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Planning to Retire Early?
Better Think About Health Care Costs
Many employers asked their retirees to contribute more to their health care costs in 2004 and plan to do the same in 2005, according to the third annual joint survey by the Kaiser Family Foundation (KFF) and Hewitt Associates.1 This news comes at a time when the Labor Department reports that older people have become the fastest-growing portion of the workforce. Workers over 55 will make up 19.1 percent of the labor force by 2012, up from 14.3 percent in 2002. The percentage of men 55 to 64 years old in the work force fell steadily from 87 percent in 1950 to under 65 percent in 1994, but climbed back to 69 percent last year. Since 1994, the rate of men over 65 participating in the labor market has grown from 15 percent to 19 percent.2
Many contend that the need to maintain affordable health insurance until Medicare eligibility is reached is the driving force behind the increase in older workers. The same KFF/Hewitt survey found that costs not only are increasing for firms providing retiree health benefits, but "a typical worker under age 65 who retired in 2004 would pay $2,244 annually in premiums ($4,644 with spousal coverage) - 27 percent more than a similar worker who retired in 2003." For those 2004 retirees eligible for Medicare, annual premiums were $1,212 ($2,508 with spousal coverage) - 24 percent more than in 2003. As a result, some who have saved and planned for an early retirement, relying on employer provided retiree health benefits, are finding that they cannot leave the workforce as planned.
The survey also found that eight percent of employers eliminated health benefits for future retirees in 2004, and 11 percent said they are likely to do so in 2005. This combined with an increase in the retirement age and fears about the solvency of Social Security leave many current workers wondering how they can possibly plan adequately for retirement.
n an effort to encourage employers to maintain their retiree health benefits, the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) provides tax-free subsidies to employers equal to 28 percent of retired workers' annual drug costs. Employers must offer a prescription drug benefit at least as generous as Medicare's and contribute at least as much as Medicare in order to qualify for the subsidy. A recent GAO report indicates that many employers have not yet decided how to respond once the Medicare drug benefit is implemented in 2006, but most employers that were interviewed were considering the federal subsidy as their primary option. Others, who have capped their retiree health coverage obligations, were considering benefit options that would wrap around Medicare's drug benefit for all retirees or for those whose benefits would not qualify for the subsidy.3
While the GAO report indicates that the decline in employer provision of retiree health benefits has leveled off in recent years, it is clear that the trend is leaving some uninsured and forcing others to make less than desirable labor market decisions. There are also many remaining questions about the impact that the MMA will have on retiree health coverage and behavior. Policymakers need to continue to observe these trends and the response of employers and potential retirees to various incentives in order to ensure health care coverage for retirees.
HCFO has funded research that directly informs policy related to rising retiree health care coverage:
Title: Health Plan Selection for Medicare Eligible Enrollees in the Federal Employees Health Benefits Program
Institution: Emory University
Principal Investigator: Curtis Florence, Ph.D.
Time: April 2002 – February 2004
How do variations in out-of-pocket premiums and benefits influence plan choice among Medicare-eligible enrollees in the Federal Employees Health Benefits (FEHB) program? Researchers at Emory University examined the following questions: (1) How sensitive is the health plan choice of Medicare eligible persons to variation in premiums? (2) How sensitive is the health plan choice of Medicare eligible persons to variation in plan benefits? (3) Do the plan choice of Medicare eligible enrollees reflect adverse selection for plans with greater benefits? (4) How strong is the preference for fee-for-service plans among Medicare eligible enrollees? How much must fee-for-service premiums increase to induce them to pick managed care plans? (5) How would different subsidy schemes affect health plan enrollment for Medicare eligible enrollees? The researchers generated policy-relevant findings concerning two approaches to Medicare reform: (1) a defined contribution subsidy and an "a la cart" plan that competes on the basis of price; or (2) a "bundled service" plan that competes on the basis of price and benefits. This study simulated the effect of various Medicare reform proposals by providing estimates of how enrollees react to changes in premiums and benefits offered and local health care costs.
In this study, researchers found that there is little risk segmentation in the Federal Employee Health Benefits Program and that reducing the premium subsidy would lower government premium spending and slightly increase risk segmentation.4
Title: The Effect of Price on Health Plan Choices of Retirees
Institution: University of California Irvine Graduate School of Management
Principal Investigator: Thomas C. Buchmueller, Ph.D.
Time: March 2002 – February 2003
What is the price sensitivity and related health plan choices of Medicare-eligible retirees? Building on previous HCFO-funded research and analyzing data from a large western employer, the researcher analyzed 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 was to educate decision makers who develop Medicare reforms by providing credible estimates of the price sensitivity of Medicare beneficiaries. In addition, the researcher sought to inform policymakers about how retirees respond to financial incentives and the impact this response might have on how insurance costs are allocated.
The results of this project indicated that price is a significant factor influencing the health insurance decisions of retirees. Additionally, preliminary elasticity estimates are at the low end of the range found in previous studies on active employees.
Title: An Empirical Investigation of Employee Health Plan Choice and Switching Behavior Under Managed Care
Institution: University of California, Irvine
Principal Investigator: Thomas C. Buchmueller, Ph.D.
Time: November 1996 - April 2001
How do consumers choose among competing health plans in a managed competition setting? The researchers conducted five related empirical studies analyzing a data set compiled from the health benefits program of the University of California (UC). This data set consists of five years (1992 to 1996) of open enrollment choices for over 100,000 UC employees and retirees. The researchers: 1) extended and refined their previous analysis of the effect of price on switching among health plans; 2) investigated the implications of overlapping provider panels for patterns of health plan switching; 3) examined the factors affecting the health plan choices and switching decisions of more than 30,000 retirees receiving health benefits from the UC; 4) examined the health plan switching decisions of individuals with serious health conditions; and 5) examined the relationship between various satisfaction measures and plan switching. The objective of this study was to better inform policymakers about how consumers make choices among competing health plans.
In this study, the researchers determined that it is not clear exactly how price sensitive enrollees must be in order to generate price competition among health plans. The study also suggested that the behavioral differences between retirees and active employees suggest that caution should be taken in extrapolating from research on the non-elderly to the Medicare program.5
Title: Older American’s Health Insurance: Emerging Concerns
Institution: The Urban Institute
Principal Investigator: Sheila R. Zedlewski
Time: May 1996 – April 1999
How well does the employer-based health care system work for early retirees? This project 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.
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1 www.kff.org/medicare/med121404nr.cfm
2 "Retirement Turns Into a Rest Stop as Benefits Dwindle," New York Times, February 9, 2005.
3 "Retiree Health Benefits: Options for Employment-Based Prescription Drug Benefits Under the Medicare Modernization Act," Report to Congressional Committees, United States Government Accountability Office, Febuary 2005.
4 Florence C, Thorpe K, " How does the employer contribution for the federal employees health benefits program influence plan selection?", Health Affairs , 2003, 22(2): 211-218.
5 Buchmueller, TC, " The health plan choices of retirees under managed competition", Health Services Research, 2000, 35(5.1): 949-976. |
