Addressing the Growing Gap in Retiree Health Coverage

1
Addressing the Growing Gap in Retiree Health
Coverage

• Paul W. Dennett
• American Benefits Council
• July 26, 2005
• Citizens Health Care Working Group
• Houston, Texas

2
The Problem

• Declining numbers of Americans with retiree
  health coverage
• Increasing share of health coverage being paid by
  retirees
• Inadequate savings by active workers for
  retirement needs, including health needs
• Inadequate vehicles to encourage savings for
  future health care needs

3
Declining Coverage

• Persistent decline in the number of firms
  offering retiree health coverage
• 66 percent of large firms (200 employees)
  offered retiree health in 1988
• 36 percent offered retiree health in 2004
• And the number is all but certain to decline even
  further....

4
Numerous Causes for Decline

• Increasing costs 12.7 increase for 2004
• Unfavorable accounting rules (FAS 106)
• Caps on employer contributions to premiums
• Changing ratio of retirees to actives
• Global competitiveness pressures
• Lack of affordable coverage in individual market

5
Employer Cost Concerns

• Nearly 90 percent of employers that offer
  coverage say CEO is very concerned or somewhat
  concerned with increasing costs for retiree
  health coverage
• Retiree health expenses account for more than a
  quarter (29) of firms total health costs

6
Retiree Cost Concerns

• Average monthly premium is 490 for pre-65
  retirees and 260 for over-65 retirees
• Nearly half of retirees with coverage pay 40 or
  more of their premium expense
• Approximately 1 out of every 5 retirees pays 100
  of their premium expense
• New or recent hires far less likely to have
  retiree health as a benefit

7
Need for Stronger Savings Incentives and Vehicles

• Few Americans save adequately for retirement, or
  at all for future health needs
• Retiree coverage needs beyond Medicare could
  exceed 200,000
• 401(k) and IRA funds are subject to tax on
  distributions, including for health expenses
• Health Savings Accounts (HSAs) have strict limits
  on contribution amounts

8
Improvements in Medicare

• Prescription drug coverage available under
  Medicare starting in 2006
• New health plan options under Medicare Advantage
  program
• Financial incentives for employers to maintain
  comparable drug coverage
• Additional options available to employers to
  encourage continued retiree coverage

9
Further Reforms

• Encourage joint efforts by private and public
  purchasers to improve health care quality and
  efficiency
• Allow tax-free use of funds from pension plans,
  401(k)s or IRAs for retiree health
• Establish new tax-advantaged savings vehicles for
  retiree health
• Modify HSAs rules to permit increased
  contributions for future health care needs

10
Summing Up

• Retiree health coverage gap is growing wider
• Increasing cost pressures fall on both employers
  and retirees
• Recent changes in Medicare will help, but more is
  needed
• Top priority is to lower health costs and improve
  quality
• Employers and individuals need better savings
  incentives and vehicles