Retiree Health Insurance: Will the New Medicare Legislation Stem the Flow of Eroding Benefits?

Fully one-third of Medicare beneficiaries rely on employer-sponsored health insurance (ESI) for coverage of outpatient prescription drugs and other vital services not covered under traditional Medicare.¹ These retirees face an increasingly dismal picture as employers decrease retiree benefits or subsidies² in response to increasing health care costs³ and an increasingly competitive global economy.⁴

Under landmark new legislation, The Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA), beneficiaries have multiple new options to consider regarding provision of supplemental services. Beneficiaries can either retain their current coverage sources or they may enroll in the new Medicare Part D, which establishes both a stand-alone Medicare prescription drug plan and a blueprint for regional, private PPO plans that policymakers hope will fill coverage gaps.

The outlook is anything but clear for beneficiaries who currently have supplemental ESI. Under MMA, employers are offered substantial, tax-exempt government subsidies if they continue current retiree health benefits. But the subsidy may not be sufficient to reverse the trend of decreasing ESI coverage to-date or to continue future ESI coverage. So employers may view the new legislation as an opportunity to drop costly benefits and encourage retirees to enroll in Part D or Medicare Advantage.

Further, there is no legal constraint on employer decisions.⁵ While legislation protects employees’ pension benefits, there is no equivalent protection of employer-sponsored retiree health benefits. Some industries- notably manufacturing- prefer that the over-65 population be covered through Medicare rather than corporations, so that the government rather than private industry bears the financial burden.⁶ Health economist Uwe Reinhardt projects that the U.S. economy would improve if the burden of retiree health care were removed from corporations.⁷

Although outcomes under MMA are uncertain, existing research provides a baseline against which to measure employer and beneficiary response. Several recent surveys of mid-size and large private-sector employers (200+ employees) found that employers are highly concerned about retiree health costs and have shifted more of the cost burden to retirees.⁸

The Kaiser/Hewitt survey revealed that in 2003, average retiree contributions to premiums increased by double digits, as did retiree health costs.⁹ Almost half of surveyed employers had capped their contributions to health insurance for current retirees. Higher retiree cost-sharing appeared in the form of larger deductibles or out-of-pocket limits, increased copayments or coinsurance, and imposition of tiered drug copayments.¹⁰

Looking forward, large employers reported that they are unlikely to terminate current retirees’ health benefits or prescription drug coverage, but anticipate increasing retiree premium contributions, dependent contributions to premiums, and other forms of cost-sharing within the next three years.¹¹ They are also considering structural changes such as access-only benefits (where retirees pay 100 percent of costs but are able to purchase through a group), catastrophic plans with Medical Savings Accounts, and shifts to defined contribution approaches. However, the surveys were fielded before the passage of MMA, so it is unlikely that the new legislation was factored into these projections. There is much debate about the degree to which employers will alter benefits in the wake of MMA, and whether they will limit drastic changes to future or early retirees, versus current retirees over age 65.¹²

The Kaiser/HRET survey showed little recent change in the number of large firms offering retiree health benefits.¹³ However, it revealed that a much smaller percentage of workers in small firms (<200 employees) and workers without unions receive retiree health benefits, compared to their large-firm or unionized counterparts. These subgroups are likely at greater risk for coverage loss or increased cost-sharing.

New retirees show early impacts of market changes: the proportion of Medicare beneficiaries ages 65-69 with ESI declined from 46 percent in 1996 to 39 percent in 2000, and there was a similar decline in the proportion with employer-sponsored drug coverage.¹⁴ If supplemental ESI becomes cost-prohibitive, retirees may opt into Medicare Advantage or Part D. However, beneficiaries losing ESI coverage will face the much-discussed “doughnut hole,” and will likely be less well off since ESI has been one of the most comprehensive sources of coverage, particularly prescription drug benefits.¹⁵

Employees are not fully prepared for these changes. In a large recent survey, most expect to continue working in some capacity during their retirement years, many for financial reasons.¹⁶ But while surveyed employees report taking increased responsibility to save for retirement, many also report concern that they will outlive their savings and analysts believe many are not making adequate provision for the cost of retirement. How MMA will affect this trend will continue to be of interest over the next few years.

