Anxiety Zone
By: Source: AARP Bulletin Today Date Posted: 2005-02-10 12:49:42
For three decades, Florida retirees Kathy and Abe Shaw paid $2 for each drug prescription under his former employer's health plan. It was an ominous sign when their copayments shot up this year. Now they're terrified that in 2006, when the Medicare drug law goes into effect, their company coverage will vanish.
"We were on that same policy, with the same copayments, for 32 years, and a year after this law passed they changed it," Kathy says. "That's an awfully large coincidence."
Ever since Congress seriously began to debate Medicare drug coverage in 2002, millions of older Americans have shared the Shaws' anxiety that it would cause employers to drop their own drug benefits. The Medicare Modernization Act, passed in 2003, offers far less generous drug coverage than most company plans.
Are the fears justified? Most retirees won't know for sure until later this year, when employers announce their coverage decisions for 2006. But according to new research on employers' intentions, the short-term outlook is relatively optimistic. While a small percentage of companies say they will eliminate their retiree drug coverage, most are likely to continue it for current retirees—at least through 2006. The long-term picture is less clear. Many companies are expected to wait and see how the Medicare law works out before making decisions for 2007.
Experts agree that because of the law, in the short term fewer employers will drop coverage than if the law had not been passed.
For nearly 20 years, retiree health benefits, which nearly always cover drugs, have been steadily eroding. In 1988, 66 percent of private companies with 200 or more employees offered such benefits. By last year, only 36 percent did so, according to the nonprofit Kaiser Family Foundation, which tracks the figures annually.
"The prospects for retiree health coverage are slowly disappearing for America's workers," says foundation president Drew Altman, "and retirees who have it will be paying more."
It is a disturbing trend that will affect future retirees more than today's. "If you're under 40 and not in the public sector, you probably will not have retiree medical benefits, period," says Helen Darling, president of the National Business Group on Health. "But most older [workers and retirees] won't lose" coverage. If they do, it will be due to company bankruptcies or escalating health costs, she adds. "It has nothing to do with the Medicare Modernization Act."
The Subsidy Game
Darling's view—so contrary to most retirees' forebodings—is shared by other experts. One reason is that the new law itself gives employers a big inducement to continue coverage. If they do keep it going, they'll get a 28 percent federal subsidy toward their drug costs for retirees who are eligible for Medicare—provided the coverage is at least as good as the basic Medicare drug benefit, known as Part D. The subsidy could save employers up to $1,330 a year per retiree. They cannot get it if they make retirees enroll in Part D.
This appears to be a strong incentive for employers to continue their own drug benefits after Jan. 1 next year, when Part D begins. Some executives in the telecommunications industry, for example, "say the 28 percent rebate will help them provide coverage longer than they might otherwise be able to," says C. William (Bill) Jones, president of the 100,000-member Association of BellTel Retirees.
The strongest evidence to date emerged in a recent survey of 333 large private companies by the Kaiser Foundation and Hewitt Associates, a leading benefits consulting group. It found that 8 percent of firms are likely to drop drug coverage, whereas 58 percent will likely take the government subsidy and continue coverage. Another 17 percent will likely offer it as a supplement to the Medicare benefit. (The rest didn't yet know what they would do.)
This adds up to at least three-quarters of large companies (those with more than 1,000 employees) expecting to continue drug coverage in some form. But there are other concerns.
There is nothing in the new law that prevents a company from qualifying for the subsidy yet reducing its benefits more toward the level of Medicare's. Will companies do that? Among employers in the Kaiser-Hewitt survey who plan to accept the subsidy, 85 percent said they would retain current benefit levels.
From the employers' perspective, "one of the attractions of the subsidy is that you don't need to change anything," says Frank McArdle, manager of research at Hewitt's Washington office and the lead author of the survey. "You don't have to disrupt retirees or experience bad labor relations, but you do get some help with a portion of the cost."
Nonetheless, with average retiree health costs escalating by 12.7 percent in 2004 alone, most employers are requiring retirees to pay an increasing share anyway. Nearly 80 percent of the same companies surveyed had raised health premiums in 2003–2004, and more than half increased copayments for drugs. Many firms raised both again for 2005.
This is what happened to the Shaws (not their real names). Under Abe's retiree health plan, they still pay no premiums, but their deductible, last year a joint $100, rose this year to $200 for Abe and $300 for Kathy. His drug copay is still only $2 per prescription, but Kathy—as a spouse not yet eligible for Medicare—must now pay $10 for generic drugs and $25 for brands. This has increased her copays for four drugs from $8 to $85 a month.
"I'm outraged," she says. "When he retired, we had a letter saying his benefits would remain the same for life and I'd have the same until five years after he dies."
