As U.S. employers continue to digest the provisions within the health care reform law, a new survey by Hewitt Associates, a global human resources consulting and outsourcing company, found most companies that offer pre-65 retiree medical benefits intend to apply for the Early Retiree Reinsurance Program (ERRP) to offset a portion of health care claims costs for retirees ages 55 to 64 and their families.

Conducted in May 2010, Hewitt’s survey of 245 large employers that offer medical benefits to more than 1.3 million retirees found that more than three-quarters (76 percent) of companies plan to pursue reimbursement under the ERRP, a provision in the newly enacted health care reform law that goes into effect June 1, 2010. Under the new program, companies can receive an 80 percent reimbursement on claims incurred by early retirees and dependents between $15,000 and $90,000 over the course of a year. Eligible claims include medical, prescription drug and behavioral health. The ERRP will last until January 1, 2014, or until the $5 billion set aside for the program is exhausted.

Hewitt estimates that the average federal reimbursement will represent between $2,000 and $3,000 per pre-65 retiree per year, or approximately 25 percent to 35 percent of total health care costs. As an example, for a company that covers 1,000 pre-65 retirees, participation in the ERRP could result in $2 million to $3 million in reinsurance proceeds per year.

“The number of employers eliminating pre-65 retiree medical benefits has grown over the past decade as health care costs continue to rapidly increase,” said Milind Desai, FSA, senior consulting actuary and co-leader of Hewitt's Retiree Health Care Task Force. “The early retiree reinsurance program encourages employers to continue offering coverage to pre-65 retirees and their families by providing some temporary relief from expensive pre-65 retiree medical claims. But because so many companies plan to apply for the ERRP, employers will need to act quickly to secure a share of the proceeds, since the federal funds earmarked for this program are limited.”

While the law requires that employers use the ERRP reimbursements to reduce the cost of the plan, Hewitt’s survey showed that most have not yet decided on a specific approach. Hewitt’s survey was conducted just as interim final rules with additional guidance around the ERRP were issued by the Department of Health and Human Services (HHS). At that time, two-thirds (66 percent) of companies that intend to apply for the reimbursement said they were unsure about how they plan to use the proceeds and were waiting for this guidance before making a decision. Sixteen percent said they are considering using the reimbursement to reduce premiums—including both employer and retiree share, and another 5 percent said they are considering reducing the retiree share of premiums only.

“While the interim final rule on the ERRP was released in early May, most employers are still looking for more details about how these funds can and cannot be used,” said John Grosso, FSA, senior consulting actuary and co-leader of Hewitt's Retiree Health Care Task Force. “We expect additional guidance by the end of June, and we believe companies will then make final decisions on how to best allocate these reimbursements to offset the cost of the plan. Employers will be required to describe how the proceeds will be used to support the plan in their ERRP application.”