Government

Most large companies will keep retiree drug benefits -- for now

A government subsidy will help many large employers maintain such plans in 2006, but fewer firms are sure about their plans for future years.

By David Glendinning — Posted Dec. 26, 2005

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Washington -- Seniors who used to work for large companies that pay for part of their medical costs in retirement might not need to bother asking a physician about which Medicare drug plan is best for them. They could be just fine where they are.

A recent survey of 300 firms with 1,000 or more employees that offer retiree benefits found that nearly 80% will continue offering drug coverage even after Medicare launches its program in 2006. Another 10% will help pay for the costs of a Medicare drug plan, while only 9% will end prescription coverage altogether, according to the survey by the Kaiser Family Foundation and Hewitt Associates.

The results indicate that fewer seniors than originally thought will be forced to turn to the government if they want to continue getting help with their drug bills, said Drew E. Altman, PhD, the foundation's president and CEO.

"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," he said.

Seniors who decide that the coverage they have is good enough to keep will not need to pick from the multitude of Medicare drug plans that will start operating in January. If the retiree coverage is as good as or better than what the federal government is offering, beneficiaries can decide to keep the benefits and will not incur a penalty for joining a Medicare drug plan in a future year.

A financial incentive exists for large employers to keep the commitment they made to former workers. Those who maintain such "creditable" drug coverage will receive a government subsidy equal to 28% of the seniors' drug costs under $5,000. On average, the firms can expect to save more than $600 on health costs per beneficiary by taking this option, according to the Kaiser/Hewitt study.

Seniors who decide to abandon their current retiree plans face an uncertain level of support from their former employers. More than half of beneficiaries making this decision will lose either the drug coverage portion of their plan or their retiree medical benefits altogether, the survey said.

"Seniors with retiree health benefits should consider their options carefully before signing up for a new Medicare drug plan," said Tricia Neuman, a foundation vice president and study co-author. "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."

Beneficiaries have until May 15, 2006, to sign up for a Medicare drug plan in the initial open enrollment period. After that, they will need to wait until November 2006 before enrollment opens for the 2007 coverage year.

An uncertain future

The companies' decisions might add up to fewer headaches for now for the more than 12 million seniors on retiree plans and their doctors. But even beneficiaries who like their retiree coverage and don't want to navigate the potentially more confusing world of the Medicare drug program might have to enter the unknown before long.

When the foundation asked the same companies that will keep offering drug coverage next year whether they will continue to do so in future years, they expressed less confidence. More than 80% of the respondents said they were very or somewhat likely to keep accepting the government subsidy for retiree drug coverage in 2007, but the number dropped to 50% when firms were asked about the prospects for 2010.

Congress approved the subsidy in an effort to preserve employer-based benefits for seniors and to prevent a mass exodus of retiree plans once Medicare's Part D launched. Lawmakers could reduce the subsidy in the future if they determine that this threat is no longer an issue.

Some large employers could be waiting to see how the opening months of the Medicare drug benefit go for seniors before they make such a major decision as terminating drug coverage for their retirees, said Frank McArdle, manager of Hewitt's research office in Washington, D.C. Some firms eventually might decide that Medicare itself presents a better deal for them or their former workers.

"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," he said. "Unfortunately, cost pressures remain intense."

Rising health expenditures have prompted many companies to scale back existing coverage, stop offering benefits to future retirees or end coverage altogether. The foundation noted that while two in three employers offered retiree benefits in 1988, only one in three does so today.

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ADDITIONAL INFORMATION

Staying the course

Most large employers who offer drug benefits through their retiree health plans will continue to do so after Medicare starts its own drug program.

Continue offering drug coverage 79%
Help pay for Medicare plans 10%
Discontinue drug coverage 9%
Become a Medicare plan 2%
Total 100%

Source: Kaiser/Hewitt Survey on Retiree Health Benefits, December

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