WASHINGTON – As the new Medicare drug benefit nears its second year, nearly eight in 10 large employers expect to continue to offer drug coverage to their retirees and accept subsidies from the federal government to offset some of those costs, according to a new survey of 302 large private-sector employers conducted by the Kaiser Family Foundation and Hewitt Associates.

At the same time, surveyed employers report taking a number of steps in 2006 that increase what retirees themselves pay for health benefits. For example, in 2006, 74 percent of firms increased premiums for retirees under age 65, while 58 percent raised premiums for Medicare-eligible retirees.  Similarly, 34 percent of firms raised cost-sharing requirements for under-65 retirees, and 24 percent did so for Medicare-eligible retirees.

Looking ahead to 2007, surveyed firms say they are very likely to make a number of additional changes that would result in retirees paying more: increase retiree contributions to premiums (64 percent); increase cost-sharing requirements (26 percent); raise drug co-payments (20 percent) and raise out-of-pocket limits (18 percent).

Surveyed firms report increasing retiree contributions for new retirees in their largest plan between 2005 and 2006, with an average increase of 15.1 percent for new retirees under age 65 and 9.6 percent for new retirees age 65 and older. New retirees include the group of workers who retired on or after January 1, 2006.

"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.

The Kaiser/Hewitt study, the fifth joint survey since 2002, analyzes responses from a non-probability sample of businesses with 1,000 or more employees that offer retiree health benefits. These large firms collectively provide health benefits for 5.2 million retirees and dependents, including 3.4 million Medicare-eligible retirees. Together they account for more than one quarter of the 12 million Medicare beneficiaries with retiree health benefits nationally and nearly half of the 7.2 million beneficiaries with private-sector retiree health coverage. The survey was conducted online between June and October 2006.

Retiree health costs

The survey also assesses the cost of retiree health coverage for new retirees.  For workers under 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 rate of inflation during that period (4 percent).

Three in four surveyed firms (75 percent) say that 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, pre-funding 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.

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), allow tax-free transfer of individuals' retirement funds to pay for health care (66 percent), and allow early retirees to buy into Medicare and pay the full cost (61 percent).

"While most employers are not pre-funding, many of them support expanded tax-favored funding opportunities which would help secure benefits for retirees and reduce unfunded retiree health liabilities that are more visible under new accounting rules," study co-author Frank McArdle, a Principal at Hewitt Associates said.

Terminations of retiree health benefits

Some firms report taking steps to reduce 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. Looking to 2007, 10 percent of firms say they are very or somewhat likely to eliminate subsidized coverage for some future retirees.

For the most part, current retirees are not generally affected by these terminations.  Between 2005 and 2006, no surveyed firms eliminated benefits for early retirees, and only 1 percent did so for Medicare-eligible retirees. Looking to 2007, only 2 percent of surveyed employers say they are very or somewhat likely to end subsidized coverage for current retirees.

Effects of the Medicare drug benefit

The 2003 Medicare drug law that 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.

For 2007, 78 percent of surveyed employers will offer drug coverage and accept the tax-free subsidy. That is only a slightly smaller share than the 82 percent of firms that say they accepted the subsidy in 2006, suggesting the subsidies so far are working as an incentive for businesses to maintain retiree drug coverage for Medicare-eligible retirees.

About 8 percent of surveyed firms – virtually the same group of employers that discontinued drug coverage in 2006 – say that they will not offer drug coverage to Medicare-eligible retirees in 2007. The remaining firms say they will choose other strategies in response to the Medicare drug benefit.

When asked about their likely strategies beyond 2007, firms that accepted the tax-free subsidy in 2006 are less certain about what Medicare strategies they will pursue, although most expect to accept the subsidy. About four in five (79 percent) say it is likely that they will offer drug coverage and accept the subsidy in 2008, but that drops to little more than half (54 percent) for 2010.

"Most employers intend to maintain drug benefits for their Medicare retirees for the next two years, but the long term is far less certain as rising costs and financial pressures continue to squeeze benefits," said study co-author Tricia Neuman, a Kaiser Vice President and director of the Foundation's Medicare Policy Project.

The survey also suggests that people with employer-sponsored retiree health coverage should carefully consider their options before signing up for a Medicare drug plan. About one third (36 percent) of firms accepting the subsidy in 2007 say that retirees would lose all retiree medical coverage if they enroll in a Medicare drug plan, while another third (32 percent) say retirees would lose their drug coverage only.

In addition, 82 percent of employers continuing to take the subsidy in 2007 for retirees say that if a retiree opts to enroll in a Medicare drug plan, the spouse of that retiree would not be allowed to keep employer-sponsored coverage. More than half (57 percent) would not allow retirees to rejoin the company plan in the future once they have enrolled in a Medicare drug plan.

The full report is available online at: http://www.kff.org/medicare/med121306pkg.cfm.

Methodology

Data from the Kaiser Family Foundation/Hewitt Associates 2006 Survey on Retiree Health Benefits are based on the responses of a non-random sample of 302 large private-sector firms (with 1,000 or more employees) that currently offer health benefits to retirees. This non-probability sample includes firms that provide health benefits to 5.2 million retirees and dependent family members, of which 3.4 million are retirees and dependent spouses ages 65 and older. These age 65+ retirees and dependents account for 27 percent of the more than 12 million Medicare beneficiaries with retiree health benefits and nearly half of the 7.2 million Medicare-eligible retirees with private employer coverage. Surveyed firms represent 36 percent of all Fortune 100 companies and 22 percent of all Fortune 500 companies. Due to the nature of the sample, findings may not be strictly comparable with previous Kaiser/Hewitt studies, which included different companies and different plans offered by those companies.

The survey was conducted online between June 20 and October 16, 2006. All premium information presented in this report reflects responses for the surveyed employers' retiree health plans with the largest number of enrolled retirees. Such plans represent the majority of retirees with health coverage among surveyed employers. Premium information presented is for individuals who retire on or after January 1, 2006 – referred to as "new retirees." The total premiums and retiree contributions to premiums are weighted by firm size and by the number of retirees in the largest employer health plan.

About The Kaiser Family Foundation

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.

About Hewitt Associates

Hewitt Associates (NYSE:HEW) is a global human resources services company. Hewitt consults with more than 2,400 employers and administers human resources, health care, payroll and retirement programs on behalf of more than 350 employers 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.

Maurissa Kanter

,  Hewitt Associates,  (847) 883-1000

Other Contacts:

Larry Levitt, Kaiser Family Foundation, (650) 854-9400
Craig Palosky, Kaiser Family Foundation, (202) 347-5270