Update on State Retiree Health Insurance: Report Cites Potential Savings

May 19, 2011

A new report estimates that the State of Illinois could save between $260 million and $300 million in FY2012 by increasing the share of health insurance premiums paid by retirees and their dependents from the current average of roughly 9% to approximately 50%.

As previously discussed on this blog, the General Assembly’s Commission on Government Forecasting and Accountability (COGFA) hired a consulting firm to study the cost of retiree health coverage in Illinois and other states and to present recommendations for possible new premium structures. Results of the study by Mercer were presented to COGFA members at a meeting on May 17, 2011. The audio version of the meeting is available on COGFA’s website.

In the report Mercer stated that the firm’s 2010 survey of employer-sponsored health plans found that a wide variety of plans required retirees and their dependents to pay a combined average of 50% of premium costs. The finding applied to both public and private plans that offered retiree health coverage. Mercer’s survey reported on state, county and local plans and on all plans including private companies with at least 500 employees.

Nationally only 25% of all large health plans (public and private) offered coverage for retirees not eligible for Medicare and only 19% offered coverage for those eligible for Medicare. However, among the 30 state governments surveyed 97% offered health coverage to non-Medicare retirees and 83% offered coverage to Medicare retirees.

In Illinois state retirees pay an average of 2.5% of premium costs and their dependents pay 27%, for a combined average of roughly 9%, Mercer officials said at the May 17 meeting. The report shows that health coverage for 113,669 Illinois state retirees and their dependents is expected to cost $750.9 million in FY2012. Of that total cost, $680.6 million will be paid by the State and $70.3 million by retirees and their dependents. These numbers do not include participants’ out-of-pocket costs such as co-payments and deductibles.

The average share of premiums paid by retirees is low because State employees who retired before January 1, 1998 and those who retired after that date with at least 20 years of service do not pay healthcare premiums. Exceptions include General Assembly members, who can retire with as few as four years of service and not pay any premiums, and judges, who can retire with as few as six years of service and not pay premiums.

The report presents scenarios for increasing the combined share of premium costs paid by retirees and dependents to between 44% and 49%. Projected savings to the State vary from $260.8 million to $300.4 million depending on whether premiums are based on years of service, age when benefits begin, pension income, total household income or a combination of those factors. Mercer recommended that the State base premiums on a combination of years of service, age when benefits begin and either pension income or total household income. Under the proposal involving pension income, for example, most retirees with more than $125,000 of annual pension income would be required to pay their entire premium cost. Retirees with more than $125,000 of pension income with the most years of service and latest benefit start dates would pay 85% of the premium cost. Mercer also recommended that any changes be phased in over two to three years to give retirees time to plan and adjust.

The report points out that any proposal to reduce the State’s retiree health insurance costs would also lower the actuarial accrued liability for retiree insurance benefits reported in its financial statements. According to the latest available actuarial valuation, the State’s actuarial accrued liability for retiree insurance benefits was $27.1 billion at the end of FY2009.

It remains unclear what if any legislative action might be taken on retiree health insurance for FY2012, which begins on July 1, 2011. COGFA had specified that the report should be completed in time for legislative proposals to be enacted before the General Assembly is scheduled to adjourn on May 31, 2011.

Governor Pat Quinn has indicated that he does not foresee any changes to the existing retiree health program until after collective bargaining agreements expire at the end of FY2012. The State’s largest union has taken the position that any changes in retiree health insurance benefits must be negotiated with the union. At the May 17 meeting, COGFA members indicated that they are compiling data on the number of non-union participants in the state health insurance program.

As previously noted, Julie Hamos, the Director of the Illinois Department of Healthcare and Family Services, has said that her agency could propose new rules requiring retired General Assembly members and judges to pay healthcare premiums but has not done so. Currently, there are 1,343 retirees in the General Assembly and judges’ plans with total estimated health insurance costs of $8.45 million in FY2011.