Solving a Piece of the OPEB Puzzle

A Massachusetts city's approach to cutting the cost of retiree health care might be a way for other jurisdictions to grapple with the problem.
by | February 13, 2013

Plenty of public officials lose sleep over their governments' underfunded pension systems, but ensuring that monthly checks go out to retirees isn't the only thing that keeps those leaders awake at night. Most state and local governments have also failed to set aside nearly enough money to deliver on the other post-employment benefits (OPEB), including health care, that they've promised to public retirees.

In many places, the cost of supplementing Medicare coverage is a big part of that unfunded liability. But recent events in Brockton, Mass., a city of about 94,000 people 25 miles south of Boston, offer hope for how governments can address that part of the OPEB problem.

Massachusetts municipalities are facing an unfunded OPEB liability of an estimated $26 billion. Brockton's $693 million unfunded liability places it among the 19 Bay State communities in which OPEB commitments outstrip funding by more than $300 million.

To help address this growing problem, state leaders enacted a law in 2011 that allows municipalities to switch their employees and retirees into the Group Insurance Commission, Massachusetts' group health insurance purchasing pool. Because of its greater purchasing power, most municipalities can save money by switching to the GIC.

That's what Brockton Mayor Linda Balzotti recommended, but the city council disagreed. Public-employee unions also opposed the move because the city would lose control over health-plan design, which the unions worried could result in benefits being cut and costs being shifted to workers. Instead, the city decided to see if it could achieve the projected $7.3 million in annual savings it would have realized by switching into the GIC by bargaining with its municipal unions.

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The city also hired KTP Advisors, a company that seeks ways to limit government health-insurance costs. For retiree health care, most jurisdictions default to the providers of their active-employee plans. Instead, KTP moved to let other providers bid, developing a request for proposals that required bidders to match or exceed current retiree benefit levels. That meant maintaining medical and prescription-drug coverage at least comparable to what Brockton retirees already had without raising co-pays or deductibles.

The RFP required bidders to compete on optimizing federal Medicare reimbursements, which most jurisdictions don't do. Brockton had long self-insured, but KTP also shifted risk from taxpayers by asking bidders to develop fully insured products.

The city had been paying $437 a month for each Medicare-eligible retiree, but the winning bid cut that to $331. Retirees also win. In addition to seeing no benefit cuts, they save on the one-quarter of the cost of their insurance for which they pay. All told, Brockton will save $2.4 million annually on retiree health care.

That took the city about a third of the way toward its overall health-insurance savings goal of $7.3 million. Brockton ultimately reached a deal with its 17 unions that is expected to achieve the rest of the savings with changes such as higher co-payments for doctor visits and tiered co-pays for different hospitals.

In union-friendly Massachusetts, some have expressed skepticism that the active-employee savings will materialize, but Brockton's retiree health-care savings may serve as a template for jurisdictions across the country that are struggling with astronomical unfunded OPEB liabilities.

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