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Retirees Control Their Benefits

August 1, 1993
When The Jesup Group Inc. bought Uniroyal Plastics Company Inc. in October 1986 for $110 million, it was counting on the newly acquired firm to bring in $13.5 million a year, based on information supplied by the seller.

The buyer and seller based the purchase price and funding on this amount—an amount necessary to help The Jesup Group cover not only the interest payments from the acquisition but also the acquisition's retiree benefits, pension obligations and environmental liabilities. As The Jesup Group began to total the year-end figures, however, it discovered a terrifying truth: Uniroyal Plastics had brought in less than $5 million.

For the next four years, The Jesup Group, then based in Stamford, Connecticut, sold off its operations to make ends meet, but it wasn't enough. Although the company's total annual sales in 1990 were $200 million, it was paying out $17 million a year in health-care costs alone, $14 million of which was for benefits for retirees of Uniroyal Plastics. (Employees of Uniroyal Plastics belonged to the United Rubber Workers (URW) union, which had negotiated a lifetime, fully paid medical-insurance plan for its members and their dependents.)

The high benefits costs, combined with a greatly underfunded pension plan, large environmental liabilities and an income that was much lower than had been predicted, meant financial doom for The Jesup Group. Efforts to restructure the company proved unsuccessful. In November 1991, the operations of The Jesup Group filed Chapter 11 in South Bend, Indiana.

When the case reached the courts, the interests of retirees became a major topic. While it was in financial trouble, The Jesup Group had failed to pay for many of the medical claims that retirees of Uniroyal Plastics had filed. (The plastics company had been self-insured.) Some former employees had bills that were outstanding from medical practitioners that totalled between $20,000 and $50,000, which the practitioners were unable to collect from either Uniroyal Plastics or The Jesup Group. One retiree owed nearly $150,000 in medical bills.

The court and the company's trustees appointed 25 retirees to serve on an official retirees' committee and represent the retirees' interests. The court also authorized the committee to hire legal counsel and consultants. Committee members hired Randall Light, a senior manager in the Human Resources Management Consulting Group of Crowe Chizek, based in South Bend. Light attended committee meetings and asked the retirees what they wanted.

"Those meetings were pretty emotional," Light says. "The retirees didn't trust the company." The retirees indicated to Light that they felt that the firm had lied to them and cheated them out of money, and that they weren't happy at all about the way in which things were handled.

The bankruptcy code required that if the operating organizations of The Jesup Group were providing benefits to retirees at the time during which their parent company filed the bankruptcy petition, then part of their reorganization plan must include benefits for retirees. The code didn't specify the amount of funds that The Jesup Group had to allocate to the retirees or how much time was allowed for it to continue payments.

By December 19, the company, the URW and the retiree committee agreed on a new, scaled-down benefits plan. The organization would pay only for prescription coverage for retirees older than 65 who were eligible for Medicare, and only for catastrophic medical coverage for those retirees who were younger than age 65.

Although the retirees agreed to this plan, they didn't like it. They wanted more-extensive benefits than what the company could give them.

They also had strong opinions about what they wanted for their future benefits. They didn't want the same situation to occur again. They no longer wanted their former employer to self-insure their benefits but instead wanted a plan that was fully insured by an insurance company. That way, even if The Jesup Group ceased making payments, it would have already paid for the premiums until that point, avoiding unexpected debts for the retirees. Also, because of their distrust of the company, the retirees wanted the company to have as little involvement with their insurance plan as possible.

Retirees take control of their benefits.
The retiree bankruptcy committee negotiated a plan with The Jesup Group. The committee members persuaded it to pay them, as an entity, the amount that it would spend on their benefits. The retirees would then buy and administer their own benefits. The company agreed.

"Given the cost of bankruptcy, the only way that the operations could have survived was to have a rapid bankruptcy proceeding," explains Oliver Janney, vice president, general counsel and secretary of Uniroyal Technology Corp., which is the name that The Jesup Group took after the bankruptcy process. "To do it quickly, we had to work out an arrangement that got everybody at least something."

Besides wanting to appease the retirees, the organization also saw the benefit of giving control of administration to the retirees. Uniroyal Technology emerged from bankruptcy as a much smaller company than The Jesup Group had been. It didn't have the people to administer the retiree benefits effectively. The group of 3,000 retirees is nearly three times larger than the company's group of 1,200 active employees. Martin Gutfreund, vice president of human resources and administration for Uniroyal Technology, says that the retirees, most of whom still reside in the local area, can plan and manage their program much more effectively. "You have a group that's capable—like a cooperative—of determining what's in their collective best interest—and they have a very democratic process for deciding that," he says.

