Retiree Health Benefits to Cost More – If They Exist At All

According to the poll by the Kaiser Family Foundation and Hewitt Associates, one in 10 firms dropped subsidized health benefits for future retirees in the last year while another 20% are likely to follow suit over the next 36 months, a news release indicated. Not only that, but a whopping 71% of companies made the retirees shell out more towards health premiums in the last year while 86% say they’ll do so over the next three years.

For new retirees, between 2002 and 2003, retiree contributions to premiums increased by 20% for pre-65 retirees and by 18% for age 65+ retirees. In 2003, pre-65 retirees paid an average of $166 for health coverage and employers paid an average of $261, while age 65+ retirees paid $83 per month and employers paid an average of $129. Further:

• 57% increased drug copayments/coinsurance and 32% imposed three-tiered drug copayments
• 53% increased general cost-sharing requirements
• 34% increased deductibles
• 29% increased out-of-pocket limits
• 26% increased hospital copayments.

In fact, everyone chipping in had to pay more because the overall tab was higher. Among surveyed employers, the total cost for employers and retirees for health benefits increased by an estimated 13.7%, from $18.1 billion in 2002 to an estimated $20.6 billion in 2003, to provide coverage to pre-65 and age 65+ retirees and their dependents.

Also, annual retiree health care costs vary widely by firm size from an average $4.1 million for a company with 1,000 to 4,999 employees to an average $156.1 million for a company with 20,000 or more employees. Among surveyed firms, retiree health costs represent more than a quarter of the total estimated cost of health coverage for active workers, retirees, and dependents.

Capping Costs

For nearly half of all surveyed firms (46%), at least part of the answer has come through imposition of a cost cap – a pre-determined limit on their future financial retiree health obligations. Financial caps are often a specific dollar amount on what the employer will contribute – for example, no more than two times a certain year’s cost or a specified amount per year of service, according to Kaiser and Hewitt.

The use of caps can likewise limit the liability of employers by requiring retirees to absorb a greater share of costs when spending for retiree health exceeds a pre-determined amount. One third of all surveyed firms offering health benefits to pre-65 retirees and age 65+ retirees have either hit their cap or expect to reach their limit on retiree health obligations within the next one to three years.

Looking to the future, continued cost-shifting to retirees appears to be in store as employers look for strategies to rein in health costs. Nearly two-thirds (64%) of firms reported that CEOs are very concerned about retiree health costs and employers expect to try these changes over the next 36 months:

• 86% of surveyed firms say they are likely to increase contributions to premiums and 70% expect to increase premiums for dependent coverage
• 81% of companies expect to raise cost-sharing obligations
• 75% say they are likely to increase deductibles
• 69% say they will likely increase physician copayments
• 65% say they will raise out-of-pocket limits
• 59% say they will hike hospital copayments and 54% are likely to push up cost-sharing for out-of-network care.

Drug Benefits

Almost all of the survey respondents (98%) said they were unlikely to eliminate prescription drug coverage in the next three years (again, when asked prior to passage of the recently approved Medicare drug bill), although the majority of large employers said they were likely to increase drug copayments or coinsurance for pharmaceuticals (85%).

Regarding prescription drugs – a key issue in the recent Medicare debate – nine in 10 large employers (93%) currently provide prescription drug coverage for retirees and the majority (64%) says drug benefits are integrated into the overall plan design. Fewer than one in ten surveyed employers (8%) have separate benefits limits on the amount the plan pays for prescription drugs; one quarter (26%) have a separate prescription drug deductible, in contrast to the new Medicare legislation which has a separate limit on the drug benefit and a separate drug deductible.

Generally, employers are an important source of health insurance coverage for workers who retire before they are eligible for Medicare (“pre-65 retirees”) and for retirees who have Medicare and rely on retiree coverage to fill in Medicare’s gaps (“age 65+ retirees”), Kaiser and Hewitt advised. For pre-65 retirees, employer-plans are typically the primary and only source of health insurance coverage, while for age 65+ retirees, employer plans generally supplement Medicare, helping to pay for benefits, such as prescription drugs, that are not currently covered, and assisting with cost-sharing requirements under Medicare.

This study reflects survey responses of 408 large private-sector employers that currently offer retiree health benefits. The majority of participating firms are multistate employers (90%) and are publicly traded (72%), and they represent a wide range of manufacturing (45%) and non-manufacturing (55%) industries. The survey includes responses from 173 firms (42.4%) with 1,000 to 4,999 employees, 138 firms (33.8%) with 5,000 to 19,999 employees, and 97 firms (23.8%) with 20,000 or more employees.

The 2003 study, the second survey on retiree health coverage conducted by Kaiser and Hewitt, was conducted between June and September 2003.

The survey is at http://www.kff.org/medicare/011404package.cfm . An article based on the survey findings appears in the current online issue of the journal Health Affairs at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.7 .