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The majority of retirees who currently enjoy post-retirement health benefits will likely continue to do so, but they will have to pay more for them.
As employers seek to slow, or in some cases stop, the rate of growth of retiree medical costs, they are freezing their contributions and shifting any annual cost increases to retirees by hiking premium contributions, increasing copayments or raising deductibles.
While retirees of all ages are being asked to shoulder a greater share of their own health care burden, it's the pre-65 group that is adding the largest load.
According to the 2006 National Survey of Employer-Sponsored Health Plans, published by Washington-based Mercer Health & Benefits, 29% of large U.S. employers offered cover- age to pre-65 retirees in 2006 --the same as in 2005, while just 19% provided such coverage to Medicare-eligible retirees--a decline from 21% in 2005.
Retiree health benefits have been eroding steadily since 1988, when an estimated 66% of large employers--those with 200 or more employees--offered them, according to a Kaiser Family Foundation/Hewitt Associates retiree benefits study published in December.
Today, an estimated 3.8 million early retirees between 55 and 65 and their dependents are receiving post-retirement health care coverage either from their former employer or via a union plan, according to the Kaiser/Hewitt survey, which was published jointly by the Menlo Park, Calif.-based Kaiser Family Foundation and Lincolnshire, Ill.-based Hewitt Associates Inc. Employer plans also provide supplemental benefits to more than 12 million Medicare-eligible retirees, the survey found.
"Most of the employers who could get out of providing retiree health benefits have left," said Helen Darling, president of the National Business Group on Health, a Washington-based consortium of the nation's largest employers. "So those that are left are those without flexibility," such as those employers subject to labor contracts.
But terminations did occur during 2006. The Kaiser/Hewitt survey found that 1% of employers eliminated benefits for a group of current retirees age 65 or older, and 11% did so for future retirees. Though no employers reported terminating benefits for a current group of Medicare-eligible retirees, 9% eliminated them for a group of future retirees age 65 or older.
Companies seeking to cap their retiree health liabilities are more likely to drop coverage for future retirees, such as active employees younger than a certain age, said Mike Morfe, senior vp in Aon Consulting's Somerset, N.J., office.
New hires are also being cut out, said Cara Jareb, director of retiree medical at Watson Wyatt Worldwide in Washington.
A significant number of employers that have maintained retiree health benefits are freezing their annual contributions to the plans.
General Motors Corp., for example, has frozen its retiree health benefit contribution for salaried employees at 2006 levels, a company spokeswoman said.
Columbia, S.C.-based utility SCANA Corp. also put a cap on its contributions to its retiree medical plan, said Chris McSwain, director of compensation and benefits.
Such caps, which have been put in place by about half of all employers that provide retiree health benefits, are forcing retirees to pick up more of their health care tab, either through increased premium contributions or other forms of sharing costs.
The Kaiser/Hewitt survey found that 74% of employers raised retiree contributions to premiums in 2006 vs. 2005 for pre-65 retirees, while 58% did so for post-65 retirees. Moreover, 80% said they are very likely to increase retiree premium contributions in 2007.
"It's easy in the short run to control costs by putting caps on benefits. The problem is, if you don't do anything to manage the underlying problem, the cost pressures are always there. It's like putting a cap on a bottle that's trying to expand," said Ronald J. Ozminkowski, director of health and productivity research at actuary and consultant Thomson Medstat in Ann Arbor, Mich.
Mr. Ozminkowski predicts that "eventually, the market's not going to allow for those caps to work anymore. They are going to have to remove them."
So far, 61% of employers have reached their caps for post-65 retirees, while 60% have done so for pre-65 retirees, according to the Kaiser/Hewitt survey. Another 9% expect to reach their cap for post-65 retiree benefits this year, while 10% expect to do so for pre-65 retirees.
Another way employers are limiting retiree health liabilities is by using "account plans," such as health reimbursement arrangements and health savings accounts. With these accounts, employers usually deposit a preset amount that employees can use to pay for post-retirement health benefits.
For example, Daimler-Chrysler Corp. is giving its post-65 nonunion employees a fixed amount and encouraging them to shop for coverage, said Derek Guyton, a principal at Mercer Health & Benefits in Chicago.
At SCANA, post-65 retirees who retired after 1993 can stay in their employer-sponsored plan or use SCANA's annual benefit contribution to purchase coverage on their own, Mr. McSwain said.
And at GM, in lieu of providing retiree medical benefits to employees hired after 1993, the automaker is putting an additional 1% contribution into their 401(k) plans to use toward paying their post-retirement health care needs, a company spokeswoman said.
"Outside of cost-shifting, we're seeing increased use of account-based programs such as consumer-driven health plans with high deductibles and HRAs or HSAs, incorporating consumerism," said Rick McGill, a consultant and part of the national team on retiree health care at Hewitt in Atlanta.