Most Employers to Continue Retiree Drug Coverage That Exceeds Medicare

When the new Medicare prescription drug benefit starts in January, most companies will continue to provide drug coverage to their retirees that is equal to or better than the government program, according to a new survey by the Kaiser Family Foundation and Hewitt Associates.

By offering their own drug plans, companies will receive a 28 percent federal subsidy for costs between $250 and $5,000, generating savings of $626 per retiree.

Seventy-nine percent of the companies in the survey said they would take the subsidy; 10 percent said they would augment the Medicare benefit; 9 percent indicated they would drop drug coverage; and 2 percent said they would sponsor their own Medicare drug plan. The results came from a poll of 300 large private-sector employers.

The Medicare drug benefit was approved by Congress in 2003. The move has been controversial because the estimate for the cost of the program was at least $100 billion too low at the time Congress voted on it. In addition, seniors must choose from dozens of prescription drug plans, creating confusion and leading to town hall meetings where mystified constituents sought help from members of Congress.

The fact that employers are not abandoning drug coverage with the advent of the Medicare program “is mostly good news for retirees,” says Tricia Neuman, co-author of the study.

Opting for the subsidy while keeping current drug benefits in place was the least disruptive approach for companies, according to Frank McArdle, head of Hewitt’s Washington research office. The survey was conducted from June to October, when firms were making decisions about next year’s coverage.

More than 80 percent of the companies surveyed said they would take the subsidy again in 2007. The number falls to 50 percent in 2010, but that doesn’t mean that companies are going to drop drug coverage altogether.

The typical company in the survey saw its average total retiree health costs increase by 10.3 percent to $69.6 million over the past year. Most firms paid $212 of the $340 average monthly premium.

But rising costs are putting pressure on companies that cover their retirees. During the past year, 71 percent of employers increased retiree contributions to premiums and 34 percent boosted co-insurance or co-payments, while 12 percent terminated retiree health plans for people joining the company.

“It has been an ongoing trend to change the way benefits are provided for future hires, but with much more continuity for current retirees,” McArdle says.

Seniors who receive drug coverage from their former employers may be spared the hassle of parsing the Medicare offerings. “You can keep the (plan) you have today,” McArdle says. In fact, if retirees do sign up for Medicare coverage, they may lose all or part of their company benefit.

Although the status quo is prevailing for retiree drug coverage, Medicare changes are creating a whirlwind for companies and individual seniors. “It’s been a steep learning curve for everybody,” McArdle says. “It’s been a monumental change in the program in a very short period of time.”

—Mark Schoeff Jr.