Retiree health costs continue to rise

In the survey, which polled 302 large private-sector employers, respondents reported taking steps in 2006 that increase what retirees pay out-of-pocket for health benefits.

For example, in 2006, 74 percent of firms increased premiums for retirees younger than 65, while 58 percent raised premiums for Medicare-eligible retirees. Similarly, 34 percent of firms raised cost-sharing requirements for retirees younger than 65, and 24 percent did so for Medicare-eligible retirees.

Changes in 2007

Surveyed firms say they are very likely to make additional changes this year that would result in retirees paying more: increasing retiree contributions to premiums (64 percent); increasing cost-sharing requirements (26 percent); raising drug co-payments (20 percent) and raising out-of-pocket limits (18 percent).

“People who worked their whole lives to earn retiree health coverage are now having to dig deeper into their pockets to pay for it,” Kaiser President and CEO Drew E. Altman said in a news release.

Some firms are reducing the number of people eligible for retiree health benefits in the future.

Such changes typically affect newly hired workers but sometimes affect certain groups of existing workers who are not yet eligible for retirement.

Between 2005 and 2006, 11 percent of surveyed employers eliminated benefits for a group of future early retirees and 9 percent did the same for a group of future Medicare-eligible retirees. This year, 10 percent of firms say they are very or somewhat likely to eliminate subsidized coverage for some future retirees.

Retiree health costs

The survey also assesses the cost of retiree health coverage for new retirees. For workers younger than 65 who retired this year, the total premium (retiree and employer contributions) for retiree-only health coverage was $6,624 per year on average in the firm’s largest plan, of which the retiree paid $2,724. For Medicare-eligible workers who retired in 2006, their coverage cost $3,240 per year on average in the firm’s largest plan, of which the retiree paid $1,320.

Overall, surveyed employers report a 6.8 percent increase in total retiree health costs between 2005 and 2006 – a rate of growth consistent with the increases reported for active workers in other studies and significantly higher than the 4 percent rate of inflation during that period.

Many firms – 75 percent – say they have not set aside money in the past three years to help cover their anticipated future expenses for retiree health benefits. Though not required, putting the money aside ahead of time can reduce the long-term unfunded liability that businesses report on their financial statements and provide a greater degree of security for workers who expect to receive retiree health benefits.

Government’s role

When asked whether senior managers at their company thought the federal government should play a larger role in financing retiree health benefits for early retirees, firms were divided, with 54 percent saying they opposed a larger government role, and 46 percent saying they favored it.

Those who favored a growing government role most often expressed support for policy changes to expand tax-favored funding opportunities for employers (72 percent), to allow tax-free transfer of individuals’ retirement funds to pay for health care (66 percent), and to allow early retirees to buy into Medicare and pay the full cost (61 percent).

The 2003 Medicare drug law created a new, government-supported drug benefit for Medicare beneficiaries and offers tax-free subsidies to firms that provide their Medicare-eligible retirees with drug coverage that is at least as generous as the standard Medicare benefit.

For 2006, 82 percent of surveyed firms say they accepted the subsidy for their health plan serving the largest number of Medicare-eligible retirees. They report average savings of $546 per retiree as a result.

This year, 78 percent of surveyed employers will offer drug coverage and accept the tax-free subsidy.