Can Obamacare provide relief to distressed American cities?

May 16, 2013

A big trip line for states and cities is the host of promises they have made to provide health benefits to retirees (Other Post Employment Benefits (OPEB)). Almost universally, cities and states are shouldering these OPEB costs as they come due. Pay as you go, if you will. From a recent Bloomberg presentation:

These so-called OPEB promises made by the 15 biggest cities alone total $115 billion, with an average burden of $2,300 for every man, woman and child, according to data compiled by Bloomberg. How will local governments manage to make good on their pledges without becoming insolvent? Will we see governments reduce benefits and raise their cost for current workers, as has been the case in several cities and states?

Cities and states cannot unilaterally end these benefits, outside of Chapter 9 bankruptcy, because they are contractual promises. As Stockton, California was entering the bankruptcy process, it eliminated lifetime unlimited health care benefits for former employees and their dependents. Stockton had awarded these OPEBs to former employees who had worked for the city for as little as a month, and the expense helped push the city into bankruptcy. Retirees and former employees took Stockton to court and a judge ruled that, given the city’s fiscal distress, it could cease these benefits.

Now there seems to be another way for cities to get out from under their OPEBs. Chicago’s Mayor Rahm Emanuel is leading the way. Emanuel’s plan is to essentially shift the cost of retiree health benefits from the city budget to the federal budget via President Obama’s Affordable Care Act. From the Chicago Sun Times:

More than 35,000 government retirees have been on pins and needles waiting to find out whether Mayor Rahm Emanuel will continue their city-subsidized health insurance after June 30, when a 10-year settlement agreement that calls for the city to share costs with retirees is due to expire.

They are not likely to be relieved when they find out how Emanuel has decided to resolve the politically volatile issue.

Ahmad disclosed Tuesday that the mayor has decided to extend the 55 percent subsidy for six months — until Jan. 1 — then phase it out for 30,000 retirees over the next three years after giving Obamacare a chance to shake out.

Chicago’s responsibility for this liability ends on June 30. The city will roll over everyone but 5,500 of the most elderly retirees to the Affordable Care Act coverage over a three year period. The city projects savings of $108 million per year, which could help pay its massive pension liabilities. From the Chicago Sun Times again:

“By taking advantage of the Affordable Care Act, which guarantees city retirees access to health care regardless of pre-existing conditions and includes subsidies for lower-income individuals, the city is freeing itself from $540 million in future costs by 2018,” Msall said.

A Wisconsin county is considering the same option. Though, the Sheboygan County case is more about health care cost arbitrage than eliminating a liability. From the Milwaukee Journal Sentinel:

Sheboygan County government retirees may lose their county health insurance benefits and instead be placed under the federal health care program known as Obamacare, the Sheboygan Press reported.

The county is confronting a $2.17 million budget gap for 2014, the Press reports.

County Administrator Adam Payne and Finance Director Terry Hansen estimated the county could save just over $286,000 in the county’s 2014 budget with the assumption that its retirees will be insured under the Affordable Insurance Exchange beginning next year.

The Affordable Care Act may not be fiscally sustainable given large federal deficits and the efforts by Republicans to repeal it. Republicans are unlikely to provide additional funds to support the program that will likely cost much more than is currently budgeted. Even so, cities and states are looking everywhere for cost reductions. Using Obamacare makes sense.

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The short answer is yes, Obamacare can provide OPEB relief to some distressed cities but only from the portion of OPEB attributable to pre-Medicare retirees (typically, those under the age of 65).

There are some provisions of the Affordable Care Act that apply to Medicare retirees but, for the most part, the law does not apply to them. The public exchanges or marketplaces being established under Obamacare to offer health insurance policies will not have plans for Medicare retirees.

Private exchanges that do offer Medicare Advantage plans and Medicare Supplement plans are not a panacea either (see related article: d-health-and-the-medicare-exchange-model  /#more-563). They can lead to confusion from overwhelming choice and plan churn fueled by higher commissions in the first year. Another drawback to private Medicare exchanges is they must offer group policies. They cannot offer individual polices linked to an employer funded HRA and avoid the ACA penalties.

Municipalities seeking to reduce OPEB significantly without slashing benefits or transferring costs onto retirees must follow other strategies including maximizing subsidies under the Medicare Modernization Act of 2003 and leveraging the private sector with nationwide competitive bidding.

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