HCFO has funded research that informs policy related to retiree health benefits:

Title: Older Americans’ Health Insurance: Emerging Concerns
Grantee Institution: The Urban Institute
Principal Investigator: Sheila R. Zedlewski, Ph.D.
Grant Period: May 1, 1996 – April 30, 1999

How well does the employer-based health care system work for early retirees? Zedlewski and colleagues investigated the effectiveness of the nation's health insurance system in providing coverage for early retirees. Many Americans retire from the labor force before reaching Medicare eligibility, yet only one-third of persons retiring from public sector jobs can depend on receiving health insurance through their former employer. During the past decade, the percent of retirees that remain covered has dropped, and that trend is expected to continue. Alternative health insurance options are limited for retirees and their spouses. At a time when health status may be diminishing, the consequences of inadequate health coverage can be devastating. The objective of this research was to increase the knowledge base about this population so that appropriate public policy might be developed and implemented.

• Availability of Retiree Health Insurance Important Factor as Near-Elderly Consider Leaving Work Force. HCFO Findings Brief, Vol. 3, Issue 2; November 1999.

Title: The Effect of Price on Health Plan Choices of Retirees
Grantee Institution: University of California Irvine Graduate School of Management
Principal Investigator: Thomas C. Buchmueller, Ph.D.
Grant Period: March 2002 – February 29, 2004

Buchmueller is analyzing data from a large western employer to assess the price sensitivity and related health plan choices of Medicare-eligible retirees. Building on previous HCFO-funded research, he is analyzing the following: 1) What is the effect of out-of-pocket premiums on the health plan choices of Medicare-eligible retirees? 2) How price-sensitive are early retirees (under 65)? and 3) How responsive are retirees to financial incentives for declining coverage? The objective of this study is to educate decision makers who develop Medicare reforms by providing credible estimates of the price sensitivity of Medicare beneficiaries. In addition, the researcher seeks to inform policymakers about how retirees respond to financial incentives and the impact this response might have on how insurance costs are allocated.

Title: Meeting the Future Long-Term Care Needs of the Baby Boomers: How the Changing Structure of Families Will Affect Paid Helpers and Institutions
Grantee Institution: The Urban Institute
Principal Investigator: Richard J. Johnson
Grant Period: December 01, 2003 - November 30, 2005

Johnson and colleagues are examining how families choose the types of long-term care services for older adults and are projecting the demand for these services over the next 40 years. They are estimating a model of informal family care, nursing home care, paid home care, and residence in assisted living settings. The model will show the impact of health status, financial resources, family networks, and relative prices, determined in part by family characteristics and in part by public policy. They will then use the model to simulate the effects of potential changes in public policy on long-term care decisions, including the impact of an expansion of Medicaid eligibility or of expansions in Medicare coverage of long-term care services. The objective of the project is to better understand how competing social, demographic, and economic trends combine to determine future demand for long-term care services.

¹ Kaiser Family Foundation. “Medicare at a Glance: Fact Sheet,” April 2003, www.kff.org. Medicare Payment Advisory Commission. Report to the Congress: Assessing Medicare Benefits, June 2002, www.medpac.gov.

²Kaiser Family Foundation. “Retiree Health Benefits Now and in the Future: Findings from the Kaiser/Hewitt 2003 Survey on Retiree Health Benefits,” January 14, 2004, www.kff.org.
McArdle, F. et al. “Large Firms’ Retiree Health Benefits Before Medicare Reform: 2003 Survey Results,” Health Affairs Web exclusive, January 14, 2004, www.healthaffairs.org.

