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Health Tracking

TRENDS

Trends In Retiree Health Benefits

Abstract

 
Based on national surveys of employers from 1988 through 2001 and recent key-informant interviews, this paper examines trends in employer-based retiree health benefits. We assess trends in the availability of coverage to early and Medicare-eligible retirees, the cost of coverage, plan choice and enrollment, prescription drug coverage, and recent changes in plan design. During a period of low health care inflation and record prosperity, retiree coverage declined slightly, unlike the coverage of active workers. Indemnity enrollment remains strong among retirees, and employers are cautious about Medicare+Choice because of continuing plan withdrawals. Numerous indicators point to a further and accelerating decline in retiree coverage.

Retiree coverage for Medicare-eligible persons is closely intertwined with prescription drug coverage. Roughly 40–60 percent of all health care expenses incurred by employers for this population are for prescription drugs, and employer coverage is the source of drug coverage for 46 percent of Medicare beneficiaries with a single source of drug coverage.⁴ Retiree coverage generally provides better financial protection than do alternative forms of private insurance for drug expenses. In 1998 Medicare beneficiaries with retiree coverage from an employer paid just 26 percent of their prescription drug expenses out of pocket; beneficiaries who had drug coverage through Medigap and Medicare managed care paid 67 and 40 percent, respectively.⁵ Hence, any diminution of retiree coverage means that greater numbers of Medicare beneficiaries will be exposed to the financial risk associated with high prescription drug costs.

Rising costs have contributed to a declining percentage of firms offering retiree coverage.⁶ Many employers have already instituted an array of incremental cost-savings approaches over the years—increased cost sharing, reduced benefits, and financial incentives to select certain types of plans—so that they can continue offering coverage. Employers implemented these measures during the 1990s, a period of low health care inflation and record economic growth.

As a result of the economic downturn that began in 2001 and double-digit insurance premium increases, employers are facing difficult decisions about whether to continue offering coverage and in what form. The factors that motivate employers to offer coverage to retirees may not be sufficient to withstand mounting financial pressures. Employers may consider alternative funding arrangements including defined-contribution approaches, but most have been reluctant to adopt these.⁷

In this paper we examine recent trends in the percentage of firms offering health insurance to retirees as well as those who have dropped this coverage altogether. We report the costs of coverage to both the employer and the retiree, including differences between retirees under and over age sixty-five. We discuss changes in plan choice and employers’ attitudes toward Medicare+Choice (M+C). Finally, we describe the changes employers have made recently and are planning in the near term.

Data And Methods

Top Data And Methods Study Findings Discussion And Policy... NOTES

 
This study uses data from the Henry J. Kaiser Family Foundation/Health Research and Educational Trust (Kaiser/HRET) survey of human resource and benefits managers in public- and private-sector organizations.⁸ We primarily use results from the 2000 and 2001 surveys, which were completed from January through May of each year. In some instances, we report data from earlier years to illustrate important longer-term trends that were triggered with implementation of the Financial Accounting Standards (FAS) Board’s FAS 106, which required employers to report their liability for current and future retirees’ health benefits on their balance sheets.⁹ We also conducted twenty-five key-informant interviews with public and private employers, unions, benefits consultants, and one large insurer, to complement our analysis of the survey data.

Employer survey data. The Kaiser/HRET survey draws its sample from Dun and Bradstreet’s list of the nation’s private and public employers. The sample is stratified by industry and number of workers. In 2000 the sample included 1,887 firms with three or more workers, and in 2001 the sample size was 1,907 firms. The response rate was 45 percent in 2000 and 50 percent in 2001.

We used descriptive statistics to analyze data from both years and employed t-tests or Chi-square tests to determine statistical significance. We make year-to-year statistical comparisons as well as comparisons to 1997, the first year in which significance tests could be performed. Significance testing was performed at the .05 alpha level. Because the surveys employed complex sampling designs, we used SUDAAN software so that standard errors are corrected for the design effect and stratification. All data are weighted to represent national estimates.

Key-informant interviews. We selected twenty-five key informants based on the breadth and depth of their knowledge and experience with employer-sponsored retiree health benefits. Although the large majority of the interviews were conducted with employers, findings from interviews with the other types of organizations are also reflected in the paper. To obtain diverse perspectives, we selected employers from a range of industries, firm sizes, and regions. We considered the type of insurance the employers offered and the length of time it was offered. Employer interviews were conducted with human resource directors, benefit managers and staff, and, in the case of smaller employers, company presidents or other executives.

