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August 3, 2010

Update: Health Insurance Exchanges – A Solution for VEBAs

 

What’s a VEBA?

VEBA stands for voluntary employees’ beneficiary association, a trust fund established solely to manage and provide employee benefits, including healthcare coverage.  While VEBAs have been around since the 1920’s, they have been used sparingly, until recently, when several large, long-lasting industrial corporations have used them in employment negotiations with their unions as a way of fixing the value of future retiree healthcare benefits.

Explain?

In past decades most unions negotiated a compelling set of retiree healthcare benefits to cover many of the healthcare expenses excluded from Medicare.  Over time the life expectancy of retirees has expanded beyond initial actuarial expectations and healthcare costs have grown at a rate in excess of overall inflation, resulting in enormous and unexpected costs for retiree medical, so much so that in the case of the US automotive industry these costs began to erode global competitiveness.

Over the past few years corporations including the large autos have been able to work with their unions to renegotiate the form of retiree benefits, converting from a “defined benefit” structure, where benefits are fixed and the costs vary depending on utilization and market prices, to a “defined contribution” structure, requiring the benefits to vary based on a fixed funding budget.

In the case of the United Auto Workers Union (UAW) this led the auto companies to establish and fund the UAW Retiree Medical Benefits Trust, which is, to my knowledge, the largest VEBA in the US, with a reported asset value of over $45 billion including large equity stakes in General Motors, Ford and Chrysler.  According to press reports this VEBA is now responsible for providing life-long healthcare benefits for 800,000 retired auto workers and their spouses.  This deal was cut in the face of a potential collapse of the US auto industry and it remains to be seen as to whether the VEBA has enough assets to fund its potential obligations to the union’s retirees.

Some numbers, please…

“We believe we’re saving our clients over $500 million each year while providing as good or better benefits for retirees. The group model is the evil here; it is a wildly inefficient way to deliver what is available via guaranteed issued coverage in the individual market” Bryce Williams, CEO, Extend Health

Back in May I posted The Coming Age of (Health Insurance) Exchanges about, in part, Bryce Williams’ company, Extend Health, an operator of the largest private Medicare insurance exchange.  The post provides a reasonable amount of detail on how an exchange works and why it should be expected to deliver more value for the healthcare dollar.

Recently, Employee Benefit News published Private Exchanges Have Potential to Breathe New Life Into VEBAs, an article that details the work of Extend Health in saving both corporations and its individual retirees healthcare costs through its exchange model where retirees over the age of 65 purchase individual Medicare Advantage and Medicare Supplemental insurance plans using funding provided by their prior employers.  This results in 25%-40% savings to the corporations, an average of 30% savings in out-of-pocket costs to the individual retirees (about $500 per year) and a 96% retiree satisfaction rate.

Implications for the VEBAs?

Given the savings that Extends’s Medicare exchange model has generated for corporations, it only makes sense that it would make a useful tool for a VEBA, with a goal to extend the life of its funding as long a possible by earning a return on unused capital and purchasing healthcare for its constituents as efficiently as possible.  Current data suggest that the exchange should create 20%-30% greater buying power for the VEBA’s over a typical Group Model.

You can read the Employee Benefit News article here and access my prior post on healthcare exchanges here.

 

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