LINCOLNSHIRE, Ill., Aug. 6, 2013 /PRNewswire/ -- In response to rising health care costs and mandated changes brought about by the Patient Protection and Affordable Care Act (PPACA), a new survey from Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE: AON), shows that many U.S. organizations have or are seriously considering sourcing post-65 retiree health care benefit coverage through the individual Medicare plan market.

Aon Hewitt's annual Retiree Health Care survey of 548 companies covering almost 4 million retirees shows more than 60 percent of employers are reassessing their long-term retiree health strategies due to the PPACA. Of those companies that have already decided to make strategy changes for their post-65 retirees, more than 40 percent have moved forward with one that will direct retirees to the individual market for coverage, oftentimes accompanied by a defined contribution subsidy. Of those companies expecting to make changes to their post-65 retiree strategies in the future, more than half indicate strong interest in this approach.

"With the PPACA legal and political landscape generally clarified, employers are looking to control cost, manage risk and source coverage through the most efficient means possible," said Maureen Scholl, CEO of Health Care Exchanges for Aon Hewitt. "Individual market-based retiree health care sourcing strategies can create significant savings opportunities for all stakeholders. We expect to see many employers apply these strategies where possible and supplement them with modified group-based programs for those retiree populations where individual strategies do not make sense."

Post-65 Retiree Benefit Strategy Changes

Aon Hewitt's survey shows many companies are also considering changing their pre-Medicare retiree strategies to leverage the individual market in the future. Of those employers contemplating changes to their pre-65 retiree coverage, 34 percent favor a defined contribution strategy with individual market/public exchange-based benefit sourcing in the future and 30 percent favor eliminating pre-65 retiree coverage and subsidies altogether. Thirty-three percent do not anticipate a future change in their strategy.

Medicare Part D Strategies

Aon Hewitt's survey shows that 53 percent of employers have altered or plan to alter their Medicare Part D or broader post-65 retiree benefit strategies. Thirty-six percent of companies that have made changes since 2010 have moved to a group-based Medicare Part D plan (EGWP) and another 21 percent of those still contemplating changes anticipate moving to the EGWP in the future.

According to Aon Hewitt's survey, the percentage of employers that filed to collect the federal Medicare Part D Retiree Drug Subsidy (RDS) has dropped from 63 percent in 2010 to 48 percent in 2013. Only 18 percent plan to file for the subsidy longer-term.

"The elimination of the tax-favored status of the RDS for 2013, coupled with the PPACA-prescribed improvements to the Medicare Part D program, created the impetus for employers to take action," noted Milind Desai, retirement actuary at Aon Hewitt. "While many organizations will continue to rely on group-based sourcing strategies for their retiree populations, they will likely migrate toward ones that are more cost effective."

Medicare Advantage Strategies

Aon Hewitt's survey shows just 34 percent of employers currently offer local/regional or national group-based Medicare Advantage plans to any of their post-65 retirees, and just 6 percent of employers say they consider Medicare Advantage to be a viable group-based strategy going forward.

However, 38 percent of employers say they would consider replacing their current group-based Medicare medical indemnity supplement strategies with a national Medicare Advantage PPO if there would be no change in retiree benefits and if it would generate material savings in the near-term.

"In the past, many employers leveraged Medicare Advantage plan strategies because the savings could be significant," said John Grosso, health care actuary and leader of Aon Hewitt's Retiree Health Care task force.  "Over time, these plans experienced significant challenges as federal funding cuts took place, which led to increases in plan premiums, reductions in benefits and plans exiting certain locations. While PPACA introduced a number of changes to the Medicare Advantage program, employers generally want to see consistent performance over time and a stable federal funding commitment before investing in these group-based strategies for the long-term."

Settlement Strategies

Settlement strategies contemplate a retiree benefit "buy-out" that enable organizations to fully or partially eliminate their ongoing retiree medical commitment. Examples of settlement strategies that employers have considered include purchasing life annuities to provide a fixed income stream in lieu of ongoing medical coverage, establishing and funding a VEBA trust to support continued retiree benefits, or making direct cash lump-sum payments to retirees.

According to Aon Hewitt's survey, more than a quarter of companies said they would consider a retiree health care settlement strategy for all or a portion of their retiree group if the market environment could support it on a cost-effective basis. 

"We saw tremendous pension settlement activity during 2012, and that trend is continuing in 2013. Companies looking to shrink benefit liabilities on their balance sheet may explore the viability of settling their retiree health care obligations as well," said Desai. "At present, there are a number of tax, legal and market hurdles that limit the feasibility of settling retiree medical program commitments in a cost-effective manner, but this may change in the future."

Aon Hewitt's full 2013 Retiree Health Care Survey report will be available on www.aonhewitt.com.

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About Aon Hewitt

Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness.  Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide.  For more information on Aon Hewitt, please visit www.aonhewitt.com.

About Aon

Aon plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 65,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world's best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources. Visit www.aon.com for more information on Aon and www.aon.com/manchesterunited to learn about Aon's global partnership and shirt sponsorship with Manchester United.

Media Contacts:
Maurissa Kanter, 847-442-0952, maurissa.kanter@aonhewitt.com
Amy Ochalski, 847-771-4225, amy.ochalski@aonhewitt.com

SOURCE Aon plc