Retirees Face Health Cost Increases

December 9, 2002
Although most large employers plan to continue offering health care coverage to their retirees, a study finds that the cost of that coverage is likely to increase over the next three years, and about one in five large employers say they are very or somewhat likely to terminate retiree coverage for future retirees.

The Kaiser Family Foundation and Hewitt Associates surveyed some of the largest U.S. companies. Highlights include:

• 95% of large employers plan to continue offering health insurance to current retirees (those who are already retired under age 65 or age 65+) in the next three years;
• 22% say they are likely to eliminate retiree coverage for future retirees (often new or recent hires) within the next three years;
• 82% expect to increase retiree premiums and 85% plan to raise prescription drug copayments or coinsurance over the next three years;
• 13% say they terminated benefits for future retirees over the past two years;
• The average retiree contribution rose 19% for pre-65 retirees and 20% for age 65+ retirees between 2001 and 2002;
• Nearly eight in 10 employers (78%) say they are likely to continue offering prescription drug coverage even if Congress enacts a comprehensive Medicare drug benefit.

"This study is the latest bad news for American workers on the health care front," said Drew Altman, Ph.D., president and CEO of the Kaiser Family Foundation. "Current retirees are being asked to pay more for their health coverage and current workers are less likely to get health benefits from their employer when they retire.”

The study is based on a survey of 435 large private-sector firms (1,000+ employees) that currently offer retiree health benefits, including 36% of all Fortune 100 companies and 28% of all Fortune 500 companies.

"Under tough economic conditions, surveyed large employers are doing what they can to continue to provide meaningful retiree health coverage, but they have to balance that objective with the priorities and bottom line of their organization and the costs of providing other employee benefits," said lead study author Frank McArdle, Ph.D., of Hewitt Associates.

In an effort to control rising costs, employers offering retiree health benefits have made substantial changes in the past two years. Forty-four percent of firms have increased retiree contributions to premiums and 36% have increased cost-sharing requirements.

While 13% of employers report having terminated health benefits for future retirees, 17% report having added benefits or improved their retiree coverage in the past two years.

The survey suggests that cost increases are on the horizon for retirees. More than eight in 10 surveyed employers say they are very or somewhat likely to increase premiums for retirees, and two-thirds (66%) say they are very or somewhat likely to increase premiums for dependents in the next three years. One-quarter of surveyed employers say they are very or somewhat likely to shift to a defined contribution approach or offer catastrophic benefits, coupled with medical savings accounts for their retirees.

The complete text of the report is at http://www.kff.org/content/2002/20021205a/6061.pdf.