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Retirees may not need city health insurance

Mayor Rahm Emanuel   | Al Podgorski~Chicago Sun-Times

Mayor Rahm Emanuel | Al Podgorski~Chicago Sun-Times

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Updated: February 23, 2013 6:27AM

Last week, the Retiree Health Benefits Commission delivered recommendations to Mayor Emanuel regarding future benefits for certain classes of former city employees. The most promising proposal — and surely its most controversial — would end the city’s comprehensive retiree health-insurance plan, which primarily covers retirees under age 65. Beginning in 2014, these retirees and their dependents could instead purchase coverage through the Illinois health-insurance exchange, in many cases at a lower price.

We estimate the proposal could save the city $60 million in 2014 and the cash-starved pension funds another $9 million.

The mayor charged the commission, of which I am a member, with proposing ways forward after the city’s agreement to provide health benefits to certain classes of (non-fire, non-police) former employees — the Korshak Settlement — expires this June. If the mayor renews Korshak for another 10 years, as the retirees have asked, annual outlays are projected to increase from $108 million in 2012 to $540 million by 2023.

The commission offered up a menu of fairly predictable options to reduce city spending: shaving benefits, cutting the city’s contributions toward premiums and reducing support for dependents. But these reductions cut indiscriminately, affecting the lowest-income and oldest retirees the same way. Plus, they attempt to preserve an old system designed to correct problems that will no longer exist once all of the provisions of the federal-health reform take effect.

Korshak was negotiated in the shadow of a dysfunctional individual insurance market, in which retirees under age 65, who generally do not qualify for Medicare, faced high and variable premiums for skimpy policies offered only to those satisfying the insurers’ underwriters. The Affordable Care Act, however, requires insurers to issue comprehensive plans to all comers, at rates that do not reflect health status and which vary to a limited degree by age. Early retirees stand to gain the most from these reforms. Moreover, those with household incomes under 400 percent of the federal poverty line ($44,680 for a single individual, and $92,200 for a family of four) will qualify for generous federal subsidies to purchase private insurance through state insurance exchanges.

The commission estimated how many retirees stood to pay less, and how many to pay more if the city terminated its comprehensive medical plan and all who are currently enrolled purchased a “silver” plan on the Illinois Exchange in 2014.

The results suggest that 14 percent to 58 percent of affected retirees will pay less if the city terminates the current plan, with the lower figure assuming retirees have substantial non-pension income, and the upper figure assuming city pensions are retirees’ sole source of income. This range jumps to 85 percent to 94 percent if we focus just on retirees earning less than 400 percent of the federal poverty line.

The federal plan is far more progressive than Korshak because it targets subsidies toward those least able to afford insurance. Also, these subsidies come from the federal government, not the city. To be sure, taxpayers will indirectly foot that bill through federal taxes, but the federal government will not compensate the city or its retirees for forgoing the benefits offered through the exchanges. The city can ill afford to turn down a federally funded windfall and spend limited city resources on a plan that, to a large degree, duplicates new federal benefits.

Given that some retirees would pay more for their coverage, perhaps some of the savings should be redirected toward shoring up city pensions. But regardless of whether the parties negotiate jointly over these two benefits, one thing is clear: There is a smart way to cut spending and it’s a way that spares — and often dramatically helps — those retirees in the worst position to absorb cuts.

Leemore Dafny is Herman Smith Research Professor in Hospital and Health Services, Kellogg School of Management, Northwestern University, and a member of the Retiree Health Benefits Commission.

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