Employers choose to retain drug coverage for retirees

January 1, 2006

Washington, d.c.—The advent of Medicare prescription drug coverage for seniors is not prompting large employers to abandon retiree drug benefits, at least not for this year. Most large businesses are accepting federal government subsidies for retiree drug coverage in 2006, although there are signs that this could change over the next five years.

WASHINGTON, D.C.-The advent of Medicare prescription drug coverage for seniors is not prompting large employers to abandon retiree drug benefits, at least not for this year. Most large businesses are accepting federal government subsidies for retiree drug coverage in 2006, although there are signs that this could change over the next five years.

Almost 80% of large employers decided to accept a 28% tax-free subsidy on outlays for retiree drug benefits in return for continuing coverage, according to a survey by Hewitt Associates and the Kaiser Family Foundation. Although an alternative "supplement" approach appears to offer even more savings to companies, employers opted for the subsidy as the least disruptive move at a time of considerable uncertainty about how the new Medicare drug benefit will work. Most employers say they are likely to stay with the subsidy plan next year, but about half say they may change by 2010.

EMPLOYER SUBSIDIES

While employers continue to reassess options for retiree drug coverage, they are taking steps to contain costs overall on retiree benefits. Companies are boosting retiree premiums, copayments and annual deductibles; nearly two-thirds have placed caps on future financial obligations for retiree coverage. At the same time, a small number (19%) of employers have limited the amount that retirees have to pay themselves by boosting annual out-of-pocket maximums.