Other companies may follow 3M's lead on retiree health care

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Many employers are reevaluating their health insurance benefits now that federal health care reform has become law. Minnesota-based 3M announced it would change its coverage for retirees-both early retirees and those over age 65.

But some experts say that the number of companies that offered health benefits for retired employees was already falling and health care reform will speed up the process.

In a memo to employees, 3M said the reform law's changes should dramatically improve the individual insurance available to workers who retire before age 65 and their dependents.

In effect, 3M is telling its employees the company won't provide them with health insurance after retirement. But 3M says it will help them pay the cost of getting insurance in the private marketplace -- whether it's a commercial health plan for early retirees or Medicare supplement coverage for those over 65. 3M says under health reform, those options will be at least as good as what the company provides now.

3M confirmed the memo's information, but did not provide any further comment.

Economist Paul Fronstin, who directs the nonpartisan Employee Benefit Research Institute, says 3M is probably the first big company to announce such changes. But he expects more companies will follow, because the new law limits how much premiums can vary based on age and other factors, such as pre-existing medical conditions.

"Employers are looking at that and saying, 'Why do I need to be offering this benefit anymore when my retirees can go out and get something that's actually better for them than what I'm offering," said Fronstin. "They can get something better than what I'm offering them and pay more, or they can buy something that's less comprehensive than what I've been offering and pay less."

3M will replace its current retiree medical plan with a health reimbursement arrangement, where 3M will put money into a retirees individual account. For retirees who are eligible for Medicare, that change will begin in 2013. For retirees under age 65, those changes won't take effect until 2015, a year after news health insurance exchanges will be up and running.

The exchanges will function a bit like online travel sites -- instead of comparing non-stop flights and car rental prices, individuals and small groups will compare health care benefits.

Tom Tiegen of the Minnesota Business Partnership says employers are also looking for ways to reduce their future retiree health care obligations.

"That's one of the fastest rising costs. You see it in California, you see it in Duluth, you see it all over the place. And so this is something you'll probably see more of," said Tiegen.

The number of companies that offer health insurance for early retirees has dwindled over the past decade. In 1999, about 42 percent of large firms provided some sort of health insurance to retirees under 65. In 2009, that fell to about 35 percent, according to Jean Abraham, professor of health policy at the University of Minnesota.

Abraham served on the President's Council of Economic Advisors, specializing in health care during the last six months of the Bush administration and the first six months of the Obama administration.

She says health reform may just have accelerated the trend away from company retiree health insurance.

"For employers, these folks are expensive. And the choice to drop that benefit and pay them a lump sum basically caps the employer's liability for providing these benefits," said Abraham. "They can choose and set what that amount of money will be each year."

The 3M change is based on health reforms that don't kick in until 2014. But Congress was worried companies would drop even more early retirees from coverage before then. So the health reform law provides a subsidy for early retiree health costs.

The federal government will reimburse employers 80 percent of an early retiree's health claims between $15,000 and $90,000. But the program has faced criticism that it's underfunded. 3M hasn't applied for the program, but a company spokesoman says it's still looking into it.

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