Most companies offering pre-65 retiree medical benefits to apply for ERRP payments

Companies that offer pre-65 retiree medical benefits say that they intend to apply for the Early Retiree Reinsurance Program (ERRP) under the Patient Protection and Affordable Care Act (PPACA) to offset a portion of health care claims costs for retirees ages 55 to 64 and their families, according to a survey from Hewitt Associates.

Conducted in May, Hewitt's survey found that 76 percent of 245 large employers that offer medical benefits (to more than 1.3 million retirees) plan to seek reimbursement under the ERRP. Under regulatory guidance issued in early May by the Department of Health and Human Services (HHS), the ERRP provision goes into effect today (June 1, 2010).

ERRP program details. Under the ERRP 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 under the program include those involving medical, prescription drug and behavioral health. The program will last until January 1, 2014, or until the funds set aside for the program are exhausted.

According to Hewitt estimates, the average federal reimbursement will represent between $2,000 and $3,000 per early 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, Hewitt says.

As healthcare costs continue to increase, the number of companies eliminating pre-age 65 retiree health benefits has grown, according to Milind Desai, 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," Desai says.

Use of ERRP reimbursements. While the health reform law requires that employers use the ERRP reimbursements to reduce the cost of the plan, Hewitt found that most surveyed employers have not yet decided on a specific approach. (Note that Hewitt's survey was conducted just the HHS regulatory guidance was issued). At that time, Hewitt found, two-thirds (66 percent) of companies that intend to apply for the reimbursement said they were not sure 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 five 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," suggests John Grosso, 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," he says.

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