Early retirement, a dream of many, can turn into a nightmare for those forced to buy their own health insurance. Too young for Medicare, early retirees who can't get coverage through a spouse often must fend for themselves in the market for individual policies. But insurers turn down about 30% of applicants ages 60 to 64, and those they accept often pay exorbitant premiums. "This is not a group anyone really wants to cover," says Sara Collins, assistant vice-president at Commonwealth Fund, a health-care policy foundation in New York.
From 1993 to 2007 the percentage of large companies offering health insurance to early retirees fell from 46% to 31%, according to Mercer, a New York consulting firm. The reason? Since 1993, accounting rules have required companies to deduct the estimated future cost of retiree health benefits from profits, an amount that for many is greater than the pay-as-you-go method corporations had previously used.
But there are signs the benefit may be staging a comeback—though only among the largest employers. An initiative introduced by insurer Aetna (AET) and a group of major companies on Jan. 1 is expanding early retirees' access to coverage. Under the plan, called Retiree Health Access, several employers are banding together to help their retirees, pre- and post-65, buy insurance at discounted group rates. While the employers don't have to kick in a subsidy, more than half now do. "With a greater mass of people, we should be able to drive costs down," says J. Randall MacDonald, a senior vice-president of human resources at participant IBM (IBM).
Of the 32 companies on board, 15 are providing benefits for early retirees for the first time, according to the nonprofit HR Policy Assn., whose 250 members—all big corporations—are eligible to join. "It's very significant," says Paul Fronstin, director of the health research and education program at the Employee Benefit Research Institute.
Insurers traditionally steered clear of early retirees—forcing companies to dig into their own pockets to cover claims. Cigna (CI), WellPoint (WLP), and others are now rolling out plans designed to give employers a way to provide insurance without necessarily spending a lot on the premiums. Why the sudden interest? With boomers approaching retirement, insurers sense opportunity: At 65, early retirees become eligible to buy lucrative policies that supplement or replace Medicare. "We want to cover them for the rest of their lives," says Kenneth Sperling, senior vice-president at Cigna's Senior & Retiree Services.
Retiree Health Access offers four options for early retirees. All foot the bill for preventative care. Al Rapp, corporate health-care manager for participant United Parcel Service (UPS), says the coverage is more affordable than what's available under UPS's existing retiree health plan, which UPS offers alongside RHA. In return for lower premiums, the RHA plans shift more responsibility for paying medical bills to retirees through features including higher deductibles, he adds.
Like RHA, the other new plans seek to hold costs down by creating large pools of early retirees. To prevent retirees from jumping in only after becoming ill—a move that drives costs up—insurance companies often offer just one chance to enroll. So far, RHA is the only one to funnel retirees from several companies into one big insurance pool. But, says Jeff Verney, CEO of UnitedHealthcare's United Retiree Solutions, "That's something all of us are thinking about."
By offering these benefits, companies earn goodwill with employees while also creating an incentive for older workers—who may be burned out or more expensive than potential replacements—to leave the payroll. According to Mercer, those with company-provided coverage retire, on average, at age 61; those without benefits tend to hang on until age 63.
When such plans are offered, employees who qualify—typically, anyone 50 or 55 to 64—are guaranteed coverage, no matter what their health status. And while insurers can raise premiums for the entire group, an individual who racks up a lot of bills won't be singled out for a rate increase.
The still-unanswered question for workers considering early retirement is whether these new benefits will prove to be affordable. Under the RHA plan, for example, premiums can range widely, from $400 to more than $1,000 a month, with annual deductibles of $250 to $3,700. The variation depends in large part on whether an employer provides a subsidy—which could determine whether or not someone's wish to retire early can become a reality.
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