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Employers still taking subsidy for retiree Rx

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Most large employers in 2007 will continue taking a federal subsidy that is available to organizations offering retiree prescription drug coverage that meets a certain level, according to a survey.

Nearly 80% of 302 large employers surveyed by the Kaiser Family Foundation and Hewitt Associates Inc. said the organizations will take the subsidy, which is available to employers that retain prescription drug coverage that is at least equal to Medicare Part D benefits.

The subsidy provides 28% of each retiree's prescription drug costs between $250 and $5,000 as tax-free reimbursement to employers.

The percentage of large employers that expect to take the subsidy next year is almost unchanged from this year, when Medicare was expanded to cover prescription drug costs and the employer drug cost subsidy went into effect.

Many benefit experts predicted the percentage of employers taking the subsidy would quickly trail off in favor of what could be more cost-effective strategies, such as providing drug benefits through a plan that supplements Part D or dropping drug coverage and paying premiums for so-called Medicare Advantage plans that provide coverage for prescription drug and other health care-related expenses.

Such a shift has yet to develop for several reasons, said Frank McArdle, a Hewitt consultant in Washington and one of the authors of the survey. One reason employers are continuing to take the subsidy is that they see it as the least disruptive approach, allowing them to offer the same coverage to retirees as they did previously, Mr. McArdle said.

In addition, employers--based on prior experience--aren't sure about the long-term viability of other approaches, such as shifting retirees to Medicare Advantage plans. Such plans could become less attractive to retirees if, for example, Congress cuts funding for the Advantage plans, something that has occurred previously, Mr. McArdle noted.

Other employers, having previously put a lot of time and effort into doing the necessary paperwork to receive the drug subsidy, are reluctant, at least for now, to analyze other approaches, said Dale Yamamoto, Hewitt's chief health care actuary in Lincolnshire, Ill.

Still, down the road, many employers aren't certain whether they will continue to design their retiree prescription drug plans to qualify for the 28% subsidy.

Among the large employers that took the subsidy this year, 48% said it was very likely they would do so in 2008, but only 21% said it was very likely they would in 2010.

Meanwhile, the cost of retiree health care plans continues to climb, though at a much slower rate than recent years. Surveyed employers estimate their retiree health plans' cost increased an average 6.6% in 2006, down from an average 10.3% rise in 2005, Kaiser/Hewitt found in the survey.

Responding to those increases, 74% of employers in 2006 increased premium contributions for pre-Medicare eligible retirees, while 58% did so for Medicare-eligible retirees.

Additionally, 34% raised cost-sharing requirements, such as higher deductibles, for pre-Medicare eligible retirees, and 24% boosted cost-sharing requirements for Medicare-eligible retirees.

Copies of "Retiree Health Benefits Examined, Findings from the Kaiser/Hewitt 2006 Survey on Retiree Health Benefits," and accompanying materials, are available at www.kff.org.