Most large employers are now beginning to rethink their retiree health care strategy as a result of federal health care reform, according to a recent report by Aon Hewitt, the global human resource consulting and outsourcing business of Aon Corporation.

In late 2010, Aon Hewitt surveyed 344 companies, representing 2.2 million retirees nationwide, and found that 61 percent were either already evaluating or were expected to evaluate their long-term retiree medical strategy by the end of 2011, due to health care reform. Meanwhile, 23 percent of respondents indicated they were still considering whether to assess their current strategy and only 16 percent had no immediate plans to review their current approach.

"Health care reform creates both challenges and opportunities for employers sponsoring retiree medical programs," said John Grosso, retiree health care group leader with Aon Hewitt. "Most employers have been studying the new legislation to understand how to effectively manage the challenges, while taking full advantage of the new opportunities going forward. Many will find that the new legislation will create significant and immediate savings opportunities."

Most immediately, among those planning to apply for the temporary Early Retiree Reinsurance Program (ERRP) to help offset a portion of the cost of health claims for retirees age 55 to 64, about half (48 percent) anticipate using the proceeds to reduce premiums, including both employer and participant share, while 21 percent intend to reduce the employer share of premiums only.

As for companies in the survey that pay a portion of health coverage for their retirees age 65 or older, three-quarters currently collect the Retiree Drug Subsidy (RDS). Of those, 73 percent said they are altering their retiree drug benefits strategy, as health reform eliminates the RDS tax advantages for 2013, and creates enhancements to the Medicare Part D program for retiree drug benefits beginning in 2011. In fact, 61 percent anticipate announcing these changes by the end of 2011 in order to begin recognizing accounting savings quickly, while 86 percent expect to actually implement these changes by 2013.

Alternatives most favored by employers making or contemplating changes to their post-65 retiree medical programs include contracting with a Part D Prescription Drug Plan (34 percent) or moving to a pure defined contribution approach (30 percent) where post-65 retirees can purchase benefits through the individual Medicare retiree plan market. Other employers that anticipate leveraging an expanded market for Medicare retiree prescription drug plans support combining access to individual Part D plans with premium subsidization (5 percent) or out-of-pocket cost subsidization (5 percent). Another 9 percent prefer eliminating employer-sponsored retiree prescription drug benefits altogether.

Of the employers favoring contracting with a Part D Prescription Drug Plan on a group basis, 57 percent will look to utilize an "Employer Group Waiver Plan (EGWP) + Wrap" approach, whereby the employer contracts for a Standard Medicare Part D plan design with a wraparound benefit that attempts to preserve the current prescription drug plan design and formulary strategy for the retiree.

"Many employers are looking to access cost-reduction opportunities created by the new changes to the Part D program," said Grosso. "For those wanting to continue to manage and control their group program, contracting with a Medicare Part D plan on a group basis, leveraging the EGWP process, will make sense. Conversely, for those looking to move away from a group-based model, individual market-based benefit sourcing, supported by some level of tax-effective defined contribution funding, may be a desirable strategy."