Last week the U.S. House majority leaders announced a sweeping $6 trillion strategy to reduce the federal budget deficits structurally. State and local officials are largely focused on the immediate impact on intergovernmental assistance programs and the Medicaid program. They should also pay attention to the hidden impact that Medicare reforms would have on their retiree medical benefits plans (or "OPEB" for other post-employment benefits).

House Budget Committee Chairman Rep. Paul Ryan's strategy for Medicare reform would invert the responsibilities of government and elderly recipients. Instead of paying most costs and charging the elderly a premium for federalized insurance, the proposed Medicare reforms would provide "premium support" or a stipend to be used toward payment to a private provider chosen by the individual. Some would call it a defined contribution instead of a defined benefit, although that tends to confuse the terms as they apply to pre-funded retirement plans. Others would call it "subsidized privatization." I'd call it a defined subsidy.

The Republican proposal would represent a monumental shift in national policy and the structure of elder-care markets. Without support from President Obama and the Senate Democrats, it's probably a non-starter politically unless some moderate Democrats decide there is no better solution. But as we look into the next decade and the current actuarial projections of Medicare's unsustainable financial structure, it's pretty obvious that Congress must ultimately put a cap on the total benefits. There just aren't enough payroll taxes to pay for the current Medicare system, and taxes alone can't match the cost trajectory. That means retirees must soon pay more out of their pockets. Even if the current Medicare managed-care industry model is retained, it is clear that the payments by seniors will increase and perhaps dramatically.

What's important to state and local managers is this harsh reality: Many public employers have heretofore written a blank check to pick up all or most of the costs that Medicare doesn't pay. They have flunked the first rule of risk management and left themselves open to the "fat tail" of high losses in once-remote scenarios that are now looking more inevitable. So when Medicare runs out of money or pulls the plug, those costs will shift to many of these state and local government employers -- who have typically failed to fund their OPEB benefits plans.

Every employer must develop its own strategies to mitigate OPEB costs, and many public employers have already done so by limiting their exposure to this costly benefit via the implicit subsidy (allowing retirees to obtain insurance at group rates, but nothing more), or by capping their benefit in the form of a stipend. But those who presently promise to pay their retirees' insurance premiums have a looming problem they need to get ahead of -- now. It's a blank check for skyrocketing cost increases once the feds start trimming Medicare benefits. Think of OPEB costs as a cancer that will metastasize when Medicare's trust fund runs out.

If legal counsel concurs, it is important to notify retirees that their current presumption of a blank check forever for retiree medical benefits will be subject to change if Congress rewrites the ground rules for Medicare. No public employer should be held responsible for a federal game-changer. If you don't get ahead of this with employee and retiree communications now, the problem will magnify later.

One means of getting ahead of the game is to install annual benefit limits on OPEB plans. For example, it could be a retiree-benefit limit of $15 or $20 per month per year of public service, adjusted by the Consumer Price Index and beginning at age 62 for civilians and 57 for public safety workers. This will reduce the actuarial cost of the plans immediately, and even more importantly, it will avoid a complete financial disaster when Congress ultimately adjusts or reforms Medicare with reduced benefits and higher premiums. My previous column on funding a rational OPEB plan for $75 a month provides the keys to successful transition and cost control. Forward-thinking leaders will reset public employees' and retirees' expectation now, not manana.