A new survey conducted this month finds most companies thatoffer pre-65 retiree medical benefits intend to apply for afederal reinsurance reimbursement program enacted under newhealth care reform legislation.

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The provision goes into effect June 1, and because federalfunding for the program is limited, companies are being encouragedto act fast.

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Hewitt Associatessurveyed 245 large employers that offer medical benefits to morethan 1.3 million retirees. The survey found that more thanthree-quarters (76 percent) of companies plan to pursuereimbursement under the Early Retiree Reinsurance Program (ERRP)included in the Affordable Care Act.

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Under the ERRP, companies can receive an 80 percentreimbursement on claims incurred by early retirees and dependentsbetween $15,000 and $90,000 over the course of a year. Eligibleclaims include medical, prescription drug and behavioral health.The ERRP will last until Jan. 1, 2014, or until the $5 billion setaside for the program is exhausted.

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Hewitt estimates that the average federal reimbursement willrepresent between $2,000 and $3,000 per pre-65 retiree per year, orapproximately 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 millionin reinsurance proceeds per year.

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"The number of employers eliminating pre-65 retiree medicalbenefits has grown over the past decade as health care costscontinue to rapidly increase," said Milind Desai, FSA, seniorconsulting actuary and co-leader of Hewitt's Retiree Health CareTask Force, in a press release. "The early retiree reinsuranceprogram encourages employers to continue offering coverage topre-65 retirees and their families by providing some temporaryrelief from expensive pre-65 retiree medical claims. But because somany companies plan to apply for the ERRP, employers will need toact quickly to secure a share of the proceeds, since the federalfunds earmarked for this program are limited."

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While the law requires that employers use the ERRPreimbursements to reduce the cost of the plan, Hewitt's surveyshowed that most have not yet decided on a specific approach.Hewitt says its survey was conducted just as interim final ruleswith additional guidance around the ERRP were issued by theDepartment of Health and Human Services (HHS).

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At that time, two-thirds (66 percent) of companies that intendto apply for the reimbursement said they were unsure about how theyplan to use the proceeds and were waiting for this guidance beforemaking a decision. Sixteen percent said they are considering usingthe reimbursement to reduce premiums--including both employer andretiree share, and another 5 percent said they are consideringreducing the retiree share of premiums only.

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"While the interim final rule on the ERRP was released in earlyMay, most employers are still looking for more details about howthese funds can and cannot be used," said John Grosso, FSA, seniorconsulting actuary and co-leader of Hewitt's Retiree Health CareTask Force. "We expect additional guidance by the end of June, andwe believe companies will then make final decisions on how to bestallocate these reimbursements to offset the cost of the plan.Employers will be required to describe how the proceeds will beused to support the plan in their ERRP application."

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