Employers Keep Cost Shifting Health Expenses to Retirees

December 14, 2004 (PLANSPONSOR.com) - The trend of companies cost-shifting health-care costs to their retirees is expected to continue in 2005, a new survey found.

A news release from the Kaiser Family Foundation and Hewitt Associates said their survey of many of the nation’s largest employers found that firms providing retiree health benefits experienced cost increases of approximately 12.7% in 2004, with employers and retirees sharing these cost increases at most firms.

The survey also found that a typical worker under age 65 who retired in 2004 would pay $2,244 annually in premiums ($4,644 with spousal coverage) – a whopping 24% 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) – 27% more than in 2004.

“The prospects for retiree health coverage are slowly disappearing for America’s workers, and retirees who have it will be paying more,” said Foundation President Drew Altman in the news release.

For some retirees, the coverage has already gone away. The survey found that 8% 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%) said they are likely to drop subsidized coverage for current retirees, but 11% said they are likely to terminate coverage for future retirees.

Containing Costs

Employers are still scrambling to control their health coverage costs, according to the survey:

  • 79% upped their retirees’ contributions for premiums in the past year and 85% expect to do so in 2005
  • 53% increased copayments or coinsurance for prescription drugs in the past year and 49% expect to do so in 2005
  • 37% raised deductibles for health care services in the past year and 43% expect to do so in 2005
  • 29% raised out-of-pocket limits on retirees’ obligations in the past year and 37% expect to do so in 2005
  • 13% changed their plans in the past year to offer retirees access to group health benefits with retirees paying 100% of the costs and 18% expect to do so in 2005.

Overall, more than half of surveyed employers (54%) have imposed financial caps on their firms’ contributions to at least one retiree health plan offered in 2004. Caps have become more common since changes in Financial Accounting Standards Board (FASB) 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 those with a ceiling on their largest health plan for retirees who are too young to receive Medicare, just over half have already hit the cap and 28% 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, more than half (56%) have already hit it and another 27% anticipate hitting the cap in the next one to three years.

Under the Medicare Modernization Act of 2003 (MMA), 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% 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, according to the Kaiser/Hewitt announcement.

Working With Medicare

Nearly seven in 10 employers (69%) said their firm’s current prescription drug benefit is more generous than the standard Medicare offering, while 4% said their plan was equal, and 5% said their plan was less generous. The remaining 22% said they did not know.

When asked about their likely course of action for their largest group of Medicare-eligible retirees:

  • 58% 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% said they plan to retain current benefit levels
  • 17% said they are likely to offer prescription drug coverage as a supplement to the Medicare prescription drug plan
  • 8% said they would discontinue drug coverage
  • The remaining companies either said they did not know which strategy they are likely to choose (13%) or are planning a different strategy (4%).

The Kaiser Family Foundation/Hewitt Associates 2004 Survey on Retiree Health Benefits reports findings from a survey of 333 large private-sector firms (with 1,000 or more employees) that currently offer health benefits to retirees. These firms represent 32% of all Fortune 100 companies and 20% of all Fortune 500 companies, employ 6.5 million employees and have 3 million retirees. The companies provide retiree health benefits to 4.9 million retirees and spouses, including 3.5 million who are Medicare-eligible. The survey was conducted online between May and September 2004.The report and related materials are available online at http://www.kff.org/medicare/med121404pkg.cfm .