Retiree Health Trends and Implications of Possible Medicare Reforms
Health care benefits had been offered to active employees for a long period of time before health coverage became a retiree benefit offered by employers. The key event that made employer-sponsored retiree health care a possible benefit for retirees was the enactment of Medicare in 1965. It was then felt possible to provide a widely desired benefit at a relatively low cost, since the Medicare program would pay the majority of the costs.
Millions of Retirees Have Employer-Sponsored Coverage
Based on the 1995 Medicare Current Beneficiary Survey5 analysis by Physician Payment Review Commission (PPRC), about 12 million individuals (37 percent of Medicare aged and disabled beneficiaries) have employer-provided supplemental coverage, including about 2 million with employer-provided coverage and Medigap. Retiree Health Is a Highly Valued Medicare Supplement
As with other matters related to retirement, the appreciation of retiree health benefits increases with age. For example, based on a Hewitt database of employee surveys, there is a twelve-fold increase in value assigned to retiree health care benefits for employees age 55 and over compared to the group age 25 to 34.6
The availability of employer-provided coverage is more critical for the pre-65 retirees because they will generally not have access to other insurance or it will be very expensive for them to purchase, if it is available at all. Post-65 retirees at least have Medicare if they have no other health insurance.
Even Medicare, however, provides a relatively low level of benefit when compared to the typical employer plan for active employees. Comparing the Medicare level of benefits to 250 large employers participating in the 1996 Hewitt Health Value InitiativeTM who offer indemnity type benefits, the Medicare design falls in the lowest quartile measured by plan value (18th percentile). That is, 82 percent of the indemnity plans offered by large employers to active employees provide richer or better benefit levels than traditional Medicare. Most of the employers participating in the 1996 Hewitt Health Value Initiative have more than 5,000 employees. Employers with fewer employees will tend to provide a lower level of benefit.
Assuming that the typical employer medical plan considers about 65 percent of total health care costs as a cost covered by the medical plan (excluded costs include items such as over-the-counter drugs, dental care and eye glasses)7, and that the average indemnity medical plan reimburses about 83 percent of covered costs8, the typical employer plan will pay 54 percent (0.83