Obamacare has survived computer glitches, the Supreme Court (twice), and Republican’s best efforts to destroy it. Now, it might face a threat from an unexpected place: a little noticed accounting standard for state and municipal pensions.
Earlier this summer the Governmental Accounting Standards Board (GASB) released new recommendations urging states and municipalities to include retiree health care when they calculate their liabilities. When private sector firms had to do the same thing in 1990, they ditched the health benefits for retired workers altogether. If state and local governments do the same, it could have serious consequences for Obamacare.
A key feature of the Affordable Care Act are the exchanges where people can buy health care directly from insurers and comparison shop. Insurance markets inherently face an adverse selection problem: The only people who want to buy lots of insurance are the ones most likely to need it. That’s why it was so important that the “young invincibles”—young, healthy people—buy insurance on the exchanges to balance out the high cost of older, sicker people. So far, the population appears sufficiently diverse. The government claims 11.7 million people enrolled through the exchanges and 4.1 million are under 35.
But the new accounting rules might change the group’s composition. Many state and municipal workers retire under the age of 65, when they qualify for Medicare. Since minimum retirement ages for these workers are below age 60, this can leave a significant coverage gap to fill. In addition, some pensions offer health care that subsidizes or supplements Medicare after retirees turn 65. All these benefits are extremely expensive—the total liabilities are estimated to total $1 trillion. State and local governments have almost no money put aside to pay for retiree health care. The average funding ratio—how much money is put aside relative to how much is owed—is only 6%. Compare that to state pensions, which are allegedly about 70% funded.
It’s unclear how states will react if they’re forced to recognize retiree health-care costs. Economists Josh Rauh and Robert Pozen think local governments will respond by putting money aside. But that would run counter to how private firms behaved when they had to record such costs in 1990. States could possibly follow suit because of a ruling by the Supreme Court earlier this year that said retiree health benefits can be modified or taken way. The case involved a private sector corporation, but Frances Rogers, a lawyer who specializes in municipal pensions at California law firm Liebert Cassidy Whitmore, believes the ruling applies to any agreement made under collective bargaining, which most public sector benefits are.
The creation of ACA health exchanges may be the final nail in the coffin for retiree health-care benefits. The exchanges make it easier for states to phase out health-care plans because pre-Medicare retirees now have other, affordable options. Paul Frostin of the Employee Research Benefits institute anticipates this will open the door to more plan terminations; he’s even found some evidence it’s already happening.
There are no precise numbers available on the number of public pension retirees who get health care and don’t qualify for Medicare yet (the potential population who will go on the exchange). There are 9.5 million public pension beneficiaries and their average age is about 70. About 70% of governments offer health benefits to retirees. That suggests it’s likely the state retiree population could be large enough—even 1 million could make a significant difference—to skew the exchange population older (and likely sicker) and increase premiums.
At this point, what will happen is speculation. Uniform health-care coverage is a laudable policy objective. But what makes good policy isn’t just intent, it’s robustness. From that view, the Affordable Care Act is less than great because it appears so fragile.