As many of the nation's largest employers struggle to control rising retiree
health costs, they are asking their retirees to pay more and plan to do so again
in 2005, according to new survey results.
The survey was conducted by the Kaiser Family Foundation, a nonprofit research
group, and Hewitt Associates, an HR consulting firm. Among the major findings:
- Firms providing retiree health benefits experienced cost increases averaging
12.7 percent in 2004, with employers and retirees sharing these cost increases
at most firms.
- A typical worker under age 65 who retired in 2004 would pay $2,244 annually
in premiums ($4,644 with spousal coverage), or 27 percent more than a similar
worker who retired in 2003. A typical Medicare-eligible worker who retired
in 2004 would pay $1,212 annually in premiums ($2,508 with spousal coverage),
or 24 percent more than in 2003.
"The prospects for retiree health coverage are slowly disappearing for
America's workers, and retirees who have it will be paying more," Kaiser
Foundation President Drew E. Altman said.
The Kaiser/Hewitt study, the third joint survey since 2002, analyzed responses
from 333 large private-sector firms (1,000 or more employees) that offer retiree
health benefits and was conducted from May to September 2004.
The survey comes at a time when fewer employers are offering retiree health
benefits and their costs are an issue in labor negotiations. In addition, many
firms are weighing potential options in anticipation of the new Medicare drug
benefit to take effect in 2006.
Changes in retiree benefits
Eight percent of employers surveyed said that, in 2004, they had eliminated
subsidized health benefits for future retirees. For 2005, only a small fraction
of firms (1 percent) said they are likely to terminate subsidized coverage for
current retirees, but 11 percent said they are likely to terminate coverage
for future retirees. Most of these terminations are expected to affect new hires
Surveyed employers reported that they have made or plan to make the following
changes to control costs:
- 79 percent increased their retirees' contributions for premiums in
the past year, and 85 percent expect to do so in the coming year;
- 53 percent increased copayments or coinsurance for prescription drugs in
the past year, and 49 percent expect to do so in the coming year;
- 37 percent raised deductibles for health care services in the past year,
and 43 percent expect to do so in the coming year;
- 29 percent raised out-of-pocket limits on retirees' obligations in
the past year, and 37 percent expect to do so in the coming year; and
- 13 percent changed their plans in the past year to offer retirees access
to group health benefits with retirees paying 100 percent of the costs, and
18 percent expect to do so in the coming year.
Overall, more than half of surveyed employers (54 percent) have imposed financial
caps on their firms' contributions to at least one retiree health plan
offered in 2004. Kaiser notes that caps have become more common since changes
in Financial Accounting Standards Board rules in the early 1990s required firms
to account for retiree health obligations on an accrued basis. Such caps often
require retirees to absorb a greater share of costs once the cap is reached,
although some firms report taking steps to soften the impact of the cap on retirees
by offering additional, lower-cost plan options.
For firms that have a cap on their largest health plan for retirees who are
too young to receive Medicare, 53 percent have already hit the cap and 28 percent
anticipate hitting the cap in the next one to three years. For firms with a
cap on their largest retiree health plan for Medicare-eligible retirees, 56
percent have already hit it and another 27 percent anticipate hitting the cap
in the next one to three years.
Employer responses to the Medicare drug law
The Medicare Modernization Act of 2003 (MMA) created a new Medicare drug benefit
to begin in 2006 and established financial incentives for businesses to continue
to provide drug coverage to their Medicare-eligible retirees. Retiree coverage
was a key issue in crafting the legislation because of concerns that the new
drug benefit could accelerate the erosion of employer-sponsored coverage.
Under the new law, employers have multiple options for providing drug coverage
to their retirees. Firms that provide coverage at least as generous as that
available through Medicare will be eligible for tax-free subsidies equal to
28 percent of drug costs between $250 and $5,000 per retiree in 2006. The Centers
for Medicare and Medicaid Services has estimated the average subsidy at $611
per eligible retiree.
The majority of surveyed employers (69 percent) said their firm's current
prescription drug benefit is more generous than the standard Medicare benefit,
while 4 percent said their plan was equal in value, and 5 percent said their
plan was less generous. The remaining 22 percent said they did not know.
When asked about their likely course of action for their largest group of Medicare-eligible
- 58 percent of responding firms said they are likely to continue to offer
prescription drug benefits and accept the tax-free subsidy created by the
MMA. Of these employers, 85 percent said they plan to retain current benefit
- 17 percent of responding firms said they are likely to offer prescription
drug coverage as a supplement to the Medicare prescription drug plan;
- 8 percent of responding firms said they would discontinue drug coverage;
- The remaining firms either said they did not know which strategy they are
likely to choose (13 percent) or are planning a different strategy (4 percent).
One in three (34 percent) surveyed firms said they evaluated the financial
impact of the MMA. Of those companies, 15 percent expect a "significant"
reduction (at least 20 percent) in their annual, before-tax accounting costs
as a result of the law; 34 percent expect a "moderate" reduction (6
percent to 19 percent); and 25 percent expect a "nominal" reduction
(up to 5 percent) or none at all. The remaining 26 percent of firms did not
know or report the expected financial impact of the law.
Nearly three out of four surveyed employers (72 percent) said they are likely
to provide age 65+ retirees with educational materials about the Medicare drug
benefit. Such efforts could help ease the transition for retirees as the MMA
"With the MMA deadline only a year away, employers are signaling their
intent to stay the course, at least in 2006. A large majority are planning to
continue offering retiree coverage, with most of these planning to accept the
28 percent subsidy for Medicare-eligible retirees," said Frank McArdle,
Ph.D., manager of Hewitt's Washington, D.C., research office. "We
expect that employers will continue to assess their options after the forthcoming
regulations are issued and as additional information emerges about the marketplace
for prescription drug plans, which could result in future strategy changes."