Janney agrees. "We have retirees who have time on their hands," he says. "They probably can do a more thorough job of managing their benefits than a company can that has to serve its active employees. Retirees have different needs for medical support from those of active employees," Janney adds.

Having gotten the organization's agreement, the committee members filed an application with the Secretary of State's office to establish a nonprofit organization, and wrote bylaws with help from their hired counsel. On October 1, 1992, the same date on which Uniroyal Technology emerged from bankruptcy, Uniroyal Retiree Benefits Inc. was established. Its purpose would be to administer all the medical and life-insurance benefits for the retirees of Uniroyal Plastics.

The committee of retirees that had negotiated the retiree corporation in bankruptcy court selected seven of its members to serve as the board of directors for Uniroyal Retiree Benefits Inc. The board members have sole authority in Uniroyal Retiree Benefits. The board members volunteer their time every Monday afternoon for board meetings, and, as needed, they work in the office. In the first months, however, they met frequently.

"It has been difficult to assume our roles and to know what to do," says Earl Burkhart, president of Uniroyal Retiree Benefits' board of directors. "We didn't have any experience with this sort of thing. It's also difficult getting some of the retirees to understand what we're doing."

The board members hired two administrative workers to help take care of the bookkeeping and to track coverage. During the first three months of operation, the scaled-down benefits plan negotiated during the early stages of bankruptcy court was in effect while board members searched for an insurance company to handle their benefits. It proved difficult because the group that the retiree corporation was trying to cover is high-risk. The group of retirees includes many people who are younger than 65 and therefore not yet eligible for Medicare.

Any insurance company with which the retirees contracted probably would be this group's primary source of coverage. "The insurance companies realize that [the retirees] aren't the healthiest population in the world," Light points out.

American Medical Security, located in Green Bay, Wisconsin, agreed to insure the retirees beginning in January 1993. A key factor for the insurance company in agreeing to a fully insured plan for the group was an agreement that the retiree corporation has worked out with the local medical community.

In the South Bend area, where approximately 65% to 70% of the retirees still live, three out of four hospitals have agreed to accept what Medicare pays as full payment. This lowers the risk for the insurance company. Eighty percent of the doctors in this area also have agreed to these payments.

"The community has really gotten into this," Light explains. "A lot of the people either are related to or know someone who's involved in this, so there's a lot of compassion going out to these retirees."

In addition to getting practitioners in the South Bend area to participate, the board of directors has persuaded some hospitals and a large physician group to participate in Madison, Wisconsin, where many retirees have relocated. Regions in which the company is working on similar agreements are Florida, Pennsylvania and Ohio. "Many doctors who understand the plan agree on an individual basis not to bill the patient the balance," Light says.

HR helps implement the benefits plan.
Once the retiree corporation had secured an insurance carrier, Gutfreund and his HR staff at Uniroyal Technology helped the retiree board of directors put the new benefits plan together. They helped the retiree corporation's board members transfer the medical benefits from one company to the other, and provided them with general assistance until they were able to take full control. After that, Uniroyal Technology broke all ties with the retiree corporation except for its role as funding agent.

The responsibility of Uniroyal Technology is to contribute a fixed amount to Uniroyal Retiree Benefit Inc.'s benefit fund. It bases the amount that it contributes on an estimate of what the scaled-down benefits plan that was negotiated during court would have cost per year, per retiree.

For example, the estimated amount that benefits would have cost Uniroyal Technology in 1993 for each retiree younger than 65 is close to $1,050. For retirees older than 65, the individual amount would be approximately $560. Multiplying each of these amounts by the number of eligible retirees in each age category determines the amount that Uniroyal Technology must contribute to the fund each year, which it pays in monthly installments. The company's contribution for 1993 is $2.4 million ($2.2 million for medical insurance and $.2 million for life insurance).

Uniroyal Technology's contribution covers approximately two-thirds of the benefits cost. Retirees must contribute the other one-third themselves. Retirees who are younger than 65 pay between $40 and $120 a month, depending on coverage, and retirees who are older than 65 pay between $68 and $136 a month. The cost to the younger retirees is lower because they don't yet qualify for Medicare and therefore incur greater out-of-pocket expenses than the older group.

