Towers Perrin's 2010 Retiree Health Care Cost Survey Shows Continuing Affordability and Access Concerns

Pre-65 Retirees Face Most Severe Financial Burden As Total Annual Family Coverage Costs Approach $20,000

STAMFORD, CT, NOVEMBER 18, 2009 — Driven by a prolonged economic recession and already high health care benefit costs for active employees, large U.S. employers are continuing to shift significant health coverage costs to retirees or exiting sponsored retiree health benefit programs altogether, according to Towers Perrin's 2010 Retiree Health Care Cost Survey. 

The survey finds that pre-65 retirees, who are not yet eligible for Medicare, will be hardest hit as they attempt to balance fixed incomes with steady increases in health coverage costs. At the same time, the survey also reveals that many employers are missing significant opportunities to deliver retiree benefit value while saving money and improving program effectiveness.

According to Towers Perrin, surveyed employers' total health benefit costs for retirees will increase 6% for pre-65 retirees and 4% for post-65 retirees in 2010. While these rate increases are consistent with past experience, the impact on retirees is significant. Today, only 45% of survey respondents subsidize retiree health care coverage in some form. That figure reflects a steady decline over the past 20 years. In addition, many employers have put caps on their premium subsidies and, since plan costs are now well in excess of those caps, many retirees now bear the full brunt of cost inflation.

"Virtually all retirees have been anxiously watching their investments over the last year and a half. For retirees supported by investment returns or living on fixed incomes, 2009 was a time filled with deep concerns," said Dave Guilmette, Managing Director of the Towers Perrin Health and Welfare practice. "In addition to their income concerns, many retirees face a special financial challenge: purchasing health care coverage.  As employers pull away from subsidization of retiree health benefits, retirees — especially those who are not yet eligible for Medicare — are facing a significant financial burden."

Among surveyed employers, the total annual cost for pre-65 retiree health coverage has increased 6%, to $7,596 for a single retiree in 2010, compared to $5,184 for a single active employee. The 2010 cost for family coverage (for the increasing group of retirees that still have dependent children) is $19,596 — nearly 31% more than comparable costs for family coverage for active employees (Exhibit 1).

In plans that offer an employer subsidy (many do not), the subsidy covers less than half of the total cost, on average, and typically does not increase to keep up with inflation.  The annual cost share pre-65 retirees pay to cover themselves is $3,984.  Their share to cover themselves plus one dependent is $7,668, and $10,548 for themselves plus family.  These costs are roughly three times higher than the cost share their active employee counterparts pay for similar coverage (Exhibit 2). In addition to higher premium costs, pre-65 retirees are paying more toward their ongoing health care expenses due to cutbacks in benefit designs.

For post-65 retirees, the cost of individual plans will increase an average of 4%, to $3,840, while the cost of plans covering a retiree plus one dependent will increase to $7,848. While the relatively low increase is good news, it masks the fact that a number of employers have eliminated prescription drug coverage or substantially reduced benefits to keep cost increases in check. With employer subsidies once again significantly lower than those for active employees, retirees pay over half of the annual premium cost — resulting in contributions that are, on average, double what these retirees would pay as active employees (Exhibits 1 and 2).

Even Medicare Advantage, which has been an attractive, low-cost option for both employers and employees, may change substantially — especially with continuing efforts to restrict Medicare funding for these plans. With costs rising and federal subsidies likely to change, the future financial advantage of these plans may diminish.

"Today's focus on cutting costs, and concerns about the outcome of health care reform, are compelling many employers to look at their overall retirement benefit proposition — including retiree medical programs," said Dave Osterndorf, chief actuary of Towers Perrin’s Health and Welfare practice. "In fact, many employers have already exited their role as plan sponsor for retiree medical benefits. Only about one in three survey respondents are offering subsidized retiree medical benefits to their current active employees. Among those that currently sponsor programs, 10% are planning to exit, and 20% are seriously considering this option for the future."

The Towers Perrin Retiree Health Care Cost Survey found that, among survey respondents, only 22% of companies offer some sort of subsidized retiree coverage to future retirees coming into the company today as new hires. Another 23% offer retirees access to a company-sponsored plan, but require participants to pay the full cost (no employer subsidy). The picture is only somewhat better for current retirees and those employees already part of the company workforce — 45% of their employers provide subsidized coverage for all or some of these current and retired workers, and an additional 14% provide access-only benefits (Exhibit 3).

Health Care Reform Proposals Cloud the Retiree Medical Benefit Picture

Not only would federal health care reform legislation bring significant changes to health benefit programs for active employees, but pending legislation now receiving serious Congressional consideration would also change the landscape for retiree medical benefits. The question for employer-sponsored programs is which mix of provisions might emerge in a final law, since some would encourage employers to hasten their exit from a role in retiree medical coverage, while others would make it easier for employers to stay in the game, with or without providing employer subsidies.

For example, all major reform bills under consideration in Congress would reform the individual insurance market in ways that would guarantee pre-65 retirees access to more affordable coverage with no preexisting condition exclusions or health underwriting. This guaranteed access could solve an important problem employer sponsors worry about today and potentially facilitate their exit from sponsorship.

