Retirees receive funding for benefits for life

A new retiree medical exit solution announced March 24th by Towers Watson uses customized group annuities and an innovative transaction structure to overcome the traditional hurdles to an exit — with positive tax implications for employers and preservation of benefits for retirees.  Longitude Solution is available to existing and prospective clients of the Towers Watson OneExchange private Medicare exchange.

Both public and private sector employers have long sought an exit solution to address the high cost of retiree medical benefits as well as the many regulatory and legal obligations associated with a retiree medical program. Rising health care costs, especially for older individuals, make offering retiree medical increasingly unaffordable, even for the largest organizations.

In addition, retiree medical creates balance sheet liabilities and income statement expense while diverting management time from more strategic benefits strategies.

Why haven’t employers exited retiree benefits before?

The fact that more employers haven’t simply stopped providing the benefit speaks to the complexity and risk of an exit.

Public sector employers and many private sector companies have long-standing contracts with unions that guarantee funding of retiree medical benefits for life. Even without a union or written contract, no employer wants to be sued by its retirees.

Beyond the possibility of a lawsuit is the concern employers have about ending a benefit that seniors on fixed incomes depend on as well as the negative press that might be associated with doing that.

Hurdles (and their solutions) to an annuity-based exit

Employers and their benefits consultants have long known that the ideal way to exit retiree medical is through a group annuity. However, to be successful, the annuity would have to do the following three things: 1) end an employer’s legal obligation once and for all, 2) avoid adverse tax consequences for both employers and retirees, and 3) create economic value for both parties.

But before a group annuity could be part of a retiree exit solution, the following four hurdles had to be overcome:

Hurdle #1: Medical inflation is a risk that cannot be hedged, and an annuity for retiree medical benefits cannot be issued unless medical inflation risk has been eliminated.

Solution: Medical inflation risk is eliminated when an employer moves from defined benefit (DB) approach to a defined contribution (DC) plan because benefits are capped to a fixed dollar amount per year.

If the transition is made with Towers Watson’s OneExchange private Medicare exchange, the added benefit is that the employer has a platform for administering the annuity and retirees don’t have to change how they purchase plans and get reimbursed for medical claims.

Hurdle #2: Retirees do not pay taxes on medical benefits funded through a tax advantage account such as an HRA, but they would have to pay taxes on existing annuity benefits as income.

Solution: By specifying that distributions can only be used for medical insurance premiums and other medical costs, an employer can mirror its existing plan design while shielding distributions from taxation.

Hurdle #3: Employers cannot deduct the full annuity payment at the time of purchase because premiums paid for long-term contracts, like annuities, must be amortized for tax deductions.

Solution: The annuity solution includes a series of transactions that are commonly used in retirement benefit plans that make the purchase price deductible right away.

Hurdle #4: Employers must address commitment made to retirees before removing the retiree medical liability from the balance sheet.

Solution: The certificates issued under the annuity are irrevocable commitments that transfer an employer’s liability to the insurance company, eliminating the employer’s obligation.

Fulfillment of obligation, peace of mind

With these hurdles overcome, both public and private sector employers can use the Towers Watson annuity-based exit solution to fully exit their legal, accounting, and regulatory responsibilities. The solution should also give retirees peace of mind because they would have tax-free funding for medical benefits from a highly rated insurance company for the rest of their lives. 

This type of retiree medical exit solution is the end of a journey that many employers began decades ago — at the time, with no clear path to exit in sight — and can now finish, in a way that meets the needs of employers and retirees alike.

For more information about the Longitude Solution, read the article in Tower’s Watson Corporate Finance Matters.


The Bay Bridge at night, looking to its footings in Alameda County











Each year, Kathy Foster and team analyze the funds in their organization’s trust to figure out how long the money will last. More than 20,000 people rely on those funds when they retire – for income and health coverage – one of the biggest costs in retirement.


Foster is Assistant CEO of the Alameda County Employees’ Retirement Association (ACERA) – steward of the retirement benefits fund for the nation’s seventh largest county.

In February 2012, ACERA was one of California’s first counties to use a private Medicare exchange. A year later, ACERA is sharing how it made the decision, what the move entailed and taking a 20/20 look back to measure projections.

Read Building a Bridge to the Future: ACERA’S Retiree Medical Strategy.

Learn more about Towers Watson’s OneExchange solution for retiree healthcare.

If the ACA is successful, eventually we’ll have as many as 30 million more people who will be insured. As it stands, we don’t have enough primary care physicians to meet this new demand. There are many possible solutions. We’re exploring 3 of them in a series of posts:

1. Shortening the amount of time it takes to get a medical degree and expanding residency programs to get more doctors into the workforce more quickly.

2. Empowering medical professionals to take on more of the responsibilities of primary care physicians, working under their supervision. These professionals include physicians’ assistants, nurse practitioners, pharmacists, nurses and others.

3. Using technology – telephones, email and telemedicine — even remote monitoring — to extend the reach of physicians — especially for people in remote and rural areas.

This is Part II of a 3-Part Series. Click here for Part I in the series and come back to the blog for Part III in coming weeks.

First, some startling statistics.

Doctors spend an average of just 12% of their day with patients. According to another study, new doctors spend just 8 minutes with patients during an appointment providing “direct care.” The rest of their time is spent filling out forms or reading charts, also known as “indirect care.”

Doctor time is at a premium as it is — split between roles as form filler, prescription writer and primary care giver — and their time is about to stretched even thinner. As people newly insured under the Affordable Care Act go to primary care physicians (PCPs) for the first time, doctors will be hard-pressed to keep up.

This is where nurses and pharmacists come in.

Many health care experts have suggested that transferring some of the responsibilities of PCPs to local pharmacists and nurse practitioners will free up physicians and result in better care for patients.

The Doctor Pharmacist Is In

“[Pharmacists] are the most overeducated and underutilized healthcare professionals in the U.S.,” said R. Pete Vanderveen, dean of the USC School of Pharmacy. “It doesn’t take eight years of education and a professional doctorate to fill a bottle with pills.”

Pharmacists can already give immunizations and provide some in-person consultations. Some legislation is already on the books, in places like California, that goes further — enshrining in law an expanded role for pharmacists.

Read the rest of this entry »

Wellness data is very “in” these days. Wearable technology such as FitBit allows individuals to track their fitness activity and apps let people track calorie consumption or weight loss.

The recent data released on Medicare doctor pay has unleashed a firestorm of controversy because of the amount of money some doctors made from treating Medicare patients — as much as $21 million in the case of one opthamologist. The Centers for Medicare and Medicaid Services released the data this week, for the first time in 35 years. The data had been held subject to the resolution of  an injunction, sought by the American Medical Association, which had been in place since 1979.

But it’s not all bad news. Think of this as another kind of wellness data. Essentially it is wellness data, a level up — data on the “wellness” not of the individual, but of the Medicare system as a whole.

The specific dollar amounts will be repeated and repeated as evidence of excess and even criminal activity on the part of some doctors. But the longer term takeaway is that data facilitates transparency. [To see exactly what reimbursements were state by state, check out this interactive map from USA Today.]

“Taxpayers have the right to understand what is being paid for and how it is being paid for,” said Jonathan Blum, principal deputy administrator for the Centers for Medicare & Medicare Services.

In addition to it being a taxpayers’ “right,” having this full data transparency allows Medicare administrators to identify areas of excess and inefficiency and consumers to compare prices. It also allows all of us to consider broader questions about health care in the United States, for example, why some surgeries are performed more or cost more in one geographic area as opposed to another.

Shining the light on this data opens up the Medicare program to be improved, streamlined and  hopefully, made sustainable for generations to come.