When setting up the plan, retirees negotiated for a two-month premium reserve. During the next two years, Uniroyal Technology's contributions will include payments in addition to the monthly installments that the retiree corporation sets aside in reserves. At the end of the two years, the reserve should have enough money to cover two months' worth of the company's contribution. The retirees hope that this reserve will serve as a cushion, should Uniroyal Technology fall into financial difficulties—as The Jesup Group did—and stop paying into the benefit fund.

The plan works in a fashion similar to an HMO. It doesn't require traditional deductibles but instead requires that retirees make copayments for service. For example, retirees pay $15 for a doctor visit, $150 for a hospital stay, $5 for lab tests and $15 for prescriptions. The insurance company pays the balance and issues prescription cards to beneficiaries. Many of the retirees who are older than 65 have discovered that this plan costs them less than private Medicare supplemental insurance that covers drug costs.

To control utilization and keep premium rates down, the insurance plan pays treatment costs based on Medicare fee schedules (determined by DRGs, or diagnostic-related groups). If a hospital charges $5,000 for a particular treatment, and the Medicare fee schedule indicates that the treatment is worth $4,000, the insurance company will pay only $4,000. The insured is responsible for paying the balance. Because of the corporation's agreement with practitioners to bill only the approved Medicare amount, however, often there's no balance to pay.

Benefits plan proves beneficial to both sides.
The plan is working out well. The board members of Uniroyal Retiree Benefits are proud of what they've done. Having control of their own benefits comforts the retirees. "Because they're on their own now and the contract is issued to them," says Light, "if their former employer again discontinues its payments, they could deal with it. They would have the opportunity either to contribute more to the plan themselves or to trim the benefits. They're totally in control."

Gutfreund adds that Uniroyal Technology also is pleased with the way in which the retirees are managing their benefits. Having the retirees control their own benefits offers several advantages to the company. Not only does the program spare Uniroyal Technology the responsibility and the time-consuming chore of administering the retirees' benefits, but it also saves the company a substantial amount of money in administrative costs. Gutfreund estimates that the administration of these benefits could require as many as two people working full-time.

Because the organization's contribution to the benefit fund is equal to what it would have been spending on retiree benefits anyway, the absence of administrative costs means that the organization comes out ahead financially. "The retirees are able to get the benefits they want and we pay the money we would have paid anyway, except that we don't have the administrative costs," Janney says.

The fact that the retiree corporation fixes the costs of funding for Uniroyal Technology offers another advantage. The annual increases that the retiree corporation has built into the plan to cover rising costs are much lower than the trend in the insurance industry. Light says that of the 15% to 25% increase in cost that insurance companies charge each year, only 5% to 10% of the increase relates directly to goods and services. Having more people using more services causes the additional increases.

"The company's obligation in this case is to fund only the increased cost of goods and services," Light says. "It's up to the retirees to control those utilization rates so that if they use the plan less, they'll come out ahead."

Light says that this element of fixed costs and increases has prompted people from other companies to take an interest in what Uniroyal has done. "Companies are interested in limiting and defining costs," he explains. "It takes the guesswork out of their post-retirement liability calculations."

Light believes that the plan offers a viable solution for a company in a situation similar to The Jesup Group's. In bankruptcy situations in which retirees' interests are jeopardized, retirees already have organized for negotiation purposes. (Although it would require more work to organize retirees who haven't organized already for bankruptcy negotiations, it isn't impossible.)

Setting up an organization from which the retirees can administer their own benefits means going just one step further. For organizations that aren't facing bankruptcy but are having financial difficulties, Light explains that this approach offers a preferred solution to terminating benefits outright, as some organizations do.

Janney explains that a plan like that of Uniroyal Retiree Benefits most likely would work better in certain industries than it would work in others. "In companies within industries that have generous retiree benefits, such as the rubber industry, I think that it offers a lot," Janney says. "It may be a way of meeting expectations for more-expensive retiree benefits than most companies are able to make available to retirees. It's the same concept that most companies have today with their active employees—the concept of sharing the costs of insurance," Janney adds.

Gutfreund believes that Uniroyal Retiree Benefits Inc.'s solution for meeting retirees' needs could be the wave of the future. "Uniroyal Technology now is financially sound, we're providing superior employment opportunities for more than 1,200 employees throughout the country, and we have met the medical-insurance needs of our retired employees," he says. "All of that came about because of some very creative and effective work."

Personnel Journal, August 1993, Vol. 72, No. 8, pp. 49-53.