A more threatening provision, found in the House-passed reform bill (H.R. 3962), would prohibit employers from reducing retirees' health benefits after those individuals have retired, unless the same reduction applies to benefits for active employees. If such a provision is retained in the final reform legislation package, many employers with retiree medical programs would be inclined to terminate their plans before any requirement to maintain benefits is signed into law.

By contrast to provisions that might hasten employers' exit, a temporary reinsurance program is included in both the House bill and the Senate Finance Committee's bill (S. 1796), under which the government would pay a large share of the cost of employer-sponsored programs for pre-65 retirees (generally until 2013) in order to encourage employers to stay the course.

"Clearly, health care reform is a moving target. For employers, the key is to act now to examine the options and understand the potential costs and other impacts, so that when changes become effective, the company’s direction will be clear," said Osterndorf.

Missed Opportunities? Employers May Be Overlooking Ways to Optimize Retiree Health Benefits

With health care reform destined to drive changes in employer benefit plans and increase already high program costs and administrative burdens, employers need to ensure that every dollar invested in health benefits is wisely spent. Not surprisingly, that scrutiny applies equally to benefits for actives and retirees.

"For employers that plan to continue to sponsor retiree medical benefits, there are ways to rein in costs and still support the retirement of their valued employees," said Guilmette. "Retiree medical programs can be very valuable and provide very effective benefits.  Unfortunately, many employers are not capitalizing on available solutions and are instead relying only on cost-shifting tactics."

Developing a consistent health benefit strategy that links active employee benefits to retiree programs is one effective way for employers to achieve savings while delivering value and empowering employees to play an active role in preparing for retirement. For example, health savings accounts (HSAs) represent a unique, tax-effective way for active employees to save for retiree medical costs and for pre-65 retirees to pay medical expenses more tax-effectively. However, only 52% of survey respondents offer employees the opportunity to participate in an HSA-qualified medical plan (Exhibit 4).

Another underutilized solution that supports retiree medical coverage needs is a retiree medical savings account (RMSA), which allows employees to accumulate unused health care dollars provided in active employee plans through a health reimbursement account (HRA). Only 9% of survey respondents sponsor such accounts.

Employers should also recognize that their traditional role as plan sponsor may not be the best way to provide value to their retirees. Accessing the vibrant external marketplace for insurance products tailored to Medicare beneficiaries can actually increase the total dollars available to retirees due to higher levels of government funding and improved plan choice. Yet 65% of employers have not taken advantage of this option.

What's more, employers can reduce the administrative burden of these plans while still preserving the value of their financial subsidy to retirees by changing their commitment into a form of reimbursement account and letting retirees choose how to spend the dollars. Employers can even contract with third parties to handle the enrollment of their retirees into new options — including state-of-the-art retiree call centers that provide counseling and decision-making support to retirees.

The bottom line in today's environment: Efficient use of employer dollars and resources is paramount. And missed opportunities to optimize investments can be costly to a company in many ways. Notably, nearly two-thirds of the survey respondents (64%) say it's important to the organization's workforce management strategy that their employees are financially prepared to retire, but only a quarter (28%) say their current employees are in fact financially prepared (Exhibit 5).

"Employers today need to address the issue of retirement readiness by looking across both income needs and medical benefits and expenses," said Osterndorf."They should explore the full range of things they can do, short of increasing their financial obligations — such as providing creative retirement savings opportunities, education and modeling tools."

"It's also fair to say that some solutions to the problems of retiree medical access and affordability, not to mention administrative burdens for employers, are just beginning to emerge." added Guilmette. "But with America's aging baby boomer generation on deck to retire, the stage is set for employees and their employers to seek retiree health care solutions that deliver more value. The size and influence of this large and growing demographic alone will drive the market to create new solutions."

About the Survey

The Towers Perrin Health Care Cost Survey has been providing the industry's most in-depth, prospective (versus retrospective) look at active employee and retiree health care costs for employers for more than 20 years. The survey was conducted between August and October 2009 and includes detailed information on the active employee and retiree health benefits programs provided by more than 550 of the nation’s largest employers. These companies provide health care coverage to 10.3 million U.S. employees and dependents, collectively spend $53 billion on medical benefits every year and, as such, represent a significant force for change in the health care marketplace. Participants were asked to report their 2010 per capita premium costs for insured health and dental plans and premium equivalents (i.e., estimated benefit and administrative costs) for self-insured plans.

About Towers Perrin

Towers Perrin is a global professional services firm that helps organizations improve their performance through effective people, risk and financial management.  The firm provides innovative solutions in the areas of human capital strategy, program design and management, and in the areas of risk and capital management, insurance and reinsurance intermediary services, and actuarial consulting. Towers Perrin has offices and alliance partner locations in the United States, Canada, Europe, Asia, Latin America, South Africa, Australia, New Zealand and the Middle East.  More information about Towers Perrin is available at

http://www.towersperrin.com/hrservices.

EDITOR'S NOTE: David Guilmette, Dave Osterndorf and other Towers Perrin consultants are available for interviews on this topic. Please contact Joe Conway (914-745-4175) or Jason Schlossberg (646-747-7140) to arrange for interviews.