Employers Plan More Restrictions on Retiree Medical Benefits

June 28, 2006 (PLANSPONSOR.com) - Results from Watson Wyatt Worldwide's 2006 survey on retiree medical benefits show that a significant number of employers intend to place further restrictions on medical benefit offerings for current and future retirees.

The majority (77%) of employers surveyed said they have taken the Medicare Part D subsidy in 2006 to offset retiree medical benefit costs. The survey report said these employers are also considering other long-term strategies for reducing costs.

Many employers have moved to cap their premium contributions for post-65 retirees. According to the report, nearly half of employers (47%) cap their contributions, up from 39% as reported in Watson Wyatt’s 2002 study.

The cap causes concern that employers may eventually be disqualified from receiving the federal subsidy as their plan contributions decrease and they begin to fail the actuarial equivalence test, the report said. Of those who cap premium contributions, 46% said they will fail the Medicare equivalence test within the next 14 years, 31% said they do not expect to fail at any time and 19% are unsure.

While 39% said that taking the federal subsidy provides the greatest opportunity for cost reduction, 40% said eliminating retiree medical benefits provides the greatest opportunity. However, employers continue to offer benefits because of concern over employee relations (38%), their overall benefits philosophy (28%) and concerns over potential litigation (20%).

Respondents also intend to reduce plan costs by placing further eligibility restrictions on their benefit offerings. Thirty-five percent of respondents said they plan to eliminate all benefits for retirees who enroll in a Medicare-approved prescription drug program (PDP), while 26% plan to eliminate only their employer-sponsored prescription benefits for those who take the Medicare option.

Very few employers anticipate placing no further restrictions on benefit offerings to both their future and current retirees (5% and 7%, respectively). However, future retirees, to a much greater extent than current retirees, can expect tightened eligibility requirements and more account-based options, the report said.

The study found that both future and current retirees will face newer or lower caps on their premium contributions, and 8% of employers plan to eliminate coverage for pre-65 retirees, while 14% plan to eliminate coverage for post-65 retirees.

Watson Wyatt surveyed 163 companies for their retiree medical study. More information can be found at www.watsonwyatt.com .

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