Reinventing Retiree Healthcare: A Financially Sustainable Path Forward for Public Sector Leaders
Originally published in NCPER PERSist
By: Steven M. Schatt and Christian Goodman, WTW Via Benefits
State and local governments across the country for years have been grappling with a mounting fiscal challenge: unfunded Other Post-Employment Benefits (OPEB) liabilities. In many jurisdictions, these obligations now surpass pension debt, placing unprecedented strain on public budgets and long-term financial planning.
With healthcare costs rising and traditional group retiree plans becoming unsustainable, finance officers and benefit administrators are seeking innovative solutions. One proven strategy is to transition retiree healthcare delivery from group plans to the individual marketplace, supported by Health Reimbursement Arrangements (HRAs).
Group Plans are becoming unsustainable
Once the cornerstone of public sector benefit programs, group retiree healthcare plans are now financial liabilities. They are expensive, complex to administer, and expose governments to long-term risks. The aging workforce and shrinking active employee pools are eroding the cost-sharing model that once supported group coverage.
Volatile healthcare costs and pay-as-you-go funding make controlling costs difficult. For many plan sponsors, continuing with group plans means diverting funds from essential services or increasing taxes, neither of which is a sustainable option.
Transitioning to the individual marketplace
Federal legislation has transformed the individual healthcare marketplace into a viable alternative for retirees. Guaranteed issue policies, improved drug coverage, and premium subsidies through the Affordable Care Act (ACA) now give retirees access to a wide range of plans tailored to their needs and budgets.
By transitioning retirees to the individual marketplace and providing financial support through HRAs, governments move from a defined benefit to a defined contribution model. This stabilizes costs and empowers retirees with greater choice and control over their healthcare.
Why HRAs work
HRAs are tax-advantaged accounts that allow employers to reimburse retirees for qualified medical expenses, including insurance premiums. When properly structured, HRAs offer:
Cost predictability: Employers set a fixed contribution, eliminating exposure to unpredictable premium increases.
Risk mitigation: Governments avoid the underwriting and claims risk associated with group plans.
Administrative efficiency: HRAs are easier to manage for diverse retiree populations.
Benefit preservation: Governments maintain financial support for healthcare, with more plan options for retirees than group coverage provided.
Proven success across sectors
Over the past two decades, public and private sector organizations have implemented HRA-based retiree healthcare models. These transitions have led to significant cost savings, preserved valuable retiree benefits, improved retiree satisfaction, and created stronger fiscal stability.
Municipalities adopting this approach have reported OPEB liability reductions of 20–50% while maintaining or improving the quality of retiree healthcare. Such results are especially compelling for finance professionals focused on long-term budget planning and liability management.
What finance leaders need to know
For finance officers, benefit administrators, and policymakers, the path forward requires strategic planning and stakeholder engagement.
Understand the drivers: Rising healthcare costs, demographic shifts, and legacy plan structures are fueling the OPEB crisis. An understanding of these factors is essential for building consensus around change.
Evaluate the marketplace: The individual marketplace offers robust options, but determining subsidy levels, eligibility, and navigating enrollment requires expertise and support.
Structure HRAs effectively: Designing a defined contribution model aligned with budgets and retiree needs is critical. This includes contribution levels, eligible expenses, and communication strategies.
Partner with trusted advisors: Work with a consulting partner or marketplace provider to analyze the financial impact and design the right approach for your organization.
The growing financial pressure of unfunded retiree healthcare liabilities requires a bold solution. Transitioning to the individual marketplace with HRA support offers a sustainable model that protects public finances and retiree benefits. For finance professionals committed to fiscal stewardship and honoring commitments to public servants, this strategy represents an effective path to meaningful reform. To reduce costs and ensure sustainability, government entities should consult with benefits consulting partners or individual marketplace providers. These experts can analyze the financial impact of transitioning retiree healthcare and provide guidance tailored to your needs.
Steven M. Schatt, FSA, EA is a senior director in WTW’s Health, Wealth & Career business segment. He is a retirement actuary and benefit strategy consultant with over 30 years of experience providing consultation to large complex organizations on the strategy, design, financing, and management of their retiree healthcare programs. Steve is a fellow of the Society of Actuaries and an enrolled actuary.
Christian Goodman has over 30 years of experience in retiree healthcare consulting and benefits delivery. He has deep expertise in pre-Medicare and Medicare individual and group administration solutions within the public sector. Christian has guided over 50 municipalities through complex retiree healthcare strategies and designing benefit programs that deliver meaningful value. A trusted advisor and frequent speaker on retiree medical solutions and OPEB plan designs, he is known for his strategic insights and strong client relationships.