For large U.S. companies and their employees, health care premiums continue to rise, albeit slowly. Meanwhile, most employers are reevaluating their retiree health insurance strategies, planning more emphasis on the individual rather than the group market. "People will need to save more for their health care needs in retirement," Milind Desai, retirement actuary at Aon Hewitt, told Financial Planning. "Someone who is 40 now can expect to spend $350,000 to $450,000 on health care in retirement."
Aon Hewitt just announced that the average health care cost per employee was $10,522 in 2012, up from $10,034 in 2011. That 4.9% increase was down from an 8.5% rise in 2011 and a 6.2% hike in 2010 but still far above the overall inflation rate. In 2012, employees contributed $2,204 to the premium cost, on average; meanwhile, average employee out-of-pocket costs such as copayments, coinsurance and deductibles were $2,200 in 2012.
To reduce cost and reduce risk, Desai said, employers that offer retiree health care benefits are considering a shift from the group to the individual insurance market. "For retirees," he said, "there will be a broader choice of vendors and of plan design."
Aon Hewitt's 2012 survey of almost 450 private and public plan sponsors representing 5.8 million retirees found that 60% of those employers have reviewed or are reviewing their retiree health care strategies. Of those planning changes, 63% percent are currently implementing or are considering moving towards an individual market strategy.
As Desai explained it, the over-65 individual health insurance market is already "robust," with most seniors participating in Medicare Advantage, Medicare supplement ("Medigap") or Medicare Part D plans. "We expect the under-65 market to be enhanced by 2014," he said. "That's when the Patient Protection and Affordable Care Act requires each state to establish a health care exchange."
On these exchanges, individuals and small businesses can shop for affordable private health insurance coverage. The federal health insurance law, which the Supreme Court largely upheld, will provide guaranteed access and renewability, according to Desai. "Employers who shift to the individual market for retiree health insurance are likely to provide some subsidy," he said. "Where this already has been done, we've seen employers using health reimbursement accounts (HRAs)." Such arrangements generally reimburse individuals for medical expenses, tax-free.
Employers also may assist retirees to choose a suitable plan from these insurance exchanges, Desai said. "Financial planners also may play a role," he added, "especially in advising clients to save for future health care expenses while they're working."