Four in five businesses (79%) that now provide retiree health benefits will accept government subsidies for continuing to provide retiree drug coverage at least as good as Medicare’s coverage when the new drug benefit starts in 2006, according to a new survey of 300 of the nation’s largest private-sector employers conducted by the Kaiser Family Foundation and Hewitt Associates.

Another 10% say that they will provide some drug coverage to supplement the new Medicare benefit, and 9% say that they plan to stop offering drug coverage to Medicare-eligible retirees.

Firms accepting the retiree drug subsidy in 2006 are less certain about whether they will continue to take this approach in future years. Among those firms that will accept the subsidy in 2006, about four in five (82%) say that they are “very” or “somewhat” likely to accept the subsidy again in 2007. Looking ahead to 2010, only half (50%) say they are likely to maintain coverage and accept the subsidy, while 22% say they are unlikely to do so, and 28% say they do not know.

“Most employers are accepting government subsidies and taking a wait and see attitude on the drug law,” Kaiser Family Foundation President and CEO Drew E. Altman said. “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.”

The Kaiser/Hewitt study, the fourth joint survey since 2002, analyzes responses from 300 large private-sector firms (1,000 or more employees) that offer retiree health benefits. These firms collectively provide health benefits for 5.7 million retirees and dependents and for 15.8 million workers and dependents. The survey was conducted between June and October 2005 as firms were finalizing decisions about the new Medicare drug benefit and whether to accept the financial incentives for businesses to continue providing drug coverage to their Medicare-eligible retirees.

The survey asked employers about their likely response to the Medicare drug benefit for their largest plan for Medicare-eligible retirees (age 65 and older). Firms have several strategies available to them for 2006. They could continue to provide coverage that is at least as generous as the standard Medicare drug benefit and receive tax-free subsidies equal to 28 percent of allowable drug costs between $250 and $5,000 per retiree in 2006. Firms also could choose to provide drug coverage that supplements Medicare’s coverage and not receive the subsidy; they could become a Medicare prescription drug plan; or they could terminate drug and/or other medical retiree health benefits altogether.

Among employers that report any savings due to the Medicare drug benefit, the weighted average savings is $644 per individual retiree in 2006. Firms that will continue to offer benefits and accept the government subsidy in 2006 will save, on average, $626 per individual retiree, while firms that supplement the new Medicare drug benefit will save more – an average of $826 per individual retiree.

Based on employers’ estimates, their responses to the drug benefit will result in median savings of 7 percent of total retiree health costs in 2005, including the employer and the retiree share of the costs for both Medicare-age retirees and early retirees.

“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,” said Frank McArdle, manager of Hewitt’s Washington, D.C., research office. “Unfortunately, retiree health cost pressures remain intense.”

The survey also finds that many firms that will accept the subsidy have policies in place that will affect retirees who enroll in a Medicare drug plan instead. Among these employers, nearly three in 10 (29%) say that retirees who sign up for a Medicare plan would lose both employer-sponsored medical and drug coverage if they enroll in a Medicare prescription drug plan, and a similar share (31%) say retirees would lose prescription drug coverage only (and retain other benefits). The remaining firms (41%) say that retirees would maintain all employer-sponsored coverage.

Also, while more than half of the employers (56%) accepting the Medicare subsidy for their largest plan in 2006 say retirees would be allowed to enroll or re-enroll in the employer plan at a future date if they sign up for a Medicare drug plan, 44% of employers say retirees would not be able to do so in the future.

“Seniors with retiree health benefits should consider their options carefully before signing up for a new Medicare drug plan,” said study co-author Tricia Neuman, a Foundation Vice President. “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.”

Most large employers are active in educating their Medicare-eligible retirees about their options under the new Medicare drug plan. Nine in 10 (89%) are distributing general education materials. About six in 10 will maintain a benefits center or call center (62%) or provide personalized communication beyond what the law requires (57%). Nearly one in five (18%) have human resources staff dedicated to Medicare drug benefit issues.

Changes in retiree health benefits, 2004-2005

When asked about the retiree health benefits overall, surveyed firms report an average increase of 10 percent in total retiree health costs between 2004 and 2005, including both Medicare-eligible retirees and early retirees (under age 65) who do not qualify for Medicare benefits. About one in eight surveyed firms (12%) say that they had stopped offering subsidized retiree health benefits in 2005 for future retirees, mainly newly hired workers.

A typical Medicare-eligible worker retiring in 2005 pays $1,536 annually toward their individual retiree health insurance premiums in the plan with the largest number of Medicare-eligible retirees; the employer pays the remaining $2,544 of the $4,080 total premium. The retiree’s share is about 9.9 percent more than what a similar retiree paid in 2004.

About one in five firms (19%) require new Medicare-eligible retirees in 2005 to pay the full cost of premiums for their retiree health insurance coverage, essentially providing the retiree access to an unsubsidized group plan. In contrast, 11% of firms pay the full premium costs for their retirees.

To help alleviate cost pressures, employers also have adopted a number of cost-containment strategies, some of which shift costs directly onto retirees. Nearly two-thirds of firms (63%) have a cap on their future financial obligations for retiree health benefits in plans offered to Medicare-eligible retirees in 2005. Among the half (49%) of firms with a cap on the largest plan available to their Medicare-eligible retirees, almost six in 10 (59%) said that they have already hit the cap, and another one in four (27%) say they expect to hit the cap within the next three years.

Between 2004 and 2005, most firms increased what retirees pay for their health benefits:

• Seven in 10 (71%) raised the amount that retirees pay toward their premiums in the past year.
• One in three (34%) raised the copayments or coinsurance retirees pay when they use services.
• One in four (24%) raised the annual deductible that they must pay.
• One in five (19%) raised the maximum amount that retirees could be required to pay out of pocket each year.

The report and related materials are available online.