As part of his plan to fix Detroit's finances, Emergency Manager Kevyn Orr has proposed that the city stop covering retirees' health benefits and instead send retired city workers to Obamacare’s health insurance marketplaces to purchase coverage.
The plan, as Detroit reporters such as the Free Press’s Nathan Bomey have already suggested, will likely result in litigation from public workers unions that argue pensions and other retiree benefits are legally protected.
The city currently spends 43 percent of its revenue on legacy costs, Orr told local reporters, which includes retiree health benefits. That share is expected to rise to 65 percent by 2017.
Detroit spent $177 million on retiree health benefits in FY 2012, according to Orr's report. The city would spend between $27.5 million and $40 million under the new plan. No additional details were available on the number of city workers who would be affected or the potential savings to the city.
As Governing reported last week, state and local governments facing the crushing costs of retiree health benefits—the total liability is estimated to top $1 trillion—could turn to the exchanges to cut costs. If retired city workers purchased health coverage on the exchanges until they qualify for Medicare at age 65, they would likely be eligible for federal tax subsidies to help offset any additional costs.
Chicago Mayor Rahm Emanuel has already proposed making the switch for future retirees, and city officials estimate the plan would save the city nearly $109 million annually.
The exchange coverage, though, is likely to be more expensive for retirees than their government-funded health benefits, according to Stuart Wohl, an expert on retiree health-care costs at Segal Company, a consulting firm. For that reason and other uncertainties about the exchanges, Wohl expects states and municipalities' movement to the exchanges will be gradual.
“I think that there is real potential for public-sector government entities to slowly move pre-Medicare retirees to the public exchanges,” says Wohl. “The amount of time for planning would make it difficult for public employers to have everything ready in time. All the facts aren't going to be out until open enrollment [on Oct. 1].”