³Kaiser Family Foundation and Health Research and Education Trust. “Employer Health Benefits: 2003 Summary of Findings,” Pub. No. 3370, www.kff.org.
Towers Perrin. Towers Perrin Projects Fifth Consecutive Year of Double-Digit Health Care Cost Increases in 2004, September 29, 2003, www.towersperrin.com.
Stuart, B. et al. “Employer-Sponsored Health Insurance and Prescription Drug Coverage for New Retirees: Dramatic Declines in Five Years,” Health Affairs Web exclusive, July 23, 2003, www.healthaffairs.org.
McArdle, F. et al. “Large Firms’ Retiree Health Benefits Before Medicare Reform: 2003 Survey Results,” Health Affairs Web exclusive, January 14, 2004, www.healthaffairs.org.

⁴ Towers Perrin, The 2003 Retirement Study, www.towersperrin.com.

⁵ Freudenheim, M. “Companies Limit Health Coverage of Many Retirees,” The New York Times, February 3, 2004.

⁶ Gross, D. “Whose Problem is Health Care?” The New York Times, February 8, 2004.

⁷ ibid.

⁸ Kaiser Family Foundation, Retiree Health Benefits Now and in the Future: Findings from the Kaiser/Hewitt 2003 Survey on Retiree Health Benefits, January 14, 2004, www.kff.org.
McArdle, F. et al. “Large Firms’ Retiree Health Benefits Before Medicare Reform: 2003 Survey Results,” Health Affairs Web exclusive, January 14, 2004, www.healthaffairs.org.
Towers Perrin, The 2003 Retirement Study, www.towersperrin.com.
Kaiser Family Foundation/Health Research and Educational Trust (HRET). 2003 Employer Health Benefits Survey, www.kff.org, www.hret.org.

⁹ Kaiser Family Foundation, Retiree Health Benefits Now and in the Future: Findings from the Kaiser/Hewitt 2003 Survey on Retiree Health Benefits, January 14, 2004, www.kff.org.
McArdle, F. et al. “Large Firms’ Retiree Health Benefits Before Medicare Reform: 2003 Survey Results,” Health Affairs Web exclusive, January 14, 2004, www.healthaffairs.org.

¹⁰ Kaiser Family Foundation, Retiree Health Benefits Now and in the Future: Findings from the Kaiser/Hewitt 2003 Survey on Retiree Health Benefits, January 14, 2004, www.kff.org.
McArdle, F. et al. “Large Firms’ Retiree Health Benefits Before Medicare Reform: 2003 Survey Results,” Health Affairs Web exclusive, January 14, 2004, www.healthaffairs.org.
Towers Perrin, The 2003 Retirement Study, www.towersperrin.com.

¹¹ Kaiser Family Foundation, Retiree Health Benefits Now and in the Future: Findings from the Kaiser/Hewitt 2003 Survey on Retiree Health Benefits, January 14, 2004, www.kff.org.

¹² Freudenheim, M. “Companies Limit Health Coverage of Many Retirees,” The New York Times, February 3, 2004.

¹³ Kaiser Family Foundation/Health Research and Educational Trust (HRET). 2003 Employer Health Benefits Survey, www.kff.org, www.hret.org.

¹⁴ Stuart, B. et al. “Employer-Sponsored Health Insurance and Prescription Drug Coverage for New Retirees: Dramatic Declines in Five Years,” Health Affairs Web exclusive, July 23, 2003, www.healthaffairs.org.

¹⁵ Kaiser Family Foundation, Retiree Health Benefits Now and in the Future: Findings from the Kaiser/Hewitt 2003 Survey on Retiree Health Benefits, January 14, 2004, www.kff.org.
Stuart, B. et al. “Employer-Sponsored Health Insurance and Prescription Drug Coverage for New Retirees: Dramatic Declines in Five Years,” Health Affairs Web exclusive, July 23, 2003, www.healthaffairs.org.

¹⁶ Towers Perrin, The 2003 Retirement Study, www.towersperrin.com.