Retiree health benefits are the trillion-dollar riddle that state and local governments are still trying to solve. Decades of generous benefits packages and the recent stream of retiring workers have left most governments struggling to cover the post-employment health insurance that was promised. But they might have found the answer to their prayers: Obamacare’s health insurance exchanges.

State and local governments typically provide health insurance to their retired employees until they qualify for Medicare at age 65. That can mean up to 10 years of extra benefits if a worker retires at 55, which isn’t unheard of. Thanks in part to collective bargaining, the benefits themselves are usually generous, covering up to 90 percent of costs. Add in the revenue problems states and localities experienced during the Great Recession, and that explains why, according to a Pew Center on the States report, states like California and New Jersey respectively have $80 billion and $71 billion unfunded liabilities that threaten their financial future.

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The exchanges could help solve this problem in a remarkably simple way: by offering state and local retirees an alternative way of receiving health coverage until they qualify for Medicare, relieving their former employers of the need to provide post-employment benefits. The online marketplaces would allow retirees to shop for affordable plans and access federal tax subsidies to pay for them. As retirees with a limited income, many would likely be eligible.

“I think that there is real potential for public-sector government entities to slowly move pre-Medicare retirees to the public exchanges,” says Stuart Wohl, an expert on retiree health-care costs at the Segal Company, a consulting firm.

But he doesn’t expect a sudden flood of public retirees buying insurance on the exchanges when they open Oct. 1 because there are too many unanswered questions. The most pressing being: How much will coverage sold on the exchanges cost? Employers got their first look in May as states released health insurers’ proposed plan designs, but those are still subject to change.

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“The amount of time for planning would make it difficult for public employers to have everything ready in time," says Wohl. "All the facts aren't going to be out until open enrollment.”

State and local governments, though, are already thinking ahead.

The city of Chicago announced in mid-May that it plans to phase out its retiree health benefits plan -- which covers 55 percent of costs -- and move 30,000 retired workers to the exchanges. The 5,500 oldest retirees will keep their existing coverage. City officials estimated that the plan would save the city nearly $109 million annually, according to the Chicago Sun-Times.

About 150 miles north of Chicago, officials in Wisconsin’s Sheboygan County are considering doing something similar. Under a proposed plan, the county would eliminate health coverage for retirees and expect the exchanges to pick up the slack. County officials project the change would save the county $286,000 in 2014, which would help to offset its existing $2.2 million budget deficit, according to the Milwaukee Journal Sentinel.

But the proposal hasn’t been formally approved, according to Sheboygan County Administrator Adam Payne, and that’s largely because of the uncertainty that Wohl describes. Details of the plans to be sold on Wisconsin’s exchange -- which will be operated by the federal government -- are still forthcoming. The county also wants to be sure that the transition would be affordable for its retired workers.

“It's difficult to have a thoughtful discussion without all the information. We don't want to pull [the] rug out from under them [retirees] and don't want to threaten them,” Payne says. “We need more information. What we're hoping for is a win-win.”

Finding that balance between saving public money and keeping coverage affordable for employees could be the most significant impediment to states and localities moving their retirees to the exchange, Wohl says. Most existing retiree health benefits are defined either through a collective-bargaining agreement or legislation, so there will likely need to be some kind of buy-in from unions and lawmakers.

The extent of benefits that the exchanges cover could be a major sticking point. Wohl estimates that current retiree health benefits cover 80 to 90 percent of a person’s medical costs; while the silver-level plan on the exchanges -- which is generally considered the benchmark for those receiving tax subsidies -- covers only 70 percent.

Asking retirees to pay for a bigger share of their medical expenses could be a tough sell, Wohl says, though he also believes states and localities could get creative. If governments offered to contribute to a health savings account, for example, that would help offset the new costs to retired employees while being less expensive for employers.

“It could be tricky to make it attractive for everybody,” says Wohl.

Checking Up on Health News

  • Cate Long, a municipal finance expert who writes for Reuters, touches on the opportunity that exchanges present state and local governments in this piece.
  • USA Today reports on a new ranking of states by the well-being of their senior citizens. Minnesota ranks at the top.
  • Vermont Gov. Peter Shumlin signed a bill to make his state the fourth to allow 'death with dignity' or physician-assisted suicide, as its critics call it.
  • The immigration bill being considered by the U.S. Senate would make it easier for foreign health workers to enter the country, Modern Healthcare reports.
  • California Gov. Jerry Brown says counties, which administer Medicaid in that state, will have to return $300 million to the state because of Obamacare's Medicaid expansion, the Associated Press reports. A story to watch.
  • An interesting nugget from the Arkansas Times' David Ramsey: An Arkansas official alleges that the state's unique privatized Medicaid expansion will double the number of insurers who want to sell on its exchange.
  • Oregon Gov. John Kitzhaber continues his national tour, touting his state's Medicaid coordinated-care experiment. Read this take from the Washington Post's Ezra Klein.