We discussed the following issues during the interviews: factors that affect the likelihood of offering retiree health benefits; the type and evolution of retiree health benefits offered, including Medicare managed care; consequences of potential changes in Medicare coverage policy; and recent and planned changes to employers’ benefit programs. The interviews lasted from one to two hours and were conducted primarily in summer 2001.

Study Findings

Top Data And Methods Study Findings Discussion And Policy... NOTES

 
Offer rates to retirees. The percentage of large firms (200 or more employees) offering retiree health benefits (to either early or Medicare-eligible retirees) appears to have declined over the past decade (Exhibit 1).¹⁰ Offer rates stood at 34 percent in 2001, down from 46 percent in 1991 and 37 percent in 1997, although there were no significant differences in offer rates by year for retirees since 1997. Small firms (3–199 employees) saw a statistically significant decline in offer rates to retirees over the past year, dropping from 9 percent in 2000 to 3 percent in 2001 (data not shown).

View larger version (18K): [in this window] [in a new window]   EXHIBIT 1 Percentage Of Large Firms That Offer Retiree Health Benefits, Selected Years 1991–2001

View larger version (20K): [in this window] [in a new window]   EXHIBIT 2 Percentage Of Large Firms That Offer Retiree Health Benefits To Early Retirees And Medicare-Eligible Retirees, 1997–2001

In our key-informant interviews, some employers told us that they no longer offer retiree health benefits to new employees or current employees who have yet to retire. The Kaiser/HRET survey showed that 4 percent of large firms reported that they had eliminated retiree health benefits for these two groups. A more troubling finding is that 9 percent of large firms reported that in the next two years they are very or somewhat likely to eliminate retiree health benefits for new employees or current employees who have not yet retired, and 6 percent are somewhat or very likely to eliminate retiree health benefits entirely.¹¹ Other employers are now applying more restrictive eligibility requirements such as longer periods of employment. The average number of years of employment required was 10.9 in 2001.

In our key-informant interviews, some employers reported not dropping benefits out of concern for the welfare of their former employees. In some cases, employers were afraid of bad publicity, while others indicated that they would not terminate benefits because Medicare does not have a prescription drug benefit. Many employers know that individual policies are expensive because of the lack of a viable market for individual health insurance and therefore continue providing coverage.

A 2001 circuit court ruling about an employer’s decision to offer retiree benefits caught the attention of several benefits consultants we interviewed. In Erie County Retirees Association v. County of Erie, the Third Circuit Court held that a retiree medical program violates the Age Discrimination in Employment Act (ADEA) if it provides lesser benefits to Medicare-eligible retirees than to early retirees. If widely enforced, it would prevent employers from providing benefits to early retirees that are not offered to Medicare-eligible retirees.¹² Key employer informants indicated that they might drop retiree health benefits altogether rather than incurring the additional costs of compliance. The Equal Employment Opportunity Commission recently announced a proposed rule of its intent to allow employers to offer Medicare-eligible retirees a different level of benefits than those offered to early retirees; however, the proposed rule is still undergoing review.

Cost of coverage. Total monthly premiums for Medicare-eligible retirees with single coverage (in the plan with the firm’s largest Medicare-eligible retiree enrollment) averaged $193 in 2001 (Exhibit 3). This represents an annual average rate of increase in the total monthly premium of 5.4 percent between 1988 and 2001 (from $100 to $193). Differences in total monthly premiums and retiree contributions were not statistically significant between 2000 and 2001. Total monthly premiums for early retirees averaged $246 for single coverage in 2001. Although total monthly premiums for early retirees are somewhat higher than those for Medicare-eligible retirees, the latter’s total monthly premium pays largely for supplemental coverage not provided through Medicare, while the former’s premium pays for the full cost of coverage. Medicare-eligible retirees pay more for their health coverage than active employees pay, in terms of both absolute dollars ($30 more per month) and percentage (14 percent more per month), but just slightly more than early retirees pay.¹³ This is the case because employers pay a higher percentage of the total premium for early retirees than for Medicare-eligible retirees.

In contrast to active workers, indemnity plans generally enroll a plurality of a firm’s retirees, but this declined sharply in the past year. In 2001, 40 percent of Medicare-eligible retirees obtained their benefits through firms in which the largest retiree plan was a conventional plan, versus 34 percent for preferred provider organizations (PPOs) and 19 percent for Medicare health maintenance organizations (HMOs) or M+C plans (Exhibit 4).¹⁴ These enrollment patterns reveal a marked change from one year ago. In 2000 just 11 percent of Medicare-eligible retirees received health benefits through firms where the largest retiree plan was a PPO, a statistically significant increase.

