U.S. Industry Seeks Solution to Spiraling Costs of Medical Care for Early Retirees; Studies Warn That the Worst Is Yet to Come

After a decade of downsizing, American industry has been hit with an unanticipated new benefit cost: health care for employees who take early retirement.

A new study by one of the nation’s leading employee benefit consultants shows that the health-care bill for early retirees increased dramatically last year and now outpaces those costs for active employees.

The study by A. Foster Higgins & Co. showed that the average cost of medical care for employees who took early retirement was $2,397 last year compared to an average cost of $2,160 for active employees and $1,372 for retirees who had reached the age of 65 and were eligible for Medicare benefits. In 1986, the average costs were $1,950, $1,857 and $1,239 respectively.

The study involved 1,600 companies nationwide and was based on a larger health care survey conducted in 1988 by Foster Higgins. The firm’s annual health care benefits survey is one of the largest of its kind in the nation, covering private and public employers from all 50 states.

With the graying of the American work force, the situation is expected to get worse in the coming years, according to the study’s co-authors, Patricia Wilson and Thomas Burke. Their study showed that one third of all retirees are now under age 65. And nearly half the companies surveyed have started early retirement programs within the last five years.

Manufacturers have been the hardest hit, largely because they have been offering early retirement programs for much of the 1980s in an effort to pare down their work forces. In the auto and steel industries, for example, the size of the work force has been cut nearly in half during the decade.

Based on the current profile of the nation’s workers, Burke predicts that “the demographics of the United States in 12 years will resemble that of Florida. With the aging of the United States, companies must realize that retiree health care is a problem which must be given top priority.”

The study showed that in 1988 retirees accounted for 13.7% of employer health care spending, a 15% increase over the previous year.

Companies that attempt to cushion themselves from this cost merely by passing it onto retirees could find themselves in a bind. “Many employers are moving toward sharing their health benefit cost increases with retirees. Increased cost-sharing, reduced benefits and the use of Medicare carve-out plans (not covering what Medicare covers) will help limit the cost increases to the employer but will not ultimately afford much control over health care costs,” they said.

The study showed that a majority of the companies surveyed are either reducing benefits or requiring higher contributions from their retirees. The study also showed that very few companies--3%--had terminated their retiree health plans as a way to deal with the cost increases.

Wilson and Burke noted that “moving from a defined benefit to a defined contribution plan (for health care benefits) does offer control by limiting the employer’s expense to whatever the defined contribution is, but fails to address the underlying cause of the cost increases in retiree health care. It also fails to address the costs caused by increasing numbers of retirees for whom a defined contribution must be made.”

Under a defined benefit plan, the employer guarantees to provide a specific benefit regardless of cost. In a defined contribution plan the employer simply agrees to pay a specific amount of money toward benefit coverage. Any increases in the cost of medical care under the defined contribution plan would be paid by the employee.

The authors warned that while shifting the cost or risk onto the retiree may limit a company’s financial liability, none of the moves being taken by companies so far does much to curb rising health care costs.

According to the authors, companies should begin addressing the problem by first acknowledging a difference in the health care needs of active workers and retirees and then collecting data to determine what is “appropriate care” by the medical community and when their employees are receiving more than necessary care or care that is being furnished in “overly excessive settings.”

The process of taking a closer look at the medical profession has already begun. Mercer Meidinger Hansen, another major benefit consulting firm, recently questioned why employers should pay for twice-a-year dental checkups. The every-six-months checkup, they told their clients, does not have a scientific basis and was developed by the dental profession before the advent of fluoride and flossing.