SURVEY FINDS BUSINESSES AND RETIREES HIT WITH DOUBLE-DIGIT INCREASES IN RETIREE HEALTH COSTS IN 2004, WITH HIGHER PREMIUMS LIKELY IN FUTURE

Few Employers Say They Will Drop Coverage In 2006 When Medicare Drug Law Is Implemented

Washington, D.C. – As businesses 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 a new survey of many of the nation’s largest employers conducted by the Kaiser Family Foundation and Hewitt Associates.

The survey found that 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. 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) – 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) – 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,” Foundation President Drew E. Altman, Ph.D., 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

The survey found that 8 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 only.

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. 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 retirees:

• 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 levels;
• 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; and
• 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 is implemented.

“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.”

The report and related materials are available online at http://www.kff.org/medicare/med121404pkg.cfm . An audiocast of today’s Washington briefing on the survey will be available on the site by 5 p.m. EST.

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The Kaiser Family Foundation is a non-profit, private operating foundation dedicated to providing information and analysis on health care issues to policymakers, the media, the health care community, and the general public. The Foundation is not associated with Kaiser Permanente or Kaiser Industries.

With more than 60 years of experience, Hewitt Associates (NYSE:HEW) is the world's foremost provider of human resources outsourcing and consulting services. The firm consults with more than 2,300 companies and administers human resources, health care, payroll and retirement programs on behalf of more than 300 companies to millions of employees and retirees worldwide. Located in 35 countries, Hewitt employs approximately 19,000 associates. For more information, please visit www.hewitt.com .