If Abe's company eliminates its coverage in 2006, as Kathy fears, leaving her uninsured, the drugs she needs would cost more than $3,900 a year at current prices. Under the Medicare benefit, once she is eligible, she'd pay about $2,850 a year out of pocket. Her husband would pay about $1,100 a year for his two drugs under Medicare, instead of the $48 he pays now.
It's a Wrap
Besides continuing present coverage or dropping it, employers have a third option. They could "wrap" their own benefits around Medicare's drug coverage. This means that Medicare would become the primary payer for drugs, just as it is for health benefits in many retiree plans, and employers would pay some of the costs that Medicare doesn't cover. Under this option, employers would not qualify for the subsidy. Retirees would be obliged to enroll in Part D or forfeit the company's supplementary coverage.
That worries Burt Goldenberg, a former construction manager now retired in Honolulu. "I'd have to pay a premium toward Medicare drug coverage in order to safeguard the better benefits I have with my former employer," he says. "That's the basic problem for me and my wife. We'd each have to pay the premium."
Premiums for Medicare Part D will vary among the private plans that offer it. The average premium, however, is estimated at $35 a month ($420 a year) in 2006, and it will rise in subsequent years. Goldenberg thinks the law should require employers choosing the "wraparound" option to pay all or most of the premium.
In fact, employers who don't take the federal subsidy can do what they like, unless constrained by union or other contracts, just as they can now. Wrapping around the Part D benefit could save companies a lot of money, since Medicare will pay a large share of the costs of retirees with moderate drug bills. Employers could also save money by shifting other costs, such as Medicare drug premiums, to the retirees themselves. But experts expect many companies to pay part or all of the premiums, or negotiate lower ones, and otherwise sweeten the basic Medicare benefit.
There are many ways employers could lower enrollees' out-of-pocket costs under the standard Part D benefit. Those costs will include not only the premium but a $250 annual deductible, 25 percent of the next $2,000 of drug costs and 100 percent of any further costs up to $5,100—a much-criticized gap in coverage known as the "doughnut hole"—before very low-cost catastrophic coverage kicks in.
"Most employers would definitely fill in the doughnut hole, because it really doesn't exist in retiree health plan designs," says Hewitt's McArdle. "Employers would not typically leave that gap in coverage."
That's one possibility. Another is that employers could provide partial coverage to bridge the doughnut hole—say 50 or 75 percent. Or they could set an annual dollar limit on how much they'll pay toward any retiree's drug bills, as many companies already do. Or they could vary other ways of sharing costs.
Most wraparound plans would still give more coverage than the standard Medicare benefit. But they're unlikely to be as generous as full retiree benefits.
The Kaiser-Hewitt survey found only 17 percent of companies saying they would likely choose the wraparound option, but that could change over time. At present others may be deterred from doing so in 2006 by the administrative complexities of coordinating with many different Medicare drug plans across the country—"a potential nightmare," one expert predicted—within a tight time frame for redesigning benefits by fall.
So some companies may be biding their time, choosing to take the subsidy and maintain their current retiree benefits through 2006, as the easiest option short-term, while closely monitoring how the new law works in practice.
The Battle Ahead
To Kathy Shaw, any change in employer health benefits is a betrayal. "This was the retirees' reward for many years of hard work and loyalty to their employers," she wrote to President Bush and several senators in 2003. "It was not a gift or an entitlement. It was an earned benefit! It was pay! These benefits should be sacrosanct!"
The National Retiree Legislative Network, with 2 million members, has been pushing legislation to protect retiree health benefits. But there's "virtually no chance of getting it passed" any time soon, says BellTel's Jones, one of the network's board members.
"So long as employer-provided health care is voluntary, the only way to preserve existing benefits is to provide financial incentives to companies," says AARP's director of policy, John Rother. "AARP fought very hard to get the 28 percent subsidy in the Medicare law."
Spiraling health care costs remain a fundamental driver in the erosion of employer benefits for workers and retirees alike. "But no one seems to be very serious about getting to the bottom of controlling those costs," Jones says. "The fact that we're giving carte blanche to the pharmaceutical companies to continue to charge enormous prices for drugs, even through the Medicare plan, is unconscionable." AARP is promoting ways to rein in costs, Rother says, including pushing to make it legal to import lower-cost drugs from Canada and to give Medicare the right to negotiate lower prices for beneficiaries if the new law does not yield anticipated discounts.
Can employer benefits—historically a foundation of the U.S. health care system—continue much longer? And, if they can't, what would take their place? As more employers drop coverage and the number of uninsured Americans—now more than 44 million—continues to rise, that debate is likely to grow ever more intense in coming years.
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