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Most Corporations Take Medicare Subsidy to Continue
Retiree Drug Insurance but Less Certain About Future
Jan. 3, 2006 – One thing that helped the government
boost their numbers for enrollment in the Medicare drug program was a
decision by most of the large corporations in America to accept the
government subsidy for continuing to provide Medicare-equivalent drug
coverage to their retirees. Most increased what retirees must pay for
their insurance in 2005 but, still, there is some uncertainty about
their continuing this insurance in future years, according to a study in
December by the Kaiser Family Foundation.
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Four in five businesses (79%) that provided retiree
health benefits in 2005 said last month they will accept government
subsidies for continuing to provide retiree drug coverage at least as
good as Medicare’s coverage in 2006, according to a survey of 300 of the
nation’s largest private-sector employers conducted by the Kaiser Family
Foundation and Hewitt Associates.
Another 10% say that they will provide some drug
coverage to supplement the new Medicare benefit, and 9% say that they
plan to stop offering drug coverage to Medicare-eligible retirees.
Firms accepting the retiree drug subsidy in 2006
are less certain about whether they will continue to take this approach
in future years.
Among those firms that will accept the subsidy in
2006, about four in five (82%) say that they are “very” or “somewhat”
likely to accept the subsidy again in 2007.
Looking ahead to 2010, only half (50%) say they
are likely to maintain coverage and accept the subsidy, while 22% say
they are unlikely to do so, and 28% say they do not know.
“Most employers are accepting government subsidies
and taking a wait and see attitude on the drug law,” Kaiser Family
Foundation President and CEO Drew E. Altman said. “The widespread
dropping of drug benefits that some had feared has been averted so far
as businesses figure out what their longer-term response will be.”
The Kaiser/Hewitt study, the fourth joint survey
since 2002, analyzes responses from 300 large private-sector firms
(1,000 or more employees) that offer retiree health benefits. These
firms collectively provide health benefits for 5.7 million retirees and
dependents and for 15.8 million workers and dependents. The survey was
conducted between June and October 2005 as firms were finalizing
decisions about the new Medicare drug benefit and whether to accept the
financial incentives for businesses to continue providing drug coverage
to their Medicare-eligible retirees.
The survey asked employers about their likely
response to the Medicare drug benefit for their largest plan for
Medicare-eligible retirees (age 65 and older).
Firms have several strategies available to them for
2006. They could continue to provide coverage that is at least as
generous as the standard Medicare drug benefit and receive tax-free
subsidies equal to 28 percent of allowable drug costs between $250 and
$5,000 per retiree in 2006. Firms also could choose to provide drug
coverage that supplements Medicare’s coverage and not receive the
subsidy; they could become a Medicare prescription drug plan; or they
could terminate drug and/or other medical retiree health benefits
altogether.
Among employers that report any savings due to the
Medicare drug benefit, the weighted average savings is $644 per
individual retiree in 2006. Firms that will continue to offer benefits
and accept the government subsidy in 2006 will save, on average, $626
per individual retiree, while firms that supplement the new Medicare
drug benefit will save more – an average of $826 per individual retiree.
Based on employers’ estimates, their responses to
the drug benefit will result in median savings of 7 percent of total
retiree health costs in 2005, including the employer and the retiree
share of the costs for both Medicare-age retirees and early retirees.
“For many reasons, taking the retiree drug subsidy
is the strategy of choice for large companies in 2006, but they will
continue to reassess their strategies moving forward as more experience
develops with Medicare drug plans,” said Frank McArdle, manager of
Hewitt’s Washington, D.C., research office. “Unfortunately, retiree
health cost pressures remain intense.”
The survey also finds that many firms that will
accept the subsidy have policies in place that will affect retirees who
enroll in a Medicare drug plan instead. Among these employers, nearly
three in 10 (29%) say that retirees who sign up for a Medicare plan
would lose both employer-sponsored medical and drug coverage if they
enroll in a Medicare prescription drug plan, and a similar share (31%)
say retirees would lose prescription drug coverage only (and retain
other benefits). The remaining firms (41%) say that retirees would
maintain all employer-sponsored coverage.
Also, while more than half of the employers (56%)
accepting the Medicare subsidy for their largest plan in 2006 say
retirees would be allowed to enroll or re-enroll in the employer plan at
a future date if they sign up for a Medicare drug plan, 44% of employers
say retirees would not be able to do so in the future.
“Seniors with retiree health benefits should
consider their options carefully before signing up for a new Medicare
drug plan,” said study co-author Tricia Neuman, a Foundation Vice
President. “Most retiree plans offer more comprehensive benefits than
Medicare, and retirees who drop employer-sponsored coverage may not be
able to pick it up again later.”
Most large employers are active in educating their
Medicare-eligible retirees about their options under the new Medicare
drug plan. Nine in 10 (89%) are distributing general education
materials. About six in 10 will maintain a benefits center or call
center (62%) or provide personalized communication beyond what the law
requires (57%). Nearly one in five (18%) have human resources staff
dedicated to Medicare drug benefit issues.
Changes in retiree health benefits, 2004-2005
When asked about the retiree health benefits
overall, surveyed firms report an average increase of 10 percent in
total retiree health costs between 2004 and 2005, including both
Medicare-eligible retirees and early retirees (under age 65) who do not
qualify for Medicare benefits. About one in eight surveyed firms (12%)
say that they had stopped offering subsidized retiree health benefits in
2005 for future retirees, mainly newly hired workers.
A typical Medicare-eligible worker retiring in 2005
pays $1,536 annually toward their individual retiree health insurance
premiums in the plan with the largest number of Medicare-eligible
retirees; the employer pays the remaining $2,544 of the $4,080 total
premium. The retiree’s share is about 9.9 percent more than what a
similar retiree paid in 2004.
About one in five firms (19%) require new
Medicare-eligible retirees in 2005 to pay the full cost of premiums for
their retiree health insurance coverage, essentially providing the
retiree access to an unsubsidized group plan. In contrast, 11% of firms
pay the full premium costs for their retirees.
To help alleviate cost pressures, employers also
have adopted a number of cost-containment strategies, some of which
shift costs directly onto retirees. Nearly two-thirds of firms (63%)
have a cap on their future financial obligations for retiree health
benefits in plans offered to Medicare-eligible retirees in 2005. Among
the half (49%) of firms with a cap on the largest plan available to
their Medicare-eligible retirees, almost six in 10 (59%) said that they
have already hit the cap, and another one in four (27%) say they expect
to hit the cap within the next three years.
Between 2004 and 2005, most firms increased what
retirees pay for their health benefits:
● Seven in 10 (71%) raised the amount that
retirees pay toward their premiums in the past year.
● One in three (34%) raised the copayments or coinsurance retirees pay
when they use services.
● One in four (24%) raised the annual deductible that they must pay.
● One in five (19%) raised the maximum amount that retirees could be
required to pay out of pocket each year.
The report and related materials are
available online.
The Kaiser Family Foundation is a non-profit,
private operating foundation dedicated to providing information and
analysis on health care issues to policymakers, the media, the health
care community, and the general public. The Foundation is not associated
with Kaiser Permanente or Kaiser Industries.
With more than 60 years of experience, Hewitt
Associates (NYSE:HEW) is the world's foremost provider of human
resources outsourcing and consulting services. The firm consults with
more than 2,300 companies and administers human resources, health care,
payroll and retirement programs on behalf of more than 300 companies to
millions of employees and retirees worldwide. Located in 35 countries,
Hewitt employs approximately 22,000 associates. For more information,
please visit
www.hewitt.com.
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