Employers Continue to Shift Health Costs to Retirees

November 18, 2009 (PLANSPONSOR.com) - Large U.S. employers are continuing to shift significant health coverage costs to retirees or exiting sponsored retiree health benefit programs altogether, according to Towers Perrin’s 2010 Retiree Health Care Cost Survey.

According to a press release, the survey finds that pre-65 retirees, who are not yet eligible for Medicare, will be hardest hit as they attempt to balance fixed incomes with steady increases in health coverage costs. At the same time, the survey also reveals that many employers are missing significant opportunities to deliver retiree benefit value while saving money and improving program effectiveness.

Among surveyed employers, the total annual cost for pre-65 retiree health coverage has increased 6%, to $7,596 for a single retiree in 2010, compared to $5,184 for a single active employee. The 2010 cost for family coverage (for the increasing group of retirees that still have dependent children) is $19,596 — nearly 31% more than comparable costs for family coverage for active employees.

In plans that offer an employer subsidy (many do not), the subsidy covers less than half of the total cost, on average, and typically does not increase to keep up with inflation. The annual cost share pre-65 retirees pay to cover themselves is $3,984. Their share to cover themselves plus one dependent is $7,668, and $10,548 for themselves plus family. These costs are roughly three times higher than the cost share their active employee counterparts pay for similar coverage, the press release said.

In addition, pre-65 retirees are paying more toward their ongoing health care expenses due to cutbacks in benefit designs.

For post-65 retirees, the cost of individual plans will increase an average of 4%, to $3,840, while the cost of plans covering a retiree plus one dependent will increase to $7,848. While the relatively low increase is good news, it masks the fact that a number of employers have eliminated prescription drug coverage or substantially reduced benefits to keep cost increases in check, Towers Perrin said. These costs are, on average, double what these retirees would pay as active employees.

The Towers Perrin Retiree Health Care Cost Survey found that, among survey respondents, only 22% of companies offer some sort of subsidized retiree coverage to new hires. Another 23% offer retirees access to a company-sponsored plan, but require participants to pay the full cost (no employer subsidy). The picture is only somewhat better for current retirees and those employees already part of the company workforce — 45% of their employers provide subsidized coverage for all or some of these current and retired workers, and an additional 14% provide access-only benefits.

Towers Perrin suggests health savings accounts (HSAs) represent a tax-effective way for active employees to save for retiree medical costs and for pre-65 retirees to pay medical expenses more tax-effectively. However, the survey found only 52% of survey respondents offer employees the opportunity to participate in an HSA-qualified medical plan. The firm also suggested accessing the external marketplace for insurance products tailored to Medicare beneficiaries to increase the total dollars available to retirees due to higher levels of government funding and improved plan choice. The survey found 65% of employers have not taken advantage of this option.

The company pointed out another underutilized solution, a retiree medical savings account (RMSA), which allows employees to accumulate unused health care dollars provided in active employee plans through a health reimbursement account (HRA). Only 9% of survey respondents sponsor such accounts.