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Survey Finds Increasing Health Costs for Retirees and Continued Erosion of Benefits
With Sustained Cost Increases, One in Three of All Surveyed Employers Have Hit or
Will Soon Hit Cap on Retiree Health Obligations
Washington, DC – In a new survey of some of the largest U.S. employers – conducted prior to passage of the new Medicare prescription drug legislation – 10% say they eliminated subsidized health benefits for future retirees in the past year, while 20% say they are likely to terminate retiree health coverage for future retirees in the next three years. These changes primarily affect new hires, rather than current retirees. The study also finds that 71% of surveyed firms increased retiree contributions to premiums in the past year, and 86% plan to increase such contributions within the next three years. The survey of large, private-sector employers was conducted and analyzed by the Kaiser Family Foundation and Hewitt Associates.
“Based on current trends, we can expect that fewer retirees will have health coverage in the future and those who do will be paying more for their health care,” said Drew Altman, Ph.D., president and CEO of the Kaiser Family Foundation.
Employers are an important source of health insurance coverage for workers who retire before they are eligible for Medicare (“pre-65 retirees”) and for retirees who have Medicare and rely on retiree coverage to fill in Medicare’s gaps (“age 65+ retirees”). For pre-65 retirees, employer-plans are typically the primary and sole source of health insurance coverage, while for age 65+ retirees, employer plans generally supplement Medicare, helping to pay for benefits, such as prescription drugs, that are not currently covered, and assisting with cost-sharing requirements under Medicare.
The 2003 study, the second survey on retiree health coverage conducted by Kaiser and Hewitt, was conducted between June and September 2003 with 408 large private-sector firms (1,000 or more employees) that offer retiree health benefits, including 45% of all Fortune 100 companies and 30% of all Fortune 500 companies. Complete survey findings are presented in a new report, Retiree Health Benefits Now and in the Future, available at http://www.kff.org/medicare/011404package.cfm. An article based on the survey findings appears in today’s online issue of the journal Health Affairs at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.7.
Firms’ Retiree Health Care Costs Continue to Rise
Among surveyed employers, the total cost for employers and retirees for health benefits increased by an estimated 13.7%, from $18.1 billion in 2002 to an estimated $20.6 billion in 2003, to provide coverage to pre-65 and age 65+ retirees and their dependents.
Annual retiree health care costs vary widely by firm size from an average $4.1 million for a company with 1,000-4,999 employees to an average $156.1 million for a company with 20,000 or more employees. Among surveyed firms, retiree health costs represent more than a quarter of the total estimated cost of health coverage for active workers, retirees and dependents.
Nearly half of all surveyed firms (46%) have placed “caps” (pre-determined limits) on their future financial retiree health obligations, prompted by rising health care costs and the Financial Accounting Standards Board (FASB) rules. Financial caps are often a specific dollar amount on what the employer will contribute, e.g., no more than two times a certain year’s cost or a specified amount per year of service. The use of caps can limit the liability of employers by requiring retirees to absorb a greater share of costs when spending for retiree health exceeds a pre-determined amount. One third of all surveyed firms offering health benefits to pre-65 retirees and age 65+ retirees have either hit their cap or expect to hit their cap on retiree health obligations within the next one to three years.
"Offering retiree health care benefits is a delicate balancing act for employers," said Frank McArdle, Ph.D., manager of Hewitt's Washington, DC, Research Office. "Double digit cost increases, shifting demographics, financial caps, global competition and the impact on the bottom line are driving large companies to reexamine their retiree health programs and make changes."
Retirees Are Paying More for Health Care
Faced with double-digit cost increases for retiree health, surveyed employers have made a number of changes in the past year that directly impact costs for retirees:
• Nearly three-quarters (71%) of large-private sector firms increased retiree contributions to premiums.
- For new retirees, between 2002 and 2003, retiree contributions to premiums increased by 20% for pre-65 retirees and by 18% for age 65+ retirees.
- In 2003, pre-65 retirees paid an average of $166 for health coverage and employers paid an average of $261, while age 65+ retirees paid $83 per month and employers paid an average of $129.
• 57% increased drug
copayments/coinsurance and 32% imposed three-tiered drug copayments.
• 53% increased general cost-sharing requirements.
• 34% increased deductibles.
• 29% increased out-of-pocket limits.
• 26% increased hospital copayments.
Yet, despite efforts by most large private-sector employers to cut costs, 12% of employers said they added or improved retiree health coverage over the past year.
