Retiree health benefits are on the endangered species
list, right up there with defined-benefit pension plans. A study last year by the Kaiser Family Foundation and Health Research and Educational Trust showed that 38% of employers with 200 or more workers offered retiree health benefits in 2003, down from 66% in 1988. And earlier this year, a survey co-sponsored by Kaiser and Hewitt Associates found that 20% of the big companies offering such benefits might eliminate them for future employees over the next three years. Consulting firm Watson Wyatt predicted a couple of years ago that by 2031, employers will be paying for less than 10% of retiree health costs.
The new wild card in this area is last year's Medicare drug law, which includes subsidies for employers intended to encourage them to continue providing drug coverage to their retirees. Some observers say that in spite of that, the law will contribute to the long-term erosion of retiree health benefits.
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Companies have to submit applications for the subsidy by the fall of 2005, and Frank McArdle, head of the Washington office of consulting firm Hewitt Associates, says that will entail a lot of work. "But it's an effort well worth making because there are several options available to employers, and each would reduce the employer's cost of providing drug coverage to retirees," he says. For example, the government is willing to pay 28% of costs to employers that provide a drug benefit that's equivalent to Medicare's. But David Cutler, a professor of economics at Harvard University, notes the gap between the 50% of drug costs that the Medicare benefit is expected to cover for retirees and the roughly three-quarters share of the cost that employers will be footing even after the subsidy. "If you just dump the retiree and say, 'Get coverage through Medicare and I'll even pay you the money,' you still only have to pay [retirees] 50%," Cutler says. "I think there's a big incentive to dump your people onto the Medicare drug benefit."
But employers are not just worried about prescription drug costs. "Companies are basically getting out of the business," and the moves to put dollar caps on retiree health benefits are merely an initial step in that strategy, Cutler claims.
Meanwhile, employees seem oblivious to the erosion in retiree health benefits. A University of Chicago study released in July showed that 59% of workers expect to get health benefits from their employer or union when they retire, and only 28% had asked their companies about retiree health benefits or been offered such information.
Ed Pudlowski, the national health and welfare practice leader at Ernst & Young, says companies should be educating their employees. That education shouldn't stop at the likely availability and cost of health benefits during retirement, but should aim to make employees better-informed healthcare consumers in general, Pudlowski says. He adds that companies are starting to see the benefit of such education. Many companies put caps on their retirement benefits some years ago, saying that they would pay only up to a certain dollar amount, with retirees paying the rest. "We've worked with a number of employers who put that in place 10 years ago and are struggling now with how to implement it because retirees are not prepared," he says. "So the client has picked up more of a share of costs than it has anticipated."
Pudlowski says that there are currently limits to employee education, though, noting that there's no source of information on the topic of healthcare that people can use the way they would check Consumer Reports to evaluate a car purchase.
Other employers are working on how to finance the continuation of their retiree health benefits. Karin Landry, a managing partner at Spring Consulting Group, says she's seeing a lot of interest in pre-funding retiree health benefits or funding them through captives. "[Companies] are saying, 'The burden's not going to go away. Let's try to fund it effectively,'" Landry says. Some of the interest in pre-funding stems from a 2003 court decision involving Wells Fargo & Co. that expanded the deductibility of pre-funding for such benefits, she adds. Meanwhile, the Department of Labor has made it easier to run employee benefits through captives, with four companies having been approved to do so to date. Using a captive in some cases can cut a company's costs by as much as 10%, Landry says.
She says that in the absence of retiree medical coverage, some companies may end up with older workers who are in poor health but can't afford to retire and lose their medical coverage. "If [companies] don't have something in place, the reality is not a pretty picture," she says. "The reality is that baby boomers, instead of retiring, will still work to get health care."
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