A Changing Outlook for Retiree Health Plans

One of the most attractive employee benefits, health-care insurance for retirees, is being re-examined by many companies. Older workers, particularly those close to retirement, should expect to pay more for the benefit--or find it tougher to qualify for coverage.

Offered by most large companies and many small ones, retiree health-care plans typically offer those retiring under age 65 a continuation of the same medical coverage they enjoyed when working. For retirees over 65, the coverage generally supplements Medicare.

Such plans have been quite useful as the nation’s demographics change and the percentage of retirees or near-retirees in the population grows. Such coverage has been particularly useful for those retiring before 65, because they can’t fall back on Medicare until age 65. And many employers have been quite generous with coverage, often footing the entire cost.

But thanks to new corporate accounting rules expected to take effect in 1993, such generosity is becoming a thing of the past.

Earlier this month, the Financial Accounting Standards Board, which makes the nation’s accounting rules, adopted new standards that require companies to recognize on their financial statements some of their present and future costs of providing retiree health plans. Currently, companies recognize only what they actually pay out in any given year--a figure that does not reflect their vastly larger future commitments.

It’s no surprise that the new rule will have a devastating effect on corporate bottom lines, reducing profits by hundreds of millions of dollars.

And coming as corporations are already reeling from rising health-care costs--and as they brace themselves for an expected recession--the timing of this new rule is inopportune.

The implication for workers is clear: More companies will think twice about offering generous retiree health benefits. Indeed, surveys show that many employers intend to alter their plans in anticipation of the new accounting rules.

“It’s going to really turn up the heat on employers to minimize their obligations to retirees,” says Lois Salisbury, chairperson of Health Access, a coalition of labor, consumer and other groups in California working to promote affordable health care. “For many retirees, those obligations are already uncertain, so this will exacerbate that trend.”

Few employers say they will eliminate retiree health plans completely. But you should expect other changes, such as:

* Higher costs for retirees. Most big companies say they will require retirees to contribute more toward the costs of coverage. They also may require higher deductibles or coinsurance.

Some employers--recognizing that plans cost more for retirees under age 65 because they cannot yet draw on Medicare first--are specifically increasing costs borne by early retirees.

The median annual cost for employers to provide retiree health coverage for individuals retiring under 65 is $2,246, compared to only $1,033 for retirees above age 65, according to a survey by Hewitt Associates, an employee benefits consulting firm.

* Stricter eligibility requirements. Some companies are tying plan eligibility or benefit levels to employees’ length of service. If you have fewer years of service, you might be required to make higher contributions--or you might not be eligible at all.

“Employers are increasingly structuring these retiree plans more like pension benefits, (where they) reward long service,” says John W. Bauerlein, a consulting actuary in the Santa Ana office of Hewitt Associates.

For example, if you have 30 years of service when you retire, a company might subsidize 100% of the cost, Bauerlein says. But if you only have 15 years of service, the subsidy may be only 50%.

* Provide lower-cost options. Employers may provide alternatives for retirees to select reduced coverage in exchange for lower contributions. For example, you might be able to select catastrophic care with a much higher deductible in exchange for a lower premium.

What can you do about these changes?

Unfortunately, not much. If you are a union member, figure that the controversy over retiree health-care cutbacks will be an issue in labor negotiations. It’s already been a bone of contention in labor talks involving such large companies as American Telephone & Telegraph and the Baby Bell regional phone firms.

But whether you’re in a union or not, you should consider the strength of a company’s retiree health plan, along with other factors, before joining that company, Salisbury says.

And if your retirement is imminent, “you ought to double- and triple-check your own expectations for retirement coverage against what your employer says,” Salisbury advises. Get your employer to commit its plan terms in writing, she urges.

“There are a lot of gray areas where employers may feel free to change commitments,” she says. “Be vigorous in determining exactly what your employer’s obligations are going to be.”