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Report Shows Employers Shifting Health Costs to Retirees

Presented this year with the option of shifting retirees to a Medicare-sponsored drug program, employers chose to keep prescription benefits in 2006, and they say they will do the same in 2007.

December 15, 2006
Related Topics: Benefit Design and Communication, Latest News
Concerns that the Medicare prescription drug benefit would lead employers to drop drug coverage for retirees this year have not materialized. Instead, employers have opted to increase the share retirees pay for their health care costs, according to a new report.

With more of the burden of health care falling on individuals, the cost of retiring is escalating, according to a report released Wednesday, December 13, by the Kaiser Family Foundation and Hewitt Associates.

“There is no precipitous drop-off in the immediate future, but at the same time retirees are paying more out of their pockets,” says Tricia Neuman, a vice president of Kaiser and co-author of the report. “Workers and people looking forward to their retirement may not be able to experience this coverage.”

Presented this year with the option of shifting retirees to a Medicare-sponsored drug program, employers chose instead to keep prescription benefits in 2006. And they say they will do the same in 2007. The Medicare drug law that went into practice earlier this year has helped employers subsidize the cost of a prescription drug benefit.

Medicare offers a tax-free subsidy to employers that provide Medicare-eligible retirees with drug coverage as an incentive to keep them from dropping coverage. In 2006, 82 percent of firms surveyed accepted the subsidy, which saved employers an average of $546 per retiree.

The report found that Medicare prescription coverage did not increase the percentage of large employers that dropped prescription coverage for retirees. According to the report, 8 percent of employers plan to drop coverage in 2007 as a result of the federal prescription drug plan for retirees, the same number as 2006.

But the Kaiser researchers said that dropping drug coverage for Medicare-eligible retirees could save employers 7 percent of their total health care costs, far outweighing the savings from the small subsidy. As the federal drug program matures, employers might opt to drop their own drug benefits.

“That could suggest that over time they could look at these alternatives,” says Frank McArdle, a co-author of the study and a principal at Hewitt Associates.

Employers looking to save on retiree health care costs are opting to require retirees to pay more for their health care. In 2006, 74 percent of employers increased the premiums that retirees under 65 must pay and 58 percent of employers raised premiums for Medicaid-eligible retirees. In 2007, 80 percent of the 302 large employers surveyed in the report plan to increase the amount individual retirees pay toward health care premiums.

A much smaller percentage of employers say they are increasing the amount retirees must pay for prescription drugs.

Taken together, the total health care cost increases individual retirees face mirror the overall rate of increase in health care costs nationally. Between 2005 and 2006, retirees under 65 faced an average annual increase in their contributions to health care of 15.1 percent. That number was 9.6 percent for retirees who leave work when they are 65 or older.

Some retirees who sign up for Medicare may end up losing their employer-sponsored health benefits. About one-third of employers say that in 2007 if a retiree signs up for a Medicare prescription drug plan, they will forfeit all of their employer-sponsored medical benefits.

Retirees will have to bear a greater burden of health care costs in the future as well. Sixty percent of employers that cap the amount they will contribute toward health care have already hit that threshold, while another 10 percent will reach it next year and another 13 percent will in the next three years.

The overall increase in cost and the slow erosion of health benefits for retirees who are not eligible for Medicare will likely encourage older workers to stay in the workforce longer, or retire but find a part-time job in order to maintain health benefits.

“We are reappraising what retirement means,” Neuman says, “and work will be a larger component of it than it has been in the past.”

Jeremy Smerd

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