Human Capital & Careers

Retiree Health Benefits Keep Shrinking

This year 8 percent of companies eliminated subsidized health benefits for future retirees, and another 11 percent are likely to do so, according t...
Stephen TaubDecember 15, 2004

Do retiree health benefits belong on the endangered list?

It’s starting to seem that way, judging by a survey of 333 companies with 1,000 or more employees conducted by the Kaiser Family Foundation and Hewitt Associates.

In 2004, according to survey respondents, 8 percent of companies eliminated subsidized health benefits for future retirees. Another 11 percent are likely to do so, although most of these benefit cuts are expected to affect new hires only. Only 1 percent said they are likely to terminate subsidized coverage for current retirees.

Individuals who do retain their health-care benefits should expect to shell out a lot more, the survey also found.

A typical worker under 65 who retired in 2004 will pay $2,244 annually in premiums ($4,644 with spousal coverage), or 24 percent more than a similar worker who retired in 2003. By comparison, a Medicare-eligible worker who retired in 2004 will pay $1,212 annually in premiums ($2,508 with spousal coverage), up 27 percent from 2004.

Many companies are cutting costs by asking retirees to share more of the burden:

• 79 percent increased their retirees’ contributions for premiums in the past year, and 85 percent expect to do so in the coming year;
• 53 percent increased co-payments or coinsurance for prescription drugs in the past year, and 49 percent expect to do so in the coming year;
• 37 percent raised deductibles for health care services in the past year, and 43 percent expect to do so in the coming year;
• 29 percent raised out-of-pocket limits on retirees’ obligations in the past year, and 37 percent expect to do so in the coming year.

One major issue lurking around the corner is the Medicare Modernization Act of 2003, which created a new Medicare drug benefit to begin in 2006.

The law provides incentives for companies to continue providing drug benefits to their employees. For example, employers that provide coverage at least as generous as that available through Medicare will be eligible for tax-free subsidies equal to 28 percent of the drug costs between $250 and $5,000 per retiree in 2006. The Centers for Medicare and Medicaid Services has estimated the average subsidy at $611 per eligible retiree, according to the Kaiser Family Foundation.

No surprise, then, that 58 percent of surveyed companies said they are likely to continue to offer prescription-drug benefits, and 85 percent of these employers said they plan to maintain current benefit levels. Another 17 percent said they are likely to offer prescription-drug coverage as a supplement to the Medicare prescription-drug plan. On the other hand, 8 percent said they would discontinue drug coverage.