Employers anticipate further restrictions on retiree medical plans

Most Now Relying on Medicare Subsidies to Offset Costs

Despite widespread use of the Medicare federal subsidy, a vast majority of employers are planning to curtail their retiree medical plans for current and future retirees in the next five years, according to a new study by Watson Wyatt Worldwide, a global human capital consulting firm.

The survey of 163 companies found that only 5 percent of employers do not expect to place any additional restrictions on their medical benefits for future retirees over the next five years and 7 percent do not expect to implement further restrictions for current retirees. Fourteen percent of employers plan to eliminate the benefit entirely for future post-65 retirees and 6 percent plan to eliminate it for their current post-65 retirees.

ìOne bit of good news for employees is that the vast majority of employers currently providing retiree medical benefits will continue to do so,î said Cara Jareb, director of retiree medical consulting at Watson Wyatt. ìThe bad news is that retirees ñ especially future retirees ñ will have to pay more for their coverage.î

Nearly two-thirds of employers (65 percent) anticipate increasing the financial contributions for future retirees and half (50 percent) expect to change their plan design. Twenty-four percent intend to tighten eligibility for future retirees and 10 percent expect to place a new or lower cap on their employer contributions. As more companies adopt account-based programs for current employees, 26 percent anticipate offering this option to their future retirees

Employers Plan Further Restrictions to Retiree Medical Benefits

Percent of Employers Planning Action Over Next Five Years
Planned Initiatives
Current Retirees
Future Retirees

No further restriction of offerings
7%
5%

Eliminate benefit for post-65 retirees
6%
14%

Change plan design for post-65 retirees
49%
50%

Increase employee contributions
64%
65%

Tighten eligibility
8%
24%

Add cap or lower existing cap
8%
10%

Add account-based options
10%
26%

Many employers are currently relying on federal subsidies from the new Medicare Part D prescription drug program to offset the cost of their retiree medical plans. Out of the 77 percent of employers that took the federal subsidy in 2006, 64 percent plan to take the federal subsidy in the future.

ìEmployers are biding time with the federal subsidy for now as they sort out their long-term retiree medical strategies,î Jareb said. ìBut many of them will likely find that relying on the subsidy will not be the most effective solution to control costs going forward. At that point, employers will need to explore other ways to fund and deliver these benefits.î