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While group health care costs for active employees have been holding stable, the news is not so good for retiree health care plans.
Last year, retiree health care plan costs for employers with at least 500 employees climbed 9.5% to an average of $3,131 per retiree from $2,859 in 1994, according to the A. Foster Higgins & Co. Inc. survey. That is substantially higher than the 3.5% increase in health care plan costs for active employees during the same period.
The major reason for the surge in retiree health care costs: retirees, unlike active employees, generally have not made the shift to cost-effective managed care plans and mainly are enrolled in expensive traditional indemnity plans. For example, 69% of retirees age 65 and older and 39% of those under 65 are enrolled in traditional indemnity plans. By contrast, just 27% of active employees working for large employers are enrolled in traditional indemnity plans.
Not surprisingly, retiree health care plan costs are highest in those parts of the country where retiree enrollment in traditional indemnity plans is greatest.
For example, retiree health care plan costs for employers in the Midwest-where just 23% of retirees age 65 and older and 47% under 65 receive coverage through managed care plans-averaged $3,311 per retiree in 1995, up 12.9% from $2,932 in 1994.
By contrast, retiree health care plan costs for employers in the West-where 74% of retirees 65 and older and 87% of retirees under 65 are enrolled in managed care plans-were the lowest in the country. In 1995, retiree health plan costs for Western employers averaged $2,686 per retiree, up 2.7% from $2,616 in 1994.
Still, there are signs that retiree health care plan enrollment in managed care plans could increase. Last year, 21% of employers offered their retirees the opportunity to enroll in health maintenance organizations with Medicare risk contracts. Under a Medicare risk contract, Medicare will pay an HMO 95% of what Medicare thinks it would cost to provide the retiree with benefits covered by Medicare.
Since HMOs can operate much more efficiently than Medicare, HMOs often can afford to offer additional benefits not covered by the federal program-like prescription drug coverage-to attract retirees and still make money. With the Medicare risk contract HMOs providing additional benefits, that leaves a smaller role-and lower costs-for retiree health care plans that supplement Medicare.
"Employers that offer a retiree medical plan to supplement Medicare can reduce their benefits cost-sometimes to nothing-when a retiree joins a Medicare risk HMO," the Foster Higgins survey notes.
Some employers, though, have taken a more drastic approach to cutting retiree health care benefits: they have eliminated the plans.
Last year, 35% of employers with at least 500 employees offered a health care plan to retirees eligible for Medicare, down from 40% in 1994. Also, 41% offered retiree health care plan coverage to retired employees under 65 last year, down from 43% in 1994.
In addition, 16% of employers with retiree health care plans last year increased retiree contributions, 12% increased cost-sharing, such as through higher deductibles and coinsurance requirements, and 7% tightened eligibility requirements.
The survey provides dramatic evidence of the financial importance to employers of the federal Medicare program, which provides the bulk of health care benefits to retirees 65 and older. Retiree health care plan costs in 1995 averaged $1,803 per retiree for retired workers 65 and older covered by Medicare. By contrast, health care plan costs for retired workers under 65 averaged $5,242 per retiree.