Imagine this scenario if you will. You've worked for decades as a hardware engineer for IBM (IBM +3.06%). Within the last couple of years, you reached the retirement age of 65 and you've been living off your pension and receiving health insurance through your former employer. It may not have been an easy job, but the company has owned up to its promise to take care of you and things are going well.
Now imagine that you get a letter from IBM in the mail informing you that, because of the passing of the Patient Protection and Affordable Care Act and the complexities it's brought to the retiree health insurance market, your retiree coverage is being dropped. Also with that letter comes a check from IBM for you to use to seek out your own individual insurance on the state-run individual health exchanges.
Sound a little harsh? You worked for IBM for decades and now they'd rather pay you off than deal with your health insurance! It certainly did to me, but that was before I dug a bit further.
Source: TaxFix.co.uk, Flickr.
Kicking retirees to the curb?
While the above story is almost entirely fictitious, what isn't is the fact that many businesses are looking hard at their retiree benefits program and some are choosing to drop coverage on their retirees in order to cut future costs which are tied to the PPACA, also known as Obamacare. IBM is one such company that made this decision, notifying its retirees last week that it would send its Medicare-eligible retirees an annual payment that they could then use to shop for individual health insurance on state-run health exchanges. According to an IBM spokesperson, the move will affect about 110,000 retirees and is being necessitated because costs for these retirees are forecast to triple between now and 2020.
IBM isn't alone, though. This weekend, we also heard that Time Warner (TWX +0.00%) plans to do the same thing with its retirees, which a spokesperson for the company confirmed on Sunday. Like IBM, Time Warner is facing rising costs for Medicare-eligible retirees and would rather give them money to seek out their own individual plan than keep them on the company's current retiree-benefits plan.
According to a research study by the Kaiser Family Foundation, roughly 29% of businesses with 5,000 or more employees are considering a change to their retiree health benefits platform. If you take a recent survey of 540 businesses from employee benefits consulting firm Aon Hewitt into question, you'll see an even broader outlook, which points to 60% of all businesses either implementing or considering the implementation of retiree benefit changes similar to what we saw from IBM and Time Warner.
But here's the shocker...
But, here's the crazy thing... this is great news for all parties involved. Sure, being kicked to the curb as a retiree doesn't exactly inspire any moral support after the years or decades or work you likely put into that company, but for both parties it's going to work out for the best.
Let's look at this from a retirees' point of view. Under the current system they receive a very rigid plan, or a small handful of plans, to choose from with the company covering their health plan costs. Under the new system, businesses like IBM will prepay their retirees a lump sum of money that they can use to personalize their plan to better suit their needs. Moreover, the health care plans under Obamacare are considerably beefier than they have been in the past, offering more comprehensive coverage. With better transparency and potentially equal or more comprehensive coverage, retirees may actually wind up better off than where they are now.
From the standpoint of the businesses involved this move is a no-brainer. With health costs for retirees rising, jettisoning retirees onto the individual health exchanges could free up millions for some of the nation's largest employers which, in turn, can be used for job creation, research and development, or even a bigger dividend check to investors.
Another underlying winner here would be Medicare Advantage providers like Humana (HUM +3.16%), UnitedHealth Group (UNH +2.85%), and Universal American (NYSE: UAM). Medicare Advantage plans are supplemental health insurance plans that seniors buy to fill the gap in insurance for what Medicare doesn't cover. With many retirees now being displaced from their company-run plans, the aforementioned companies above -- which receive about two-thirds, one-quarter, and three-quarters of their revenue, respectively, from Medicare Advantage plans -- could be big beneficiaries.
Sometimes the effects of Obamacare on our nation's workforce, or retirees in this case, isn't subtle, but this is one scenario where it appears it's going to work out well for retirees, for corporate America, and for a select group of insurers.
Editor's Note: The attribution for the image in this article was incorrect in a previous version. The Fool regrets the error.
