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Can Obamacare fill in the gaps?
When Kenneth Blair joined the Detroit police force decades ago at age 19, he thought he was signing up for a steady job—and pension and health-care benefits for life.
The fate of his pension is still up in the air as Detroit’s bankruptcy makes its way through the courts. But Blair’s health benefits as he would have known them are already gone.
Blair died in 2004 after serving on the police force for 30 years, and his benefits were transferred to his wife Cynthia. She received a pension check and was enrolled in the same medical plan offered to current employees of the city of Detroit. For $125 a month, Blair could see almost any doctor she wanted; for $25 more, she got full dental and vision coverage.
But then the city of Detroit decided it wanted to get out of the business of offering retirees healthcare. Public-employee unions were unable to prevent the change. So in December of last year, Blair and thousands of other retirees got a letter informing them that anyone under 65 “would need to obtain their own health insurance coverage” as of March 1 of this year. It recommended that they check out the health-care exchanges set up under Obamacare.
“I was shocked. I still am shocked. I’m still reeling from it,” said Blair, 60, who, like many retirees, assumed that the city would continue to offer healthcare to retirees, since her husband had been promised lifetime healthcare. “It’s such a big amount of money coming out of my pension.”
Employers have a legal obligation to continue paying pensions, although bankruptcy can change that. But most legal experts would agree that employers can do away or dramatically change health insurance for retirees—even if they had promised it for life. Take GM, for example: In the '70s and '80s, employees received notice that “your basic health-care coverages will be provided at GM's expense for your lifetime,” but a court later ruled that GM could alter or do away with coverage.
“Health insurance doesn’t have the same degree of protection that the pension plans do,” said Robert Clark, an economics professor at North Carolina State University.
Indeed, public employers across the country may soon begin following Detroit’s lead and withdrawing coverage for retirees, instead sending them to the health-care exchanges set up by the Affordable Care Act.
“Since the passage of the Affordable Care Act, I think it is fair to say that every public-sector employer is looking at the exchanges as a potential way to get out of the unfunded liabilities that the public sector is bearing,” said Olivia Mitchell, executive director of the Pension Research Council and a Wharton professor. “People are becoming more expensive to take care of.”
Last year, for instance, Chicago announced that it was phasing out health-care benefits for people who retired after August 23, 1989. And Sheboygan County, Wisconsin also voted last year to stop allowing county retirees to use the county’s health-insurance plan, instead shifting them onto the health-care exchanges.
“We had to make a decision about what we could afford, and we’re obligated to fund pensions by law, but not health-care benefits," said Bill Nowling, a spokesman for Detroit's emergency manager, Kevyn Orr. “I know it sounds crass, but we can’t afford it.”
Detroit was spending $180 million a year for healthcare for its current employees and retirees; once it moved the retirees to the exchanges, costs dropped to $60 million, Nowling said.
"Ford, GM, and Chrysler got out of retiree health care years ago," he said.
For Blair, the public exchanges represented less choice and more money.
She bought an HMO plan though the exchange, which costs her $449 a month, although she receives a $125 subsidy from the city. It was a more frustrating plan, she said: Doctors in the HMO were overbooked and she wasn’t able to schedule appointments for weeks or months. She paid $100 to see an out-of-network doctor when she needed blood pressure medication but couldn’t get an appointment in network. A doctor wanted her to have a mammogram and a colonoscopy, but she put it off, since she couldn’t afford the co-pays.
“We retirees are really in a no-win situation,” she said, in an interview. “This has been a nightmare, and I’m in decent shape compared to some people.”
Health insurance for retirees used to come standard with most jobs. It was one more way for employers to try to recruit the best and the brightest during booming economies. But the private sector started doing away with retiree healthcare in the 1990s after regulators required companies report their liability for retiree medical plans. In 1988, about 66 percent of private-sector employers offered retiree health care; by 2013, only 25 percent did, said Mitchell, of the Pension Research Council.
But the public sector has been slower to do away with retiree healthcare, in part because strong unions have continued to negotiate for the benefit. Nearly 80 percent of state and local government organizations still offer retiree healthcare, Mitchell said. But the plans are extremely costly for governments already struggling with budget problems, and they only keep getting more expensive as health care costs continue to rise. While there are $800 billion in unfunded pension liabilities from public-sector employers across the country, unfunded retiree health-care liabilities are pretty big, too, at $627 billion.
The decision by public sector employers to take away benefits that they had long promised has angered many retirees, and an advocacy group, ProtectOurSeniors.org, has supported a bill introduced this year in Congress that would prevent companies—public and private—from taking away earned health-care benefits. The bill would also require companies that filed for bankruptcy to pay retiree pensions for at least three years.
“Post-retirement health benefits are not entitlements, they are earned benefits that were paid for by workers and guaranteed by employers,” said Jack Brennan, chairman of the Association of BellTell Retirees, in a statement earlier this year after the bill was introduced.
Public employee retirees who begin using the exchanges will find a very different type of health care, said Amanda Starc, a Wharton professor who studies health care management. The plans have higher deductibles and a smaller network. And, unless they get subsidies, the retirees will also find the plans expensive.
“They’re going to get some sticker shock,” she said. “They’re going to be asked to pay a little bit more for a little bit less.”
Shifting retirees onto the exchanges could have repercussions for people across the country, Starc said, because it could skew the pool of people in the exchanges. The more old, sick people and the fewer young, healthy people are in the exchanges, the higher costs will go for everybody.
But it doesn’t have to be all bad. The exchanges could increase transparency and give public-sector retirees more options, said Paul Fronstin, director of health research at the Employee Benefit Research Institute. Some retirees who can’t afford the health plans will qualify for subsidies, and the exchanges will force retirees to be more active in their healthcare.
It's possible that one day the Detroit retirees could even long for the exchanges. The unions have decided that next year, retirees will get out of the exchanges and be covered under a Voluntary Employee Benefits Association, which is kind of like a private exchange. The city is only obligated to contribute $400 million into it over 20 years, which is a fraction of the $120 million it had been spending annually on retiree health care.
Many retirees will see their pensions shrink by 4.5 percent if Detroit's bankruptcy plan is approved. But the amount of money they're paying for medical bills could mushroom.
That’s bound to cause angst for people who are already grappling with how to survive on less money than they’d planned for. Roger Rice was a Department of Public Works employee for 38 years. He and his wife were covered under the city health plan, until the city couldn’t afford it anymore. He turned 65 and was covered by Medicare, but she isn’t yet of Medicare age, so the couple pays $700 a month for health insurance.
That made things very expensive when she had a heart attack—because of the stress, he said, when testifying in Detroit’s bankruptcy trial. His pension will likely be cut 4.5 percent when the bankruptcy is approved, and with the $700 health care bill, he said, the amount of money he earns every year has been cut by half.
“Can you imagine my answer when someone asks how I’m enjoying my retirement?” he said.