RETIREE BENEFIT CUTBACKS

Even the nation's largest employers are cutting back on their retiree health care plans by terminating plans or asking retirees to pay more of the costs, a new study shows.

Among 597 companies with at least 1,000 employees tracked by benefit consultant Hewitt Associates L.L.C., 87% of the organizations offered health care plans to retirees 65 and older in 1996, down from 92% in 1991. During the same period, the percentage of employers requiring retirees to pay part or all of the premiums climbed to 88% from 77%.

In addition, while virtually no employers in 1991 placed a financial cap on plan spending-such as by placing limits on employer contributions to a plan-39% did so in 1996.

These findings are reported in a survey that Hewitt conducted for the Kaiser Family Foundation, an independent health care philanthropy, and released last week in New York.

The Hewitt survey is only the

latest in a series of reports detailing the decline of employer-provided health care coverage for retired workers.

A survey released earlier this year by A. Foster Higgins & Co. Inc., now part of William M. Mercer Inc., found that the percentage of employers offering health care coverage to retirees under 65 fell to 40% in 1996 from 46% in 1993, while during the same period, the percentage of employers offering coverage to retirees 65 and older dropped to 33% from 40%.

The percentage of employers offering retiree health care coverage is much lower in the Foster Higgins study because it surveyed many more smaller employers than Hewitt; small companies are less likely to provide coverage than the biggest ones.

The cutbacks are continuing: Sears, Roebuck & Co., the nation's No. 2 retailer with more than $34 billion in revenues, last month said it will stop contributing to a retiree health care plan for employees 65 and older who retire after 1999 (BI, Sept. 29).

More changes to plans could be in the offing, the Hewitt survey notes.

"The environment may soon be ripe for another wave of retiree benefit changes, triggered by a number of factors causing employers to examine retiree health programs," the study says.

For example, some employers placed caps on how much they would spend on their retiree health care plans. A company, for example, could place a cap equal to 125% of 1997 costs on how much it will spend next year.

As companies approach these caps, they have to decide whether they will raise them or stick with them, according to the study.

"Most employers would agree that raising the cap once may be viewed as acceptable. However, raising the cap more than once may raise the issue of whether the cap is 'real' from an auditor's perspective," according to the study.

In addition, as more employers have successfully controlled employees' health care costs by moving workers to managed care plans from traditional indemnity plans, they now will be examining how to extend managed care plans to retirees.

More employers are doing just that. The Hewitt study-citing figures from the Foster Higgins survey-says the percentage of employers offering so-called Medicare risk health maintenance organizations climbed to 38% in 1996 from just 7% in 1993.

Under these arrangements, the government gives HMOs a fixed payment rate. HMOs in turn agree to provide the same benefits to retirees that Medicare offers.

If retirees move into risk HMOs with their rich benefit programs and out of the traditional Medicare program, employers can cut costs significantly, as the retirees likely no longer will need the benefits offered by the corporate Medicare supplemental plans, the study noted.

For example, if as many as 25% of a company's retirees move to a Medicare risk HMO, the company may achieve accounting cost reductions of between 10% and 15%, according to the Hewitt study.

Even if the employer agrees to pay a portion of the premium-if any-charged by Medicare risk HMOs to give retirees an incentive to move into the HMO, "Risk HMOs can be a bargain" given that the average employer plan offering post-65 retiree coverage costs in excess of $100 per month per beneficiary, Hewitt notes.

By contrast, other much-discussed changes in the Medicare program could send employers' retiree health care costs soaring.

The most significant and costly proposed change would be raising the eligibility age for Medicare to 67 from 65. The U.S. House of Representatives approved such a change as part of budget legislation but agreed to drop the proposal in the face of Senate opposition.

But the issue of a higher Medicare eligibility age is unlikely to go away.

A national commission that will make recommendations to ensure Medicare's long-term solvency is charged with looking at a higher Medicare eligibility age.

Raising the Medicare eligibility age to 67 could increase employers' health care costs per retiree by up to 400%, depending on plan design. That is because health care plan costs for retirees not eligible for Medicare average about $4,000 per retiree, compared with an average of $1,350 for retirees who are eligible for Medicare, a reflection of how much coverage Medicare provides.

Faced with such significant cost increases from a higher Medicare eligibility age, more employers might eliminate their retiree health care plans, warns Walter Maher, director of public policy in the Washington office of Chrysler Corp.

"Medicare reform is a serious and necessary job, but policymakers should be concerned about any unintended consequences" from their actions, Mr. Maher said.

Free single copies of "Retiree Health Trends and Implications of Possible Medicare Reforms," are available from The Kaiser Family Foundation at 800-656-4533. Request Document 1318