View larger version (15K): [in this window] [in a new window]   EXHIBIT 4 Type Of Plan With Firm’s Largest Medicare-Eligible Retiree Enrollment, 2000–2001

Prescription drug coverage. Nearly all (99 percent) Medicare-eligible retirees in the firm’s plan with the largest retiree enrollment had prescription drug coverage in 2001. Of such retirees, 29 percent received coverage from firms in which the largest retiree plan had a three-tier cost-sharing formula for prescription drugs, and 31 percent had a two-tier formula. With tiered drug coverage, retirees pay less for generics than for preferred and non-preferred drugs.¹⁵

Prescription drug copayments continued to be more commonplace than coinsurance in 2001, regardless of the type of drug (generic, preferred, or nonpreferred); roughly 65 percent of Medicare-eligible retirees faced copayments across the three classes of drugs.¹⁶ Most Medicare-eligible retirees faced financial incentives to choose generic drugs. Copay amounts averaged $8 for generics, $14 for preferred drugs, and $17 for nonpreferred drugs. Copays for nonpreferred drugs increased 21 percent from 2000, when they were $14 (p = .06). During the past few years many large firms in particular have made changes to increase cost sharing for retirees or provide financial incentives to choose less expensive drugs. For example, 19 percent of large firms introduced a three-tier cost-sharing formula for prescription drugs, 32 percent increased retirees’ cost-sharing requirements, and 53 percent increased retirees’ share of the premium (Exhibit 5).

Discussion And Policy Implications

Top Data And Methods Study Findings Discussion And Policy... NOTES

 
This paper presents a number of clear-cut reasons for pessimism about the future of retiree health benefits. Unlike coverage for active workers, the prolonged economic expansion of the 1990s and record-low health care inflation from 1994 to 1998 did not boost coverage for retirees.¹⁷ Instead, the percentage of employers offering health benefits to Medicare-eligible retirees decreased from 32 percent to 22 percent among firms with 200 or more employees from 1997 to 2001.

Impact on retirees from the largest firms. More than 65 percent of retirees obtain their coverage from the nation’s largest firms (5,000 or more employees), and these firms were the most likely to have dropped retiree coverage. Among these firms, one in five of those not offering retiree health benefits in 2001 had offered them previously. Thus, despite promises made to employees about life-time health insurance coverage, employers are dropping retiree benefits, which is permitted as long as the employer reserved the right to modify, revoke, suspend, terminate, or change the benefit plan in its Summary Plan Description.¹⁸

Impact on Medicare spending. By reducing beneficiaries’ out-of-pocket expenses, retiree coverage not only reduces financial barriers to care but also raises the demand for medical services. Other factors held constant, Medicare spending is 23 percent higher for beneficiaries with retiree coverage than for those with no Medicare supplemental coverage and 15 percent higher than for those with Medigap coverage; however, these estimates do not account for potential adverse selection.¹⁹ Should retiree coverage erode further, it would inadvertently ease pressure on the Medicare Trust Fund and the remaining federal budget. This would come at the expense of retirees, who would be required to pay even more for their health care or possibly have to forgo needed health care services.

Uncertain but interdependent future. Consequently, retiree coverage, prescription drug coverage, Medicare program outlays, and the M+C program all face an uncertain but interdependent future. Should Congress add prescription drug benefits to the Medicare benefit package, the cost of providing retiree benefits for the Medicare population will decline, thereby encouraging employers to retain retiree coverage. This is true because employers are likely to wrap retiree prescription drug benefits around Medicare benefits as a supplement.²⁰ A revitalized M+C program will similarly reduce the cost to employers of providing retiree benefits. If employer-based retiree coverage is retained, about one-third of the Medicare population will have greater financial protection against the cost of prescription drugs and other services. Nonetheless, without congressional changes in prescription drug coverage and the M+C program, an accelerated decline in retiree coverage, and thus, in drug coverage, seems inevitable.

Editor's Notes

 
Lauren McCormack is a senior research associate and Wayne Anderson, a research health analyst, at RTI International, a trade name of Research Triangle Institute, in Research Triangle Park, North Carolina. Jon Gabel is vice-president, health systems studies, at the Health Research and Educational Trust in Washington, D.C. Heidi Whitmore is a senior research associate there, and Jeremy Pickreign is a statistician.

