Human Capital & Careers

The Medicare Reform Effect

In the absence of regulatory, accouting, or disclosure guidance, many companies are taking a wait-and-see approach rather than change their benefit...
Joan UrdangFebruary 6, 2004

As health-care costs increased, many companies cut back on the medical benefits they offer to their retirees. So when President Bush signed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 into law in December, some claimed the legislation would mean the end of such benefits altogether.

That’s because a provision of the act lets employers set up pretax health savings accounts (HSAs) for workers who have high-deductible plans. And, says Derek Guyton, principal at Mercer Human Resource Consulting, some companies may decide to offer HSAs instead of an outright plan for all retirees.

In spite of such predictions, however, many companies are taking a wait-and-see approach. Eastman Kodak Co., for example, which covers approximately 40,000 U.S. retirees, has seen its health-care costs for both employees and retirees increase by $121 million since 2000. But the company is not making changes to its plan just yet. “It will take us some time to sort out all of the [act’s] ramifications,” says director of worldwide benefits Rita Metras, “but we think it is a very positive move for retirees.” She argues that the act will actually encourage employers to keep their plans. The incentives for companies—such as a 28 percent subsidy for those that offer prescription-drug coverage that is “actuarially equivalent” to that offered by Medicare—make the legislation attractive, says Metras.

Companies are also waiting before making any changes because there has been little regulatory, accounting, or disclosure guidance on how the HSAs and subsidies should be treated. Although the Financial Accounting Standards Board has issued interim guidance that defers any accounting for the effects of the act, its official position is not expected until later this year.