Keeping retiree health benefits afloat

HR Magazine, Dec, 1998 by Stephenie Overman

Companies find ways to continue benefits through cost sharing, tax breaks and tighter eligibility requirements.

The share of companies offering health care coverage to retirees has shrunk from roughly 65 percent in the 1980s to fewer than 40 percent today, according to the U.S. General Accounting Office (GAO). Companies that still offer health benefits to retirees are using cost control measures and stricter eligibility requirements to fund their plans, the GAO study found.

That's no easy task. In 1991, the latest figures available, the per capita personal health care spending among the elderly was $7,016, nearly double the $4,040 figure just four years earlier, according to the Employee Benefit Research Institute (EBRI) in Washington, D.C. Experts say it is becoming more difficult for companies to maintain pay-as-you-go systems due to increased life spans and the changing demographics of the workforce - fewer entrants to the workforce coupled with retiring baby boomers.

The popularity of managed care in the 1990s helped to stabilize health care costs, allowing companies to offer a wider range of benefits for active workers. Following suit, retiree health benefit plans "are moving into managed care and are requiring retirees to contribute toward the premium," says Paul Fronstin, senior research associate at EBRI. "They're playing catch-up with active workers' benefits."

But the savings may not last. Another recent government report projected that health care spending will double over the next decade, reaching $2.1 trillion by 2007. The Health Care Financing Administration explains that most of the savings from switching health care systems have been realized now that most Americans are covered by managed care.

How can companies afford to continue retiree health care coverage in the face of rising health care costs? One employer in the GAO study uses eligibility standards by requiring 35 years of service to qualify for the maximum employer contribution of 75 percent. Retirees with 19 years of service are eligible for an employer contribution of only 30 percent.

The eligibility controls may reduce costs for employers, but they also eliminate retirees from coverage. The share of participants in employer-based retiree health plans slipped by 8 percentage points between 1988 and 1994, notes the GAO. Among those already retired, the proportion covered declined 10 percentage points. Of those who had to discontinue their coverage, 27 percent cited cost as a factor. In 1997, the per-employee cost of health insurance for employer-based coverage was $3,800, an exorbitant amount for someone no longer receiving a steady income, says Fronstin.

In addition to the rising cost of health care, employers have been affected by the Financial Accounting Standards statement No. 106 (FAS 106), which requires liabilities for retiree health benefits to be recognized explicitly on balance sheets. The Financial Accounting Standards Board (FASB) statement, issued in 1990, covers the accounting of all post-retirement health and welfare benefits other than pensions. The rule mandates that companies accrue the projected cost of post-retirement benefits on their financial statements during an employee's working career. That has caused many employers to reexamine their role in providing health benefits for current and future retirees, according to EBRI's 1998 Health Confidence Survey.

RETENTION AND TRADITION

Major corporations that continue to offer retiree health care coverage, such as AT&T and General Electric Co., cite retention value, union contracts and tradition as reasons.

Companies have realized that such benefits are an effective tool both for downsizing and for attracting and retaining experienced workers, says Fronstin.

"It's probably always a good idea to have those tools" available, he says. Indeed, the EBRI survey found that 74 percent of workers would not retire before becoming eligible for Medicare if their employer did not provide retiree health benefits.

Burke Stinson, AT&T's human resource spokesman in Basking Ridge, N.J., acknowledges that retiree health care's value as a retention tool has diminished.

"After World War II, with so much uncertainty in the workforce, companies wanted to attract and retain people," he says. "Technology and the work itself were viewed as something not about to change significantly. A gold watch and a good medical plan were conditions of employment at large companies looking for a stable workforce.

"Nowadays, people ask less and less about benefits and more about bonuses and workplace flexibility; a young person wants to know about access to the top. So [retiree health care] is not what it once was in terms of attractiveness," he says.

Yet AT&T continues to offer the benefit because "it's a matter of class and tradition," Stinson adds. "And let's not forget we have a progressive union-the Communications Workers of America. For decades, pensions and medical benefits have been on the bargaining table, so there is pressure from the unions as well" to keep retirees covered.