Retirees Will Experience Higher Costs in the Future
Looking to the future (again, prior to enactment of the new Medicare legislation), continued cost-shifting to retirees appears to be on the horizon as employers look for strategies to rein in health costs. Nearly two-thirds (64%) of firms reported that CEOs are very concerned about retiree health costs and employers expect to implement the following changes sometime in the next three years:
• 86% of surveyed firms say they are likely to increase contributions to premiums and 70% expect to increase premiums for dependent coverage.
• 81% of companies expect to raise cost-sharing obligations.
• 75% say they are likely to increase deductibles.
• 69% say they will likely increase physician copayments.
• 65% say they will raise out-of-pocket limits.
• 59% say they will increase hospital copayments and 54% are likely to increase cost-sharing for out-of-network care.
Almost all of the survey respondents (98%) said they were unlikely to eliminate prescription drug coverage in the next three years (again, when asked prior to passage of the Medicare drug bill), although the majority of large employers said they were likely to increase drug copayments or coinsurance for pharmaceuticals (85%).
Employer Coverage Plays Critical Role in Drug Coverage
Employer-sponsored retiree health benefits provide substantial assistance to retired workers. Typically, retiree health benefits have a $250 deductible for retirees and $500 for retirees and spouses, and out-ofpocket spending limits, with the deductible counting toward the out-of-pocket limit for the majority of firms.
With regard to prescription drugs – a key issue in the recent Medicare debate – 9 in 10 large employers (93%) currently provide prescription drug coverage for retirees and the majority (64%) says drug benefits are integrated into the overall plan design. Fewer than one in ten surveyed employers (8%) have separate benefits limits on the amount the plan pays for prescription drugs; one quarter (26%) have a separate
prescription drug deductible, in contrast to the new Medicare legislation which has a separate limit on the drug benefit and a separate drug deductible.
“Prescription drug benefits offered by employers to retirees tend to be much more generous than what seniors can expect to get from Medicare if they sign up for the new drug benefit when the new law goes into effect,” said Tricia Neuman, Sc.D., vice president, Kaiser Family Foundation. “A big question is whether the new Medicare drug law will encourage employers to stay in the game.”
Because the survey was conducted before final details of the Medicare prescription drug legislation were decided, the survey did not ask employers to respond to specific provisions of the legislation. The new Medicare legislation offers incentives to encourage employers to maintain retiree health coverage for Medicare-eligible retirees, including $89 billion in both direct subsidies and tax benefits. This survey
provides a baseline prior to implementation of the new Medicare law. Future work will be needed to assess employer responses to the new legislation.
|This study reflects survey responses of 408 large private-sector employers that currently offer retiree health benefits. The majority of participating firms are multistate employers (90 percent) and are publicly traded (72 percent), and they represent a wide range of manufacturing (45 percent) and nonmanufacturing (55 percent) industries. The survey includes responses from 173 firms (42.4%) with 1,000 to 4,999 employees, 138 firms (33.8%) with 5,000 to 19,999 employees, and 97 firms (23.8%) with 20,000 or more employees. Together, these companies have 8.3 million employees and 3.6 million retirees, and provide health benefits that affect the lives of approximately 20.8 million employees and dependent family members and 5.9 million pre-65 and age 65+ retirees and dependents. Employers in the sample provide health benefits to an estimated 3.9 million Medicare-eligible retirees and their spouses, representing about a third of the estimated 12 million nonfederal retirees with employer health coverage. The survey was conducted online between June 24 and September 12, 2003. All premium and benefit design information reflects responses from surveyed employers about retiree health plans with the largest number of enrolled retirees. Premium information is for individuals who retire on or after January 1, 2003, referred to as “new retirees.” Total premiums and retiree contributions to premiums are weighted by firm size and by the number of retirees in the largest employer health plan.|
A webcast of the briefing held to announce the findings will be available on January 14, 2004 at 5 p.m. at http://www.kaisernetwork.org/healthcast/kff/14jan04. The survey report and summary of findings, as well as the 2002 survey findings, are available at http://www.kff.org/medicare/011404package.cfm. The Kaiser Family Foundation is a non-profit, private operating foundation dedicated to providing information and analysis on health care issues to policymakers, the media, the health care community, and the general public. The Foundation is not associated with Kaiser Permanente or Kaiser Industries. Hewitt Associates (www.hewitt.com) is a global human resources outsourcing and consulting firm. Hewitt provides service from offices in 38 countries.
©2004 Project HOPEThe People-to-People Health Foundation, Inc.