As New York’s elected officials consider options for balancing budgets in the face of record deficits, they should be attuned to opportunities for cost-savings in all areas, no matter how big or small. One approach for identifying potential savings is examining practices in which New York State and its local governments are out of line with their peers. One such opportunity is to eliminate a public employee fringe benefit rarely offered anywhere else: reimbursement for Medicare Part B premiums.

Medicare Part B Reimbursement

Medicare is a federal health insurance program available to most U.S. residents at age 65. Part B is an optional part of Medicare that covers common medical and preventive services, such as visits to the doctor. The federal government requires individuals to pay a premium for Medicare Part B, and sets premium rates yearly. The share of the premium paid rises according to ability to pay. Currently, the base monthly premium is $96.40; for retirees with greater incomes, the required premium increases to as much as $350 per month.[1]

New York State and City offer employees with a minimum of ten years of service health insurance when they retire. The City does so free of any charge, but the State requires a co-payment of 10 percent of premiums for individual coverage and 25 percent for family coverage.  Since many New York State and City retirees are fairly young, they receive health insurance coverage in the early years of their retirement through the State or City; however, when they turn 65, they are required to enroll in Medicare, which then becomes the primary insurance. Because younger retirees receive health insurance benefits provided through the State and City, the State and City compensate older retirees for the “loss” of these benefits by reimbursing them for the cost of the Medicare Part B premiums.

A little known fact about these reimbursements is that the State and the City reimburse retirees for the full amount paid out-of-pocket, rather than merely the base premium. About 3,000 State and 4,500 City retirees receive the higher reimbursements.  The highest premiums are paid by retirees with income of $214,000 (individual filing) or $428,000 (joint filing); these individuals are in the financial position to provide for the full cost of their own premiums without financial hardship. While the federal government recognizes this, the State and the City perversely offer reimbursement for the greater costs, providing larger benefits to those that need them the least.

Costly benefit that is rarely offered

Receiving reimbursement for Medicare Part B premiums is a costly fringe benefit that is rarely offered, even among public sector employers. Only five other states offer any reimbursement; of these, four reimburse most or all of the out-of-pocket premium cost.[2] The federal government does not provide reimbursement for its retirees and the benefit is virtually unheard of in the private sector, where all retiree health benefits have been steadily waning.

The costs to New York taxpayers of these reimbursements are significant, and little has been done to contain them. Starting this fiscal year, the State limited reimbursements to 90 percent for individual coverage and 75 percent for family coverage, but this provided only minor relief (approximately $20 million) against total costs of $140 million in fiscal year 2010. In New York City, the costs are even larger: reimbursements totaled $213 million in fiscal year 2010 and are projected to rise to $312 million by 2014 – an increase of almost 50 percent.

Time to bring NYS and NYC in line with others

The rationale for providing the Medicare Part B premium reimbursement is weak when considering the immense fiscal pressures on the State and City. Its elimination would offer immediate and meaningful budget savings. For New York City, full elimination of all reimbursements would close more than 10 percent of the current budget gap, without affecting any of the services that New Yorkers depend upon. Furthermore, elimination of the benefit would not put the State or the City at a competitive disadvantage for attracting a qualified workforce, as most other states and regional private employers do not offer this benefit.

Finally, enrolling in Medicare should not be viewed as the “loss” of a retirement benefit; in fact, there should be broader reforms of retiree health insurance.  Premiums for retiree health insurance should be increased by both the State and the City to 50 percent of the cost to relieve the burdens of rampant cost escalations.

By Maria Doulis

[1] Centers for Medicaid and Medicare Services. “Medicare Part B Premium Costs in 2010.” Accessed December 20, 2010.  Available online at http://www.medicare.gov/Publications/Pubs/pdf/11444.pdf.

[2] Jack Hoadly.  “How States Are Responding to the Challenge of Financing Health Care for Retirees.” The Henry J. Kaiser Family Foundation.  September 2003.  Available online at http://www.kff.org/medicare/upload/How-States-Are-Responding-to-the-Challenge-of-Financing-Health-Care-for-Retirees-PDF.pdf