Funding for this research was provided by the Centers for Medicare and Medicaid Services (CMS) as part of Contract no. 500-95-0061. The views expressed in this paper are those of the authors and do not necessarily reflect those of the CMS. The authors thank Brigid Goody of the CMS and Tom Hoerger from RTI International for comments on an earlier draft; Nathan West of RTI International for research assistance; and other project staff from RTI International and the University of Wisconsin-Madison for assisting with the key-informant interviews.

NOTES

Top Data And Methods Study Findings Discussion And Policy... NOTES

 

1. Estimates for the number of early retirees are from the Health and Retirement Survey. See M.A. Morissey and G.A. Jensen, "The Near-Elderly, Early Retirees, and Managed Care," Health Affairs (Nov/Dec 2001): 197–206. Estimates for the number of Medicare-eligible retirees are based on RTI International’s analysis of the 1998 Medicare Current Beneficiary Survey (MCBS).
2. Medicare Payment Advisory Commission, Report to the Congress: Assessing Medicare Benefits, June 2002, www.medpac.gov/publications/congressional_reports/Jun02_Entire%20report.pdf (31 July 2002).
3. J. Rogowski and L. Karoly, "Health Insurance and Retirement Behavior: Evidence from the Health and Retirement Survey," Journal of Health Economics 19, no. 4 (2000): 529–539.[Medline]
4. Hewitt Associates, "Retiree Health Trends and Implications of Possible Medicare Reforms," September 1997, www.kff.org/content/archive/1318/retiree_r.html (31 July 2002). Authors’ calculations of employer coverage of drugs from B. Briesacher, B. Stuart, and D. Shea, Drug Coverage for Medicare Beneficiaries: Why Protection May Be in Jeopardy, Issue Brief no. 505 (New York: Commonwealth Fund, January 2002), 2.
5. Briesacher et al., Drug Coverage.
6. U.S. General Accounting Office, Retiree Health Benefits: Employer-Sponsored Benefits May Be Vulnerable to Further Erosion, Pub. no. GAO-01-374 (Washington: GAO, May 2001).
7. S. Trude et al., "Employer-Sponsored Health Insurance: Pressing Problems, Incremental Changes," Health Affairs (Jan/Feb 2002): 66–75.
8. HRET is a nonprofit 501(c)3 research organization affiliated with the American Hospital Association.
9. Prior to 1999, the survey was sponsored by KPMG Peat Marwick and the Health Insurance Association of America.
10. A firm is regarded as offering retiree health benefits if it offers coverage to retirees currently leaving the workforce or those grandfathered to receive coverage after previously retiring.
11. These figures likely underestimate the extent of change, since a response of "not likely" includes firms that have already embraced these measures.
12. L. McCormack et al., "Retiree Health Insurance: Recent Trends and Tomorrow’s Prospects," Health Care Financing Review (Spring 2002): 17–34.
13. Medicare eligibles pay an average of $55 per month in premiums, which is 28 percent of the total premium, whereas active employees pay $25 per month, which is 14 percent of the total premium. Early retirees pay an average of $66 per month in premiums.
14. Data in Exhibit 4 refer to the proportion of retirees who obtain their benefits through firms in which a particular plan type had the largest retiree enrollment during the respective year. The data do not reflect the distribution of enrollment across the four plan types. The HMO/M+C category includes Medicare HMOs that are and are not part of the M+C program.
15. Under two-tier cost-sharing formulas, retirees face one level of copayments (or coinsurance) when using generic drugs and a higher level when using brand-name drugs. With three-tier cost sharing, retirees face one level of cost sharing when using generic drugs, a higher level when using a brand-name drug when no generic drug is available, and a still higher copayment level when using a brand-name drug for which a generic form is available.
16. Coinsurance is a percentage and a copayment is a specific dollar amount associated with purchase of a medical service or product.
17. P. Fronstin, "Trends in Health Insurance Coverage: A Look at Early 2001 Data," Health Affairs (Jan/Feb 2002): 188–193; and J. Gabel et al., "Job-Based Health Insurance in 2001: Inflation Hits Double Digits as Managed Care Retreats," Health Affairs (Sep/Oct 2001): 180–186.
18. Employee Benefit Research Institute, Fundamentals of Employee Benefit Programs, 5th ed. (Washington: EBRI, 1996).
19. R. Khandker and L. McCormack, "Medicare Spending by Beneficiaries with Various Types of Supplemental Insurance," Medical Care Research and Review 56, no. 2 (1999): 137–156.[Abstract]
20. Hewitt Associates, Retiree Health Coverage: Recent Trends and Employer Perspectives on Future Benefits, October 1999, www.kff.org/content/1999/1540/Retiree.pdf (31 July 2002).

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