Pass Governor’s Proposal to Reform State Retiree Health Insurance Benefits
State of New York retirees with more than 10 years of service receive health insurance benefits substantially more generous than those offered by private sector and most public sector employers.1 In fiscal year 2016 it will cost taxpayers $1.3 billion for benefits for approximately 140,000 eligible retirees and their dependents, and the cost will rise to $1.7 billion by fiscal year 2020.2 Governor Andrew Cuomo’s Executive Budget includes a fair proposal to reduce these growing costs, and the Legislature should adopt it.
State retirees are offered a choice of health insurance plans with the range of options varying by the region of the state. The State’s share of the cost of insurance is pegged to the cost of a large plan, the Empire Plan, for which the 2016 total annual premium is $8,171 for an individual and $16,234 for a family.3 The State funded portion of the premium varies with the date at which the person retired (before or after January 1, 2012, January 1, 1983, or April 1, 1979), and for recent retirees, with their salary at the time of retirement (above or below grade 10 or about $40,000 annually). The minimum State share of the premium, for higher paid workers retiring recently, is 84 percent for an individual and 69 percent for a family. The State share is 90 percent and 75 percent, respectively, for workers who retired before 2012.
Under this arrangement recent retirees selecting the Empire Plan pay $82 monthly for individual coverage and $352 monthly for family coverage if they are in the lower salary category, and $109 or $419 monthly if they are in the higher salary category.4 The remainder of the total monthly premium of $681 or $1,353 is paid by the State.
This State contribution is generous compared to national norms. Nationwide, only 11.6 percent of private employers offer health insurance to retirees under age 65, and even fewer (10.3 percent) offer any insurance to retirees over 65.5 Most state and local employers do offer health insurance to retirees, but require significant premium-sharing, often at rates greater than those paid by employees.6
Retirees age 65 and over must enroll in the federal Medicare program and pay the premiums it requires. Medicare premiums are adjusted annually based on changes in the cost of the program. They included a monthly premium in 2015 of $105 for the medical component of Medicare Part B and an Income Related Monthly Adjustment Amount (IRMAA) for those with high incomes. In 2015 the IRMAA ranged from a minimum of $500 annually for individuals with incomes above $85,000 annually and couples with incomes above $170,000 annually, and as high as $2,700 for retirees earning more than $214,000 annually. The State reimburses retirees for all Medicare premium costs; this amounted to a minimum subsidy of $1,760 and as much as $4,020 for the wealthiest retirees.
Reimbursement of Medicare premiums is a highly unusual practice limited to a few other public employers. Among large cities, only New York City pays the full amount for retirees and their spouses; Los Angeles reimburses the cost of the standard premium for retirees only; and Boston reimburses 50 percent of the premium for retirees.
The Governor’s Proposals
The Executive Budget includes three proposals to reform the State’s payment for retiree health insurance.
- End reimbursement for the IRMAA. Paying for this additional Medicare premium provides higher income individuals and couples with a larger State subsidy than lower income retirees. This is not a progressive policy and aids those who least need it. It also contradicts federal policy which seeks to increase Medicare financing from higher income households. This change would affect relatively few retirees and would save about $6 million annually. The Governor has proposed this reform in two prior Executive Budgets; it should be approved this year.
- Freeze reimbursement for the regular Medicare Part B premium. The Governor proposes to limit future Medicare Part B reimbursement to $105 monthly, the 2015 rate. Any future federal increase would not be reimbursed. The rate in 2016 is $122 per month, so the increased cost for retirees would be $17 per month in 2016. However, for social security recipients Part B premiums did not increase due to a federal prohibition against increasing premiums if social security does not increase. Therefore, a large portion of retirees would experience no financial impact from this proposal in 2016. This is a modest and fair way to limit the State’s cost for this benefit, which is already unusual. The savings in fiscal year 2017 would be $1 million and will grow each subsequent year.
- Moderately reduce the State’s premium subsidy for retirees with less than 30 years of service. A collective bargaining agreement effective in 2012 established the current two-tier level of premium subsidy, with those in pay grades 10 or above receiving a lower percentage subsidy than others (84 or 88 percent for individuals and 69 or 73 percent for families). This replaced the previous uniform subsidies of 90 percent for individuals and 75 percent for families regardless of pay grade.
The Governor proposes to retain the current subsidies for those retiring with at least 30 years of service, but to reduce it for those with less service time. The reduction would be one percentage point for each year of service between 20 and 30 years and 2 percentage points for each year between 10 and 20 years. At least 10 years of service is needed to qualify for the insurance benefit. This would still provide a minimum subsidy rate of 54 percent for individual coverage for the lower salaried retirees and 50 percent for the higher earning retirees for those with 10 years of service. The respective minimum rates for family coverage would be 39 percent and 35 percent.
All retirees would still have a substantial State subsidy, and the new rates would apply only to future retirees. All current retirees would retain their current benefits. The savings from this change are only about $3 million in fiscal year 2017, but would grow significantly in future years with the fiscal year 2020 savings estimated at $25 million.
The Governor’s proposals are fair and sensible ways to reduce the State’s future cost for retirees’ health insurance. They have a limited short-term impact on current retirees, help align State and federal policy on the financing of Medicare, and do not adversely affect the nature of the health benefits for retirees. The proposals will yield savings by fiscal year 2020 of about $42 million annually and can reduce the State’s long-term unfunded liability for future retiree health benefits ($63 billion) by more than 25 percent or approximately $17.5 billion.7
- Citizens Budget Commission, Everybody’s Doing It: Health Insurance Premium-Sharing by Employees and Retirees in the Public and Private Sectors (January 2013), p. 16, www.cbcny.org/sites/default/files/REPORT_HIS_01282013.pdf.
- New York State Division of the Budget, email to Citizens Budget Commission staff (March 11, 2016).
- Calculated with information from New York State Department of Civil Service, Employee Benefits Division, 2016 Rates & Information for Retirees of New York State (November 2015), www.cs.ny.gov/employee-benefits/nyship/shared/publications/rates/2016/ny-retiree-rates-2016.pdf.
- At the time of retirement, individuals can opt to “cash out” their unused sick leave and have it credited toward the share of retiree health insurance premiums. This reduces the employee’s share of the monthly premium below the amounts indicated.
- U.S. Department of Health & Human Services, Agency for Healthcare Research and Quality, Center for Financing, Table II.A.2.h: Percent of private-sector establishments that offer health insurance to retirees by State: United States, 2014, http://meps.ahrq.gov/mepsweb/data_stats/summ_tables/insr/state/series_2/2014/tiia2h.pdf
- Citizens Budget Commission, Everybody’s Doing It: Health Insurance Premium-Sharing by Employees and Retirees in the Public and Private Sectors (January 2013), p. 14, http://www.cbcny.org/sites/default/files/REPORT_HIS_01282013.pdf.
- Office of the New York State Comptroller, 2015 Comprehensive Annual Financial Report, p. 94, http://osc.state.ny.us/finance/finreports/cafr/2015cafr.pdf; and New York State Division of the Budget, email to Citizens Budget Commission staff (March 11, 2016).