefit and administrative costs) for self-insured plans.”

Far fewer employees will receive subsidized coverage

Only 22 percent of employees hired today will be offered an employee retiree plan and receive help from the employer to pay for it. Meanwhile, 23 percent of employees hired today will be eligible for an employer retiree medical plan without financial assistance from their employer (i.e., they get only “access” to the plan).

Source: Towers Watson, 2010 Retiree Health Care Cost Survey

What burdens retiree health benefit plans?

Employers are finding it much more difficult to offer health benefits to their retirees, states a Towers Watson report titled “The Current State of Retiree Health Benefits in the United States.” The consulting company says that these are some of the problems besetting the plans:

  • Grandfathered groups have created complexities and heavy cost burdens. Many employers still have large, continuing obligations for legacy populations that were protected when the plan offerings, cost-sharing, or eligibility rules were changed, often a decade ago or more.
  • The effect of premium caps is now clear. Employers that capped their financial subsidies — initially for accounting reasons in many cases — now find that the limits have long been exceeded and that retirees, who are bearing significant costs and inflation risk, are increasingly dissatisfied with the programs.
  • Eliminating coverage has had unintended consequences. Employers that have discontinued retiree medical benefits (or that require participants to pay the full cost) find themselves with an older workforce that is deferring retirement to retain employer-provided medical coverage, confounding corporate workforce management efforts and increasing active-employee plan costs.

“Some Medicare supplemental plans “fill in every dollar that Medicare doesn’t cover,” says UnitedHealthcare’s Joe Altman.

Employers want an intermediate point between offering retirees what they’ve traditionally offered and offering nothing at all, says Dave Osterndorf of Towers Watson.

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