Most Large Firms to Retain Retiree Drug Coverage in 2006

But companies are less certain about future benefits strategies, survey finds

Karen Pallarito

Karen Pallarito

Updated on December 07, 2005

WEDNESDAY, Dec. 7, 2005 (HealthDay News) -- A majority of large U.S. companies will accept government subsidies to continue providing drug coverage to their retirees in 2006, and most are likely to do so in 2007, a new survey finds.

But beyond that, all bets are off.

Looking ahead to 2010, only 50 percent of employers said they were likely to accept the government subsidy and continue drug benefits. Twenty-two percent said they were unlikely to do so, and 28 percent didn't know what they would do, according to the survey, sponsored jointly by the Henry J. Kaiser Family Foundation and Hewitt Associates.

In the short-term, this is "mostly good news" for retirees because employer-sponsored plans typically are more generous than the standard Medicare drug benefit scheduled to take effect on Jan. 1, 2006, said study co-author Tricia Neuman, vice president and director of the Kaiser Family Foundation's Medicare Policy Project.

"But even with this good news, retirees are not totally out of the woods," she added. "Because employers will no doubt revisit this issue in future years, retirees will need to stay on top of these issues and think about the implications of employers' decisions and what that means for their own health coverage, both this year and each year into the future."

Jeffrey B. Wenger, assistant professor of public administration and policy at the University of Georgia, is less sanguine about what employers' projections indicate. "It's really a vote of no confidence from business that we don't know where this policy is going to be five years from now," he said.

The Kaiser/Hewitt survey is the first to capture how large, private-sector employers are responding to the roll-out of the Medicare drug benefit, which is designed to cover both brand-name and generic prescription drugs at participating pharmacies. The survey, conducted between June and October, represents 300 large firms that collectively provide health benefits for 5.7 million retirees and their dependents.

Nationally, more than 15 million retirees and dependents receive employer-sponsored health coverage, according to Frank McArdle, Hewitt's Washington Research Office Manager. This group includes retirees on Medicare who use employer-sponsored health coverage to help fill gaps in the Medicare benefits package, as well as early retirees who are not yet Medicare-eligible and rely on their former employer or union for their health coverage.

Overall, the survey shows continued erosion of retiree health benefits as many employers raise retirees' share of the premium, cap contributions to retiree health benefits and increase the amount that retirees pay out of pocket.

In 2005, for example, a typical Medicare-eligible retiree paid $1,536 toward their premium, about 9.9 percent more than the previous year. What's more, 12 percent of firms stopped offering retiree health benefits for future retirees, mainly newly hired workers.

"It's continuing a long-term steady trend away from these benefits," noted Paul Fronstin, director of the health research and education program at the Employee Benefit Research Institute, in Washington, D.C.

With the enactment of the new Medicare drug benefit, policymakers worried that some employers might pull the plug on drug benefits for retirees. So the law creates an incentive: Employers that maintain drug coverage can earn a 28 percent tax-free subsidy, helping to offset employers' cost of providing those benefits.

Seventy-nine percent of employers said they would accept that subsidy in 2006 and continue providing drug benefits. The subsidiary is estimated to save $644 per individual retiree, according to the survey.

"Basically, employers were given a free pass and they've taken it," said Bruce Stuart, a professor and director of The Peter Lamy Center on Drug Therapy and Aging at the University of Maryland. "With the subsidy, they can afford to hold off making a decision" about whether to continue providing drug benefits, he said. "And by not making a decision, they still get a windfall."

More information

To read a copy of the retiree health benefits report, visit the Kaiser Family Foundation.

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