Don’t look now, but the feds are dropping more cash from helicopters — and the Empire State is already grabbing a big handful.

HHS Secretary Kathleen Sibelius announced yesterday that 2,000 employers throughout the country had applied for a piece of a $5 billion “Early Retirement Reinsurance Program” set up under the new federal health care law to subsidize employer-sponsored health insurance for retirees who haven’t yet reached the Medicare eligibility age of 65.  Specifically, the plan will reimburse 80 percent of claim costs between $15,000 and $90,000 for early retirees.

And who might those employers be?  Sebelius highlighted corporate applicants, noting that they included “50 percent of Fortune 500 employers.” The HHS release also featured a guest quote from Commerce Secretary Gary Locke, citing business complaints about rising health costs.  Much of the resulting media coverage obligingly focused on the private sector side, highlighting applications from firms like General Motors, General Electric, Pfizer and Alcoa.

In reality, however, the lion’s share of this particular federal honey pot is likely to be slurped up by state and local governments, which account for the bulk of the nation’s retiree health insurance expenditures.  Among larger employers — those with 200 or more workers — 81 percent of large state and local governments offer retiree health care, while only 29 percent of private firms do, according to the latest annual Kaiser Family Foundation employer health benefits survey.  Ninety-five percent of smaller businesses, which employ more than 40 percent of the workforce, don’t offer any retiree coverage.

Government retiree health costs are especially high because they include the youngest early retirees of all: cops and firefighters, most of whom can collect employer health benefits for two decades or more before they are eligible for Medicaid Medicare.  Public-sector benefits in general also tend to be more generous than those in the private sector.  For example, while new retirees paid an average of 41 percent of the premium in the largest private plans covered in the Kaiser-Hewitt survey a few years ago, state government retirees in New York kick in just 9 percent of their premium costs, according to data from the Department of Civil Service (DCS).

Of the 156 New York employers applying for subsidies from the reinsurance fund, 66 were government entities, including counties, municipalities, school districts and public authorities.  Another 33 were unions or union trust funds, including several representing government employees.  Of the remaining 57 applicants, only 33 were for-profit businesses, including IBM and Kodak.

By far the biggest employer on the New York list was the state government, whose largest public-sector health insurance plan apparently is poised to soak up 7 percent of the national reinsurance fund all by itself.*

The New York State Health Insurance Plan (NYSHIP) expects to receive $346 million over the next two years, DCS announced soon after HHS issued its release yesterday.  Civil Service Commissioner Nancy Groenwegen said the money would be used to reduce premiums for “all participants” in the plan, including covered employees and retirees.  The NYSHIP plan has 900 participating employers in the public sector, including 154 school districts, 11 county governments and 196 municipalities in addition to the state.

On a NYSHIP premium base estimated by DCS at $12 billion over the next two years, $346 million works out to a little less than 3 percent. So, from the state government’s standpoint, a projected 19 percent increase in health insurance premiums over the next two years will be shaved down to about 16 percent.  That works out to a two-year savings of about $180 million–not all that much, really, in the context of a two-year budget gap of at least $20 billion.

News coverage of reinsurance fund predictably greeted it as free money.  “Feds give NYSHIP $346M boost,” as one Albany headline put it.  In fact, this is simply a transfer of tax money from one pocket to another.  Think of it as another form of temporary stimulus whose disappearance will leave a bigger hole to fill in a couple of years.

What happens after the reinsurance program expires in two years?  The HHS press release said the fund was “created … as a bridge to the new health insurance Exchanges in 2014,” a reference to the federally subsidized plan that will become available then under the health care law.  Hmm. Is the Obama administration inviting states and local governments to dump $1.5 billion trillion in unfunded retiree health care liabilities into Washington’s lap?  Stay tuned.

* Oddly, the City of New York was not on the New York list of applicants for reinsurance subsidies.  Neither were Nassau and Suffolk counties, which have enormous retiree health care liabilities, although Westchester County did apply.  California’s state government also seemed to be missing from that state’s list.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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