EMPLOYERS FACE HIGHER COSTS UNDER MEDICARE PROPOSALS

WASHINGTON-Legislation passed last week by a Senate panel to shore up the financially tottering Medicare program would mean higher health care costs for employers, especially those with retiree health care plans.

In some cases, costs to employers would double.

Medicare-related provisions in a broad budget package approved by the Senate Finance Committee would:

Gradually increase to 67 from 65 the age in which individuals are eligible for Medicare. That increase in eligibility age would be phased in beginning in the year 2003 and slowly increase until it hit 67 in 2027. The schedule for raising the Medicare eligibility age would be the same as the one Congress approved in the early 1980s for eligibility for full Social Security retirement benefits.

Link for the first time the level of Medicare benefits with retiree income. Under a new means test, individual retirees with incomes of $50,000, and couples with incomes of $75,000, would be subject to a $540 deductible on Medicare Part B, which covers physician expenses. Deductibles would rise with retirees' income and top out at more than $2,000 for the most affluent.

That would be a radical change to Medicare's current design, in which retirees-regardless of income-pay the same flat $100 Part B deductible.

Increase to 30 months from 18 months employers' responsibility to pay the health care claims of employees with end-stage renal disease before Medicare becomes the primary payer.

These provisions are part of budget reconciliation legislation the Finance Committee approved last week.

A related package that the committee also approved last week contains a number of pension provisions that would:

Increase the threshold in which employers can "cash out" the pension benefits of employees terminating employment. Under current law, employers can cash out terminating pension plan participants if the present value of their accrued benefits is less than $3,500. The Finance Committee bill would raise the cash out threshold to $5,000.

Employers welcome this change because cashing out former employees means that companies no longer have to pay premiums to the Pension Benefit Guaranty Corp. on behalf of those participants or keep sending annual pension plan reports to those individuals.

Require employees in 401(k) plans to obtain spousal consent to obtain a lump-sum payment. If spousal consent is not obtained, a 401(k) plan distribution would have to made in the form of a periodic payment.

Such a requirement would add yet more paperwork burdens on employers, said James Klein, president of the Assn. of the Private Pension & Welfare Plans in Washington.

Increase to 15% from 10% the federal excise tax for employers that engage in prohibited transactions under the Employee Retirement Income Security Act.

The Finance Committee bill also would permanently extend the tax-favored status of employer-paid educational assistance benefits.

But the Medicare provisions of the Finance Committee package would have the most impact on benefit programs.

Raising the Medicare eligibility age to 67 from 65 by itself could double retiree health care costs for some employers. The biggest impact would be on those whose plans provide coverage until retired workers become eligible for Medicare.

For example, if workers now retire on average at age 63, an employer offering health care coverage only until retirees are eligible for Medicare would be liable to provide coverage for two more years, a doubling of its current liability.

"Bang, you really get hit," said Sylvester Schieber, a consultant and director of Watson Wyatt Worldwide's Research and Information Center in Bethesda, Md.

"It is a direct cost shift from Medicare to employers' retiree health care plans," said Mary Case, a principal with The Kwasha Lipton Group in Fort Lee, N.J.

For employers currently offering health care coverage for retired workers both before and after they are eligible for Medicare, the cost increases would be smaller but still could be in the range of 10% to 20%, said Anna M. Rappaport, a principal with William M. Mercer Inc. in Chicago.

Regardless of the exact amount, raising the eligibility age for Medicare would have a dramatic effect on employers' health care costs because Medicare now shoulders so much of the cost.

For example, an A. Foster Higgins & Co. Inc. survey found that last year health care plan costs for retirees not eligible for Medicare averaged $5,210 per retiree. By contrast, the cost of covering a Medicare-eligible retiree averaged $1,874, a reflection that Medicare pays the lion's share of hospital and physician bills for beneficiaries.

Linking deductibles to retirees' incomes also would boost costs for employers whose post-employment health care plans are integrated with Medicare.

Employers would take a direct hit if, for example, their health care plans were designed to automatically pick up physician costs not paid by Medicare. While a means test for Medicare deductibles also would shift costs to many employers with retiree programs, the overall cost impact would be relatively modest given the small percentage of retirees whose incomes exceed $50,000 a year.

Still, if these proposals are enacted into law, employers likely will look even closer at how they can control retiree health care costs.

"Many employers would have to do something; the cost shift is simply too great," said Joe Martingale, a principal with Towers Perrin in New York.

One design option that would protect employers from Medicare cost shifts would be a defined contribution plan-type approach in which an employer's liability for retiree health care coverage is limited to a specific dollar amount, Mr. Martingale noted.

The political outlook for a higher Medicare eligibility age or linking deductibles to retiree income is unclear. Neither proposal was in a Medicare package earlier passed by the House Ways and Means Committee, and the White House already has signaled its opposition to both the higher Medicare eligibility age and means testing for Medicare deductibles.

"Politically, these are tough proposals," said Ms. Rappaport.

But Mr. Schieber says a higher eligibility age for Medicare could attract support from both conservative and liberal lawmakers.

Conservatives might support the proposal for ideological reasons, while liberals might come on board because they think that unless the cost of entitlement programs, such as Medicare, are reined in, little room will be left in the federal budget for